Citigroup Inc. (C) Earnings Call Transcript & Summary

Good afternoon. I'm Susan Katzke. I cover the U.S. large-cap banks at Credit Suisse. Next up for the banks at the conference, we turn to Citigroup. We're pleased to be joined this year by CFO, Mark Mason, and look forward to a broad-based update on the macro and the path of recovery onto the strategic road map and refresh underway at Citigroup today. So let's get started. And by all means, if there are investor questions along the way, please just send me an e-mail, and I will try and weave it in. So welcome, Mark. Good to have you with us.

Hi, Susan. Thank you, Susan. Good to see you.

Great. So to level set at the start, if you will, can we talk about your macro view and the path of recovery as you see it in the U.S. and global economies?

Sure. So I think I'd start by saying that our view is very positive as it relates to the path of recovery. And when you think about it and you look at kind of GDP and the improvement we've been seeing in that forecast, particularly in the U.S. and in parts of Asia, if you look at what we're seeing in the way of unemployment forecast, if you look at the vaccines that are being rolled out and the take-up there as well as the stimulus programs being contemplated, there are a lot of positive reasons to feel good about the path to recovery. When I think about our business specifically and start with consumer, this quarter, we're likely to see purchase sales that are down year-over-year, but that's on the heels of good, strong purchase sales in the fourth quarter. And the trend for improvement is likely to continue. Payment rates remain elevated. Now that's going to mean pressure on loan growth, but it's good from a credit perspective, which is good. And really, beyond the first quarter, we think we will see sales continue to improve and loan growth towards the back half of the year, but slower than normal just given the higher payment rates. If I kind of pivot internationally, internationally, we're likely to see losses peak really in the early part of 2021. And so looking at a credit recovery in the back half of 2021, particularly in Asia. On the corporate side, our commercial card spend really remains muted, and that's likely to be the case until the second half of the year. And really, it's going to be a recovery in travel that's likely to fuel that. But outside of kind of cards, corporate card spend, the TTS business has been very resilient. So I look at things like clearing and cross-border flows. They were up 6% and 5% in 2020. We're seeing continued momentum in the first quarter as it relates to that activity. We're seeing robust growth in emerging payments, things like instant payments that really reflect e-commerce and B2C activity, which is great. And that's driving fee revenue that we think will be pretty important going forward. In terms of loan growth, that's muted on the corporate side as well, given the markets that we've seen thus far.

Okay. And when we step back and we think about the course of the last 12 months, do you concern putting together a fiscal stimulus and monetary support. Is there really a new playbook for recession in the U.S. and globally, having seen the efficacy of Fed support? And how does that impact the bank's risk appetite, if at all?

Yes. A good question. I mean we're still in the midst of this, right? And so we're seeing consumer behavior that, frankly, is not something that we're all familiar with, right? So the stimulus, obviously, has fostered higher savings, higher payment rates, but it is, in fact, bridging the economy. And I think the thing that's unclear is does this end up being a delay of higher losses or a deflation of losses or both, right? And I think more -- increasingly so, it's looking like it's likely to be both. But if I take your question around how we think about things going forward and how we manage and think about risk appetite going forward, what I'd say on the consumer side and the corporate side is we've been very disciplined about our risk framework and risk appetite. And it's one of the things that make us -- that allow for us to feel good about managing through this crisis. And so I don't see our risk appetite changing or our risk framework changing as a byproduct of this experience. What I do see on the consumer side is remaining very focused on when we leg back in, so to speak, in terms of trying to drive increased volumes because, as you know, we dialed that back, right? We looked at credit lines and dialed those back as a cautious effort going into this -- a period of uncertainty. And what's going to be important is as the economy starts to turn, turning that back on. As it relates to the corporate side, again, very disciplined about the clients that we focus on. We've been there by their sides through this crisis, whether it's through the early part this time last year where people started to draw on lines or ask for new facilities or the middle of last year when things turned to debt capital markets and accessing markets more broadly for liquidity. And we think that discipline and commitment, frankly, to clients is going to pay off going forward.

Okay. Fair enough. So we were chatting before this session, and some of the optimism that you have about the outlook seems to be reflected in a steepening yield curve. So let's spend a minute talking about your net interest revenue prospects and what you see is both the path of interest rates going forward. And let's talk a little bit about Citi's rate sensitivity. And maybe then we'll wrap that into the 2021 guidance of down $1 billion to $2 billion in net interest revenue and talk about where you put that in the context of this steepening that we're seeing right now in terms of the yield curve?

Yes. Why don't I start there? So I mean, we -- our net interest revenue forecast I talked about at earnings was about -- was to be down $1 billion to $2 billion in 2021. And when I discuss that -- and that is still our view, to be down $1 billion to $2 billion in 2021. When I talked about that, I talked about things stabilizing off the fourth quarter and in the first half of the year and then seeing loan volumes pick up towards the back half of the year. We still see that stabilization playing through the first half. That said, when you look at the first quarter, keep in mind, there are 2 fewer days in the first quarter than in the fourth quarter. So that dynamic is obviously going to play out. When you think about the drivers of that, we've got interest rates, obviously. And there were -- there are headwinds associated with rates as we saw reductions in the first quarter and through last year. And so that's going to play out in terms of impacting the net interest revenue and that guidance that I've given. The other dynamic, obviously, are loan volumes, and the pressure on loan volumes is likely to kind of play through the first half. We expect that to pick up in the second half. A lot of that is going to be the consumer balances that I referenced earlier. And a factor there through all of this is, obviously, what happens with the stimulus. And so there, we'll see what happens tomorrow and in the future as it relates to that. But that's kind of a factor that's out there. As it relates to kind of how we think about rates and kind of funding cost optimization and things of that sort, we've been very disciplined about trying to manage the liquidity that has been infused into the market throughout 2020. You saw us kind of pay down debt, given some of the higher deposit balances that we had last year. We've also made some investments through the course of 2020, and we kept powder dry in light of kind of the lower loan volumes that we've seen through the year. And having kept that powder dry, that creates an opportunity as we see the steepening of the yield curve. We do tend to be more sensitive to the short end. But having this liquidity in dry powder does create an opportunity that we'll look at kind of going forward. But net-net, we're holding to our NIR guidance, notwithstanding some of those moving variables, including the stimulus and the like.

Okay. And curious, you spoke to the dry power. What would give you -- are you willing to start using the dry powder now given the steepening that we see?

Yes. We're always looking at the opportunities to put that to work first with our clients and then just to optimize the balance sheet if we have that excess liquidity. And as you mentioned, we are seeing a steepening there, and we're looking closely at it.

Okay. So let's just stick with the near term for a moment here, and let's talk about the market environment so far this quarter and any other first quarter guidance updates specifically that you're willing to give out.

Sure. Yes. Look, we -- I think we're off to a very good start to the year when I look at our performance thus far. The quarter is not over. But if I look at markets, broad-based client engagement, if I look at our fixed income and equities trading activity off of a strong quarter last year, I would expect that we would be down kind of mid-single-digit range, if you will. If I look at Investment Banking, continued strength, good momentum in equity capital markets, I'd expect to be up in the high teens, call it, low 20s year-over-year. In our consumer business, we still have pressure from the lower levels of spending, the higher payments I mentioned. And we're likely to have higher card partner payments as credit performs well. That plays through our retail services business. And then we just talked about rates, right? And so lower rates. And given the multiple rate cuts that we saw last March, we're going to see the impact of that play through, not just our consumer business, but our accrual businesses in the ICG like TTS at probably similar levels to what we saw in the prior quarter. So that's revenue, right? On the expense side, I continue to feel good about our full year outlook. We're at 2% to 3% year-over-year increase in expenses tied to the transformation. It's likely to trend higher this quarter, up maybe mid-single-digit range, just really as we ramp up the transformation. Think about costs like consulting expenditures and headcount and technology. But again, 2 to 3 year-over-year tied largely to the transformation there. On credit, it's interesting. We're continuing to see the positive signs in terms of delinquencies. We feel good about the way that's trending kind of from a macro standpoint. And remember, as we think about reserves, we look at things like those macro variables, GDP, unemployment. Those become very important. I think we're likely to see a release in the quarter, and it could very well exceed the release that we saw in the way of reserves in the last quarter of the year, in the fourth quarter of 2020. And that's going to be driven again mainly by those improved macro variables but also the seasonality in the card balances, right? So they're generally higher in the fourth quarter than in the first. So obviously, it's early. There's still uncertainty there, but that's kind of the current view.

Okay. And just to clarify on the trading comparisons, I want to be sure we're considering your outlook for the entirety of the quarter against what was a very strong March last year.

Yes.

As opposed to -- yes, January and February, perfect.

Yes. Yes, that guidance is for the full quarter, mid-single-digit range, down mid-single-digit range.

Perfect. Any update on the Revlon-related situation and potential charges in the quarter?

Look, I would -- you know this already, right? I'm very disappointed by the decision, as you would have imagined. I do believe that we have good grounds for an appeal, and we're going to pursue that. There'll be additional information in the K, which will be filed very soon. And beyond that, Susan, there's really not a whole lot more that I can say at this point on it, right? But we do feel good about the grounds we have for an appeal.

Okay. I felt compelled to ask.

I understand.

So let us turn to the good stuff. Let's turn to the work underway at Citi today, including the work around consent orders and the infrastructure and operating environment transformation as well as some of the other strategic initiatives that are underway now. And I want to start with the expenses in your infrastructure transformation. And you've touched on this a little bit. But there's been some question around what it seems to be an upward drift in the expense guidance from a couple of percentage points in December to 2% to 3% now, which you articulated that 2 to 3 percentage points hold. As we -- as you drifted upward, can you just talk a little bit about the process. And the 2% to 3% presumably follows a conclusion of the process of mapping out the priorities?

Yes. So look, remember, we -- when I discussed that, we were finalizing the plan, and that's where the 2% to 3% came from as we put together our 2021 plan. And let's take a step back for a second, right? So the way -- I think we are in a unique place with a unique opportunity as a firm, right? And the reason I say that is because if you think about the fact that we're all managing through this crisis now, this pandemic, in our case, we have a new CEO, who is committed to taking a fresh look, doing a refresh of our strategy. And we have this consent order that, in many ways, we've taken and built our transformation around. And I think that is a unique opportunity for us to build and become a better bank, and a bank that is actually on a path of -- or back on a path, I should say, of improving returns for the long term. And so the combination of kind of the interconnectedness, if you will, of a transformation that includes risk and controls, includes improving our operating environment, includes using data as a strategic asset with a strategic refresh that's focused on improving value to our customers and leveraging our competitive advantage, I think, is a unique opportunity. Expenses, up 2% to 3% driven by the transformation. In many ways, I've -- and I've echoed this a number of times, these are investments that we're making, right? This is spend that I think is critical to improving the way we're able to compete in the future, right? And so we're going to make those investments. It is informed by the planning that's been done through the establishment of the 2021 plan. As you know, as it relates to the consent order, there's a gap that we recently submitted. There's a more fleshed-out plan that we submit in May. That obviously will further inform kind of the path forward, but we feel good about this 2% to 3%. The final point I'd make, and the reason that I wanted to start with why I think this is an opportunity is that as Jane and I and the executive management team worked through this strategy refresh, if we identify investments that are aligned with that strategy and put us on a trajectory of improved returns over time, we're going to make them, right? We're going to make them. And you can count on -- I think that's the right thing to do, the right way to run a firm. And you can also count on the fact that we're going to continue to manage to identify productivity opportunities and efficiencies in the franchise in order to ensure that we get on that path to improve returns as quickly as it makes sense.

Okay. So obviously, you're expecting pretty significant benefits on the other side of this body of work.

Yes. So look, like I said, they're investments. So with that comes benefits, so I think you're right. And the benefits come in a number of different forms. They come, obviously, in the form of the strength in risk and controls. But there are also efficiencies that are tied to that, right? And those efficiencies mean that there's less reconciliation work to do, for example, and you require less manual touch points and people doing that type of work. And so there are less errors and the like that have to be worked through. So there's efficiency in the operation of the franchise. There's an -- there's efficiency in our ability to actually innovate and create products for our clients and get them to our clients more rapidly. And those things, I think -- not I think, I know will pay dividends kind of in the future as we start to or continue to make progress on this.

Great. So turning to the strategy refresh. The statement that simplification can have value caught my attention on the January earnings call. So let's talk about the process Citi is going through right now to evaluate its businesses. How clean is the slate that you're working with?

Yes. Good question. So that -- the simplification point, I think a lot of people caught that. There are other components to it that I think are really important. So one is the approach that we're taking is that we want to -- we're being -- we want to be clinical about this, right? So we're doing a dispassionate review of our businesses, of our strategic positioning, of where we have a competitive advantage or where we can secure a leading market position, particularly in a world that's more digitized, right? So dispassionate review, being clinical about that. We want to be focused, and we'll be focused. And what that means is that as we come out of that, we want to ensure we're directing investments in accordance with it, right? That capital allocation and other types of investments are aligned with those businesses where we have those advantages, where we see there's stronger growth opportunities and the opportunity for improved returns over time. The third piece I'd mention is what I like to think of as ensuring that we're capturing the linkages across the place. So we want to be connected. We want to make sure that the businesses fit well together. And that we are -- and that there are linkages and that we can get after them. And so that's kind of, I think, another important note. And the last one you mentioned, which is simpler, right? And that is to deliver a simpler firm. That means removing organizational complexity, means moving up -- removing operational complexity and ensuring that we're easier to manage, and we can deliver faster to our clients. And so that's a little bit of the framework that we're putting to that. To that end, this is a review that is a pretty clean slate. It's a dispassionate review. We've got a clean slate. We're looking kind of across the board. The work is still underway. As you've seen with the announcement around wealth, we're not waiting as we identify things that make good strategic sense and speak to those 4 or 5 items that I mentioned. We're comfortable announcing those. The wealth management business, I think, is a very compelling opportunity for us, an opportunity to create a single integrated platform. But we're also excited about things like growth in our Securities Services business, which we feel really good about. And that would include ETFs and other parts of the franchise as well, including TTS and work that we've done to kind of bring together commercial and the commercial client business into the ICG and things of that sort.