Citigroup Inc. (C) Earnings Call Transcript & Summary

Good afternoon. I have a disclosure to read, and then we'll kick off. For important disclosures, please see Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures. [Operator Instructions] With that, I'm pleased to have with us this afternoon, Mark Mason, CFO of Citigroup. Mark, thanks so much for joining us this afternoon.

Thank you, Betsy. Great to see you. Great to be here.

So there's a couple of different questions I wanted to kick off on. The first one has to do with your global footprint. And really, these are strategic questions for Citi. I noticed your globe in the background, so it's a good prompt here for me. But could you give us some color on what you're hearing from clients and what you're seeing from a macro perspective around the world? You're one of our truly global organizations at the U.S. Fins Conference so would appreciate your color on that.

Sure, sure. And hopefully, next year, we can do this in person, but as I mentioned, great to be here. And look, I think that -- I think we can all agree that we're in a very different place this year than we were last year, and we're thankful for that. And when I think about where we are as a global economy, much of that is driven by the significant take-up that we've seen as it relates to vaccinations here in the U.S. and increasingly so more broadly. When I look at this recovery, it's being led largely by the U.S. and China. And when I look at the U.S., in particular, things like the stimulus have proven to be key. When I look at the prospect of infrastructure and dollars or spend around that, that seems to provide some promise for longer-term continued recovery. When I think about the conversations that we're having around inflation, whether that's transitory or not, the levers that the fed has to manage that, even talk of tapering, all of those things kind of speak to the strength, if you will, of the recovery that we're seeing here in the U.S. When you look at China, that seems to be consumer-led as well. There is some concern around overheating there. You look at Europe, and while that's a bit delayed, it does not appear to be derailed. Emerging markets has some fits and starts. We've seen some increases in terms of cases there. But when you look around the world, there does seem to be some path to recovery, which is promising. You mentioned -- you asked about corporate clients. The corporate clients that we spend time with, it varies by sector in terms of the sentiment. But overall, I'd say there's some general optimism there. There remains a lot of liquidity in the market. Balance sheets are strong. Most of our clients are either in the midst of a transformation or certainly considering a transformation, and that's not that surprising when you look at digitization and the impact that that's had on many of these sectors when you look at even going direct to consumers as companies contemplate that. When you look at how supply chains have to be reconsidered or even changes in demand, it's no wonder that many of our clients are talking, as I mentioned, about a transformation or how they rethink their business model. I mentioned it's been a consumer-led recovery, and you can see that in spend levels. Spend levels have increased across our cards portfolios, for example. You could also see that in higher payment rates as there remains a lot of liquidity with our consumers. Higher savings rates, again a by-product of the stimulus that we've seen kind of play into these economies. And so again, the promising thing here is that there seems to be a path and we're on it, and I think that's promising.

Great. Okay. Before I dig into some of the key topics for Citi, like strategy work that you're doing, I just did want to get a sense from you as to what the key trends are that you're seeing for this quarter, 2Q '21. Maybe you can give us an update on the guidance that you laid out during the earnings call.

Sure. So again, I kind of harken back to where I started, which is very different place than we were a year ago. If you think back to the second quarter of 2020, at least for Citi, we were looking at Markets revenues back then that were up 50%. We had seen record levels of debt issuances from our clients. We had seen -- we, ourselves, took down expenses pretty meaningfully in the second quarter last year in light of going remote and the shutdown. Fast-forward to where we are today in the second quarter, and there's still a quarter left, when I look at our Markets business and I look at revenues for Fixed Income and Equities, revenues are likely to be down in the 30s percent range, low 30s percent range, again a mix of continued strong performance in Equities, offset by Fixed Income in light of the strong prior year Fixed Income performance, as I alluded to earlier, so down in the low 30s percent or so for Q2. When I look at Investment Banking, Investment Banking revenues are likely to be down in the low- to mid-single-digit range. We do see strong M&A performance, and we do feel good about the pipeline and the dialogue that we're having in Investment Banking. If I think about our North America Consumer business, again, here, and I alluded to it earlier, the good news is that we are seeing good purchase sale activity. We're also seeing continued high payment rates, and that's putting pressure on our ANR on the lending volumes. When I look at revenues for the quarter for North America Consumer, likely to be down at similar level to what they were in the first quarter in terms of the year-over-year performance. Expenses. We look at our expenses. I think there's a range out there now. I think The Street expectation's roughly about $11.2 billion. Betsy, I think you have us at about $11.6 billion. I think we'll end up probably somewhere in the middle of that range. And when I look through that, again, last year this time, we took expenses down pretty meaningfully. But we also, as you know, have spend that we're making in the way of transformation. We've also continued to invest strategically, areas like wealth, areas like investment banking, areas like our TTS franchise, we continue to invest in. And so expenses kind of in the middle of that range, if you will. And then lastly, cost of credit. And the trends that we're seeing in terms of delinquencies continue to be very stable. I'd expect our cost of credit to be relatively benign. I am expecting a release in the quarter but not at the level. It's probably less than what we saw last quarter. So that gives you a little bit of a sense of how we're thinking about it thus far. But like I said, still some quarter left, but that's kind of where we are currently.

Okay. All right. Great. That's very clear. So I appreciate that color and context, Mark.

Sure.

Let's dig into the strategy refresh that you are in the middle of doing, and I did want to kick off on the TTS business. We have been doing some work on TTS here at Morgan Stanley, and we are looking at this -- what we believe is a very high ROE business. You have strong share. You've got great franchise. You've got superior scale. It is a fragmented business, though. So maybe you can help us understand, is there opportunity for additional share consolidation? What kind of share are you targeting? And then maybe we can get into some of the technology investment spend you're doing here and how you're competing with fintechs.

Sure. There's a lot there. Before I go to there, I want to make sure that I didn't misspeak. I think for Investment Banking, Betsy, I think I said and should have said mid to high -- down mid to high single digits. So if I didn't, I want to correct myself on that. TTS. So this is a core part of our franchise without question. And as you know, when I think -- when we look at this franchise, it is a servicing platform and model for our large multinational clients. What do I mean by that? This TTS franchise, we provide integrated working capital solutions that include payments, receivables, liquidity management, corporate commercial cards as well as trade lending to large multinational clients. We also service large financial institutions. We cover 80% of the Fortune 500 corporate clients. We cover public sector clients, and we also cover kind of new digital economy clients. And we're able to do that because we are uniquely positioned with a presence in nearly 100 countries. And not only do we have a presence there and expertise there, but we're connected to over 250 clearing centers, and we're able to transact with our clients in over 145 currencies. And in many ways, that uniquely positions us, not just to continue to grow with these large multinational clients, but also to more deeply penetrate their wallets and the wallets of commercial and middle-market clients. And that is, in fact, what we're doing. That is, in fact, why we're investing in this part of the franchise. And so what are we investing in? We're investing in our digital capabilities. And frankly, we've been doing that for a number of years now, and that has played to our benefit through this crisis. We're now able to do digital onboarding with clients in over 50 countries. We're also investing in our instant payment capabilities. We're able to offer that in 27 markets, and that will increase by another 8 markets by the end of the year, and so significant opportunity to do more with clients, significant investment being made in our capabilities. You mentioned fintech, and you mentioned kind of share consolidation. I'll talk about share first. We've got a very solid share in a fragmented market with our multinational clients, and we expect that we will be able to grow that, in part, because of how we're seeing this market shift towards demand for more digital capabilities, towards the ability to actually go direct to consumers. And I believe that the investments that we're making will allow for us to win some of those additional opportunities as clients migrate there. And some of the larger players, I think, will fare best on the other side of that. When I think about fintechs, I think about 3 buckets, so to speak. So one is partner. So think partner, client, competitor. And for us, we end up dealing with fintechs largely in the first 2 buckets. And so when I think about partnering capabilities, particularly for our large multinational clients who want to do business, I think, with the larger providers, such as us, fintechs serve as partners for us to expand the capabilities of our solutions. And so you've heard me talk about in the past how we've worked with corporate clients to help them better understand how they can manage and mine their receivables and reconcile those receivables. We've done that in partnership with fintechs who provide those capabilities that we can add on to our solutions. We also see fintechs as clients, particularly when we are dealing with digital economy clients. Fintechs actually leverage our rails in order to bring their solutions to bear to some of the segments that they cover. And then competitors, less so, but I don't want to dismiss fintech as competitors. Fintechs certainly inspire us, if you will, to stay on top of our investments and expanding our capabilities. And so this, again, core part of our franchise, large business, over $9 billion in revenues, very good margin, low capital intensity, high returning. Jane talks about strategy refresh. This is going to continue to be a focal point for us.

And I estimated that the RoTCE in this business is somewhere in the mid-30s. Is that -- sound in the ballpark to you?

In a normal environment, roughly in that range. I think we talked about a couple of years ago being significantly higher than the 20s. But in a normal environment, roughly in that range.

And so a normal environment, meaning a higher interest rate environment?

Rate environment, exactly, yes.

Okay. Got it. So if rates do pack up -- back up like 100 bps, I know that sounds like a lot in this world, but we would see it in this business line.

Certainly some upside for this business. Remember, this is a business that has over $600 billion of deposits around -- and globally. And so yes, we would see some upside with an improved rate environment.

Okay. So let's turn to wealth management. That is another sleeve that I know Citi is increasing its investment spend in. Could you give us a sense as to how you're focusing on the growth opportunities here. There's geography. There's segment. There's client type. Maybe give us a sense as to how you're prioritizing among those opportunity sets.

Sure. So wealth is a core segment for us. And I think that the first thing I'd point out, Betsy, is that one of the first things that we did that Jane announced was we rethought the structure around how we wanted to cover this client segment. And so we brought together the Private Bank with the wealth activity that we have in the consumer part of the franchise and in many ways, creating that combined segment, if you will, ensure that we're able to leverage the products, the services, the platform that we have in getting after this market. And so that was a very important step. You would have heard earlier this quarter that we announced the management team to support that new structure, and we believe that there's significant opportunity globally but specifically in the U.S. and in Asia. And you've heard us talk specifically about getting after the Asia wealth opportunity. You can look back over the past -- the last 20 years or so, we've seen that market grow from $5 trillion to $42 trillion, big opportunity for us. We've got a very strong brand in that market already. When you look at the U.S. over the next 15 years or so, we would expect some $25 trillion of wealth to change hands. Again, we believe we're well positioned to get after that given the platform that we have. And we're investing in the platform. And what does that look like? So in Asia, we've hired some 400 relationship managers between July of last year and where we are today. We're continuing to invest in front-end hiring in bankers, both here in the U.S. and around the world. And those types of capabilities are what we believe is important in order to get after this in earnest.

So when you think about the opportunity set between where you are today and where you'd like to be, how much of that investment spend have you done already? And what's left to come in the run rate?

Yes. Look, we're working through that as part of the refresh, but we're not waiting, right? So we've got a new management team that we put to this business. They're working on fleshing out what the multiyear plan looks like as part of this refresh that Jane and I are driving. And on the other end of that will be, I'm sure, a continued need for investments. But we've started to make it already, and we'll continue to make it kind of through the balance of the year and next in support of that strategy as it comes together.

And is it fair to say that of the investments you've made already, are you beginning to see some results with regard to the revenue?

We're very optimistic about it. I mean that's -- we are managing out of this crisis and into a recovery, but we're very optimistic about it. We've proven the capabilities here as it relates to bringing on new private bankers or bringing on new relationship managers and them building out their client set. This is, in some ways -- in that regard, this is not new territory for us. And so we feel very good about the investments that we've made thus far and that they're going to pay off for us.

Okay. So on the flip side, you announced Citi's going to be exiting consumer operations. I believe it's in about 13 markets in Asia and EMEA. The question is how did you determine what to exit? And can you give us a sense of any updates on timing and how shareholders should be benefiting from this move?

Sure. So look, in many ways, strategy is as much about what you decide you're going to do as it is about what you decide you're not going to do. And as you've heard Jane described and I've described in other forums, we've taken a very clinical approach to the strategy refresh. We've looked at businesses where we have a competitive advantage where we think we can win, where we've got scale that will drive growth and returns across the franchise. And as we looked at these 13 markets, while they're good businesses, we don't have scale in them. And in many ways, they'll be better businesses for other owners. And so we took the decision and feel very good about the decision. And we've had very active dialogue to date with potential buyers. We've got investment memorandums that are out there for consideration. I'd expect that we'll be hearing back from potential buyers over the next month or so, and then we'll continue down a path of execution accordingly from that point on. What should shareholders expect? Look, I think that this is a path towards a simpler Citi in some regards. And so that is a good thing, a more focused organization strategically. I think, obviously, this is an opportunity to free up capital and resources. And freeing up the capital and resources allows for us to deploy it in areas where we think there's more growth. We've talked about wealth. We've talked about commercial. We've talked about TTS but also an opportunity where there is excess capital to return that to shareholders. And so I think from a shareholder point of view, these types of strategic decisions over time are upside without question.

And on -- I did get a question in on this while you're speaking about Mexico. It appears you've decided to keep Mexico. And the question is why did the Mexico consumer business stay in the pack as opposed to be on the side of the ledger for exit?

Yes. I guess Mexico has come up from time to time over the years, huh? Look, I think that when you look at it, think about some of the things that I referenced, the importance of scale, places where we have a competitive advantage. If you take a step back, I mean, Mexico, in many ways, there's a more positive outlook on how that economy is going to turn. GDP estimates have gone up to 5% or so for Mexico. They've got a labor advantage that's there as clients start to reconsider supply chains that could certainly play to the advantage of Mexico as the U.S. drives this recovery, that could certainly play to the advantage there. So some broader market positive implications potentially over time for Mexico. And then we've got Citibanamex. We've got a leading market franchise in Mexico that's of scale that is high returning. We also have -- and we made investments there in terms of our capabilities. We're seeing growth digitally and mobilely with customers there. And we've got -- it's integral to the broader corporate network. And so there are a lot of positives as it relates to Mexico, and we're optimistic about it over time. But those are certainly factors that went into the refresh as we continue to go through it or make the refresh.

So as we think about the operating leverage that you could get from Mexico, do you anticipate that would be coming more from the revenue side of the equation or the expense side of the equation?

Again, we're managing kind of out of this as we speak. And so I think that as the recovery unfolds, we'll see some upside on the top line. But we'll see how things kind of play out.

Okay. Great. So there's a next theme I wanted to dig into was the Consumer a little bit more. And before I do that, I did get a couple of questions to ask you to repeat what the outlook is for the guidance on Consumer. I guess there were some questions here on what exactly you mentioned. Could you repeat that, please?

Yes, sure. So I was -- I gave a guidance with regard to North America Consumer, and what I mentioned was that in light of kind of the way things are evolving through the quarter in terms of purchase sales versus payment rates and loan volumes, et cetera, that we'd likely see Consumer revenues that are down year-over-year at a similar level, perhaps a little bit better than what we saw in the first quarter. First quarter, I think, was down some 15% or so year-over-year, so similar levels, maybe a little bit better in terms of second quarter year-over-year performance.

And is that primarily a function of the payment rate that you're seeing in your card books? Or what's driving that?

Yes. So again, if you kind of just -- as things have kind of played through this crisis, there's been significant pressure on the volumes, on lending volumes. And so again, while we are seeing good purchase sale activity, and in fact, in some ways, purchase sales are back to pre-COVID levels, we are also seeing continued high payment rates. So yes, Betsy, and those continued high payment rates are, in part, a by-product of all the liquidity that's still in the market as we've seen the stimulus kind of take hold. And so that is continuing to put pressure on the volumes on the ANR that we see across the portfolio. And therefore, you see that in the top line revenues.

And when you think about how your portfolios are operating, you've got the branded card, you've got the retail partner card side. Any differences there with regard to either spend levels or payment rate levels? Any differences in behavior?

Yes. So look, I mean, in terms of both of the card portfolios, we are seeing spending levels as of kind of end of March back to kind of pre-COVID levels. And that has continued to play through which is a good thing. They are different portfolios, obviously, right? The retail services portfolio tends to be more partner driven. And so the nature of the sectors that your partners are in are an important factor. But we are seeing, like I said, solid spend levels across both, and similarly, continued high payment rates, albeit they'll be different for branded cards versus retail services.

How do you think about the loan growth opportunities here? When are you thinking or seeing signs of inflecting positively, in cards specifically, yes.

Yes. So look -- yes, so again, we're expecting that we will see loan growth start to pick up in the second half of 2021. But again, we're seeing this dynamic kind of play through as a result of the stimulus, but our estimates right now are that we'll see that pick up in the back half of the year.

And what about the credit box, where are you on the credit box with not only card but your other consumer offerings? And is there any room to widen that? Would that make a difference?

Yes. Look, I mean, the important thing, I think, for us is that we kind of open back up the spigot, so to speak, in a timely fashion. And so we've started to do that. We don't want to make the mistake of being late to kind of go out and start to acquire new customers again or extend credit where that makes sense inside of our credit box. And so we've started to do that very proactively, and that's part of the spend level that you see flowing through our expense line. We are, at some point, we'll be kind of back to the levels that we were pre-COVID in terms of where we are against our existing credit box. But we have not, at this point, kind of look to expand kind of our risk profile in any way. We're sticking to the risk profile that we've set for the Consumer segment and really just trying to ensure that we get after it as a recovery is unfolding, and that's what we're doing.

Okay. Great. So then on to the topic of Macy's. I'm sure you know there was in the Macy's 10-K or 10-Q or 8-K, one of those, I noticed that you had indicated to them that you sent them a notice of cancellation on the retail partner card relationship that you have. Maybe you could help us understand how you think through that type of decisioning. Because from an investor perspective, it feels like this is a high ROA business, maybe 2 to 3 percentage points. And it's a little bit of a head-scratcher why you would opt to potentially indicate lack of interest in that book.

Yes. So look, I mean, as I said earlier, the Retail Services business is a partner relationship, and we've been a partner with Macy's for 16 years. And as they stated and you referenced in their recent 10-K, I think it was in March, they referenced that they saw their retail sales levels decline and declined to a level where they triggered a termination clause as part of our contract. In order to preserve our contractual rights, we issued a notice of termination to them, while we continue to have a dialogue and conversations around a path that's optimal for both parties. And so that's what we're doing. We're actively engaged with them. As I think about the Retail Services business, we feel very good about it. It is a core part of our Consumer business, if you will. It is high returning, both on an ROA basis and both -- and also on an RoTCE basis. And we'll continue to look for opportunities that make good economic sense with strong partners in the retail services space. The conversations we're having with Macy's, like I said, are ongoing. There's no impact to the customers as a result of any action that we've taken at this time, and we'll keep you posted as appropriate on how that evolves.

Okay. That termination you were required, does it -- by the contract to move forward with that in order to have the negotiation with them? Is that how I'm -- that's what I'm hearing from you. Is that accurate?

No. What I'm saying is that in order to kind of protect our contractual rights. So we have -- obviously, when that trigger is hit, we have the ability to issue the notice. And we took advantage of the ability to issue the notice, but we are continuing the dialogue and discussions with them.

Okay. Great. Moving on to the institutional side. You mostly bank large multinationals. The capital markets are wide open. Large corporates have significant amount of surplus cash. Is there an opportunity there for loan growth eventually? Or is -- are you moving on to other areas to drive loan growth?

Yes. I -- given the liquidity that's in the market and all the debt issuance activity that we saw last year, I'm not expecting corporate loan growth. We obviously are here to serve our clients, and we'll continue to do so with the episodic activity and demands that they have. But I don't expect significant loan growth in the balance of the year on the corporate side. That said, we are seeing, more broadly, opportunities as it relates to trade and in markets and in the Private Bank. And we'll continue to -- and I've mentioned earlier Consumer, expecting that on the back half but not on the corporate side at this stage.

And it seems like you have some more room in your GSIB surcharge bucket to add more risk in markets and trading and that type of thing. Is that a fair statement?

Yes. What's interesting, as you point out, for many of us in the industry with the increase in deposits, we've seen kind of the GSIB score tick up, and in some instances, into the next bucket. As you know, there are a number of different factors that influence capital, not just your GSIB score, but the stress capital buffer and risk-weighted assets and all of those things, and so a number of different factors there. We're looking at capacity in alignment with our strategy refresh. So where does it make sense to allocate capital that's consistent with our desire to improve our returns and narrow the gap to peers? And we're doing just that. In the case of very specifically Fixed Income and Equities that you point out, we're looking to ensure we're optimizing the capital that we have allocated there already and doing that in a way that's consistent with the client demand and opportunities that are available to us. And so not necessarily looking to allocate more, but certainly looking to make sure that we're optimizing what we've allocated thus far.

Okay. Two quick last questions here in the moments we have left. One is just a question from the audience on the expenses. Some people interpreted the expense commentary that you gave for 2Q '21 to be a little bit of an uptick since it's, I believe, $11.2 billion and $11.6 billion. And so should we take that into the back half of the year as well? The basic question here is, is there a change in the outlook for full year 2021 expenses?

Yes. So I'm not changing my guidance for the full year at this point. We'll obviously have another opportunity to get together at earnings and as we continue to flesh out plans and what have you, so not giving full year guidance at this point.

Okay. And then just on the capital return question. The SCB, obviously, is coming soon in a couple of weeks. How should we be thinking about how flexible you can be when the SCB goes into place?

Yes. So look, I think the thing -- I'd point out a couple of things. One is better place than we were last year, right? We were able to start doing buybacks earlier this year. We certainly took advantage of that in the first quarter at the -- and did buybacks to the capacity we were allowed to do so. We're able to do that again in the second quarter. We're out taking advantage of that capacity as well this quarter. As I look about the go-forward, as you mentioned, the stress capital buffer will be an important factor. We'll see what comes out of the most recent CCAR analysis. But assuming that that's consistent, we'll be operating in a way that is aligned with the CET1 target that we've set for ourselves, so the 11.5%. As of the last quarter, we were at 11.8%. So there's capacity there, obviously. And we would operate in accordance with that going forward. I would point out that, over time, it would be my intention to continue to take a look at the CET1 target we have of 11.5% and look for opportunities to bring that down/operate inside of a range. The ability to return capital is obviously driven by the income we generate, the utilization of the DTA. And our objective would be to put capital to work where we can generate returns that make good sense and anything that was excess to return it to shareholders.

And relative to the dividend, how do you think about the buybacks versus dividend?

Well, look, I mean, we obviously want to ensure that we're taking advantage of where we're trading relative to book. And so where it makes sense to do that, we will. We obviously know that there are investors who get a lot of value out of the dividend as well, and so we want to make sure that we protect their interest, too. And so doing -- trying to balance that would be something we continue to do.

Great. Okay. Mark, thank you so much for your time today. Really appreciate it.

Betsy, thank you. Good to see you.

Good to see you, too, and we will move on to the next session now. Thanks so much, everybody, for joining us.