Citigroup Inc. (C) Earnings Call Transcript & Summary

Thank you again, everybody, for joining us. We're here with Citigroup's Treasurer, Mike Verdeschi. Many of you know him. He's been at Citi for a number of years, joining the company back in 1990. And he's responsible for managing their treasury activities and particularly, obviously, managing the very large balance sheet that Citigroup has. The timing of this meeting couldn't be better with the announcement, of course, yesterday, of the Federal Reserve raising rates. And Mike just told me this morning that Bank of England raised rates by 75 basis points as well.

So with that, what I'd like to do is maybe, in talking about the outlook, Mike, just what's your macro outlook? What are some of the indicators that you focus in on to watch to see what's going on?

Sure. Gerard, thank you, and thanks for having me here. Really looking forward to this discussion this morning. The timing is great. I mean it is all about the macro right now. And my focus and the industry's focus really has on that theme of inflation and the response of the central banks and how that's really working its way through economic activity and financial conditions. Maybe just starting with inflation. Of course, what's gotten the Fed to be so aggressive is the combination of higher prices, both in goods and in services. I think the good news is that more recently we're starting to see some of the pressures in goods begin to alleviate. You saw that in the global PMI price components that started to soften a bit. And our economists think that over 4Q you'll continue to see some softening of those price pressures in goods. The problem you have is in services. Pent-up demand, obviously, coming out of COVID lockdowns. You're seeing continued pressure in the service sector in terms of prices. And that's likely to persist certainly where employment levels are and where wages are. So in response to that, the Fed has been incredibly aggressive. I mean this is one of the most concentrated hiking cycles we've seen. And so including yesterday, 375 basis points just over 8 months' time. Now what's interesting, and I'm glad the Fed referred to this because they talked about a lag effect, and that's something we've been very focused on. It takes -- many economists would say it takes roughly 1 year for a rate hike to work its way through the system. We've now had 375 basis points in 8 months. It means the very first 25 basis point hike has not even worked its way through the system yet. So the Fed talks about a lag effect. I think that's an important point. The other is the impact on financial conditions. And so we know equity prices have come off. There's a lot of focus on that. But when you think about the broader financial conditions and the tightening, that includes the increase in the value of the dollar. It includes credit spreads as well as volatilities. And so some would equate -- some analysis would suggest, if you just look at the tightening of financial conditions, that may equate to another, call it, 400 basis points of equivalent tightening. I wouldn't say it's exactly overlapping. So that has been a big focal point. Now what's interesting about the Fed is, yesterday, many thought they would do this notion of a dovish hike, meaning that they would hike and they would indicate that perhaps they would start slowing the pace. They did indicate that they may stop doing those [ 75s basis points ] and they indicate 50 basis points but they're going to keep going. And they're going to be persistent because they want to really get inflation under control. I think that surprised the market that their terminal rate, although they didn't do the dot plot, would suggest that they're going to be higher. Now there's other things that we're looking at. When you say what are we focused on, 5-year, 5-year inflation expectations, that is something the Fed watches very closely. And those inflation expectations have still been pretty well anchored. And so that is something they want to be focused on. They don't want to lose the market. They don't want to lose expectations. But the balancing act, of course, is, when you're hiking this aggressively, the fears of will this create a recession, will it create a hard landing. And another gauge I'm looking at is the price differential or the rate differential between the 2-year and 5-year part of the treasury yield curve. That's inverted, and it's been -- it's inverted at a level that we haven't seen before. And basically it tells you that the market is expecting the Fed to hike aggressively, but thereafter, perhaps begin to cut somewhat aggressively as well. So those are important dynamics that we're looking at very closely. Now what has this also forced, it's forced global central banks to begin to hike their rates as well. When I say forced, I'll explain what I mean by that. First of all, they're responding to their own situation in their economies. Inflation is high. But also they have to be mindful of their currency. So a part of that hiking may be, in fact, defending their homeland currencies. And so again, you're finding the situation where Bank of England hikes. I think, unlike the Fed, they hiked and they kind of said, "Look, the market is expecting much more." And maybe they don't do as much as what the market is anticipating. So how does this all play through? Of course, Europe has been a great area of focus, obviously, for energy purposes and their reliance. And so the focus is perhaps that's where greater vulnerability exists in terms of recession. The U.S. as well, obviously, with the pace of hikes, there's some view that perhaps the second half of next year is probably when -- if you're going to see a recession, that's probably when it begins to manifest. And then, of course, Asia plays a key role. Obviously, the lockdowns in China and the economic consequences of that perhaps a little greater than maybe had anticipated. So there's a lot in play at the moment, and this notion of rolling recessions is on the minds of, I think, of the marketplace. From our perspective, a couple of other points is, when we talk to our corporate clients, a lot of the focus is on higher rates in the geopolitical dynamic. The one other thing I would add to that is that we're also focused on how markets are functioning. Obviously, I talk about this notion of hiking rates and defending currencies. And obviously, a couple of governments have -- are beginning to use fiscal spending in order to support their economies. Obviously, we saw the impact in the U.K. with that announcement. So that is a dynamic in how the markets are responding to this very aggressive hiking cycle. That's another area that we're keenly focused on, liquidity in the marketplace, if you will.

Mike, when you said rolling recessions, that brings back the memories of the 1980s when we had rolling recessions in this country and the high rate environment. Have you been surprised? You mentioned the 375 basis points rate increases. Have you been surprised there hasn't been more disruption yet? We had the U.K. pension issue, temporarily it seems to be resolved, but it just seems like the system is more resilient than one may have expected. If we would have said last November, we're going to see 375, 400 basis points in 8 months, I think a lot of people would think the system would have had a meltdown.

Yes, I agree with that. I mean, I think it's not just been in the U.S. It's been global. And so when you look at some of the impacts, I mentioned equities, and equity prices are off 20%-plus. But that -- but given where they had come from, that is not an unreasonable pullback and repricing, if you will. So I agree with you. I think the markets have held up pretty well given what's happening. But of course, we're going to stay keenly focused as the markets are handling it well now, as you begin to see perhaps those recessions unfolding, how do things evolve from there. But I agree, to date, it's been pretty impressive.

And obviously, we all know that the Fed is using rates as a tool to try to tame inflation. But the other tool that doesn't receive as much coverage is QT. So maybe can you share with us what your views are on QT, how it's unfolding and how it may impact the banking industry?

Sure. So for QT, I would go back to maybe the 2018 and '19 experience with QT. At that time, they probably reduced their balance sheet by something along the lines of $700 billion. They did it over a 21-month period roughly. And what's interesting at that time is they had to try to find a level of bringing down their balance sheet, taking reserves out of the system, but not leaving reserves in the system short of where they needed to be. And of course, reserves in this system that, I would say, optimal level had increased post-Financial Crisis because the industry needs more reserves, obviously, more liquidity cushions are being held as part of how regulation and bank practices had evolved. What you found in the fall of 2019, maybe reserves got a little bit low. And of course, you saw some of the spikes in the short-term financing markets. Play to take forward right now, with quantitative tightening, I talked about $700 billion, you probably look at more at $2 trillion to $2.5 trillion, right? So I want to make sure I'm using the right handle, so trillion, back -- and what I think the Fed is doing this time is being mindful of, as they're pulling that liquidity out of the system, that they don't leave the system short of reserves. So they stood up a standing repo facility to ensure that they can step into that market, use that as a backstop and provide additional reserves. So I think that is one key difference. The other is that you have the interplay of the reverse repo program. And so that is up over $2 trillion now. So I think, from our perspective, it's a larger amount. It's still, again, all of this is a highly concentrated time line that they're operating in, but they're giving themselves a tool of adding reserves back in the system, I would say, in a reasonably accelerated pace if need be. So that is helpful. And I think the focus on deposits, of course. So when we think about the last cycle, deposits were still growing, this cycle, many economists would say deposits will still grow, albeit at a slower pace. And obviously, we've seen some headwinds to that more recently.

And speaking of deposits for Citi under QT, what's your outlook for the deposits? They've been very plentiful for you and others. And then what are some of the alternative funding sources that you could tap into should the deposit outflow actually be maybe greater than expected?

Yes. It's an important point. Because when we think about that quantitative tightening and how it's going to unfold, certainly the magnitude, we do think that deposits are going to slow down. When I think about Citi, though, and I think about our funding sources, obviously, in the bank, we're heavily weighted towards deposit funding, and we will continue to be. But to say a bit more about that, our focus on deposits is really driven by that client relationship. And so when I think about our ICG business, that client relationship is really driving the activity that we're seeing. And so our focus has been on operating accounts. And so that comes out of that relationship, and that tends to be stable. When I think more broadly about what we've described on Investor Day and the businesses that we were investing in, it includes wealth management, includes commercial business. Those activities will be deposit-generating as well. So well established in ICG, adding a couple of investments in business activity that can also bring deposits. The other point, too, is that we're operating around the globe. And so we have deposit-raising capabilities around the globe, multiple currencies. That provides some additional flexibility as well. But you asked the point about other funding. It's really important. Because if you go back, call it, 2018, when I think about our wholesale funding level, so some of our term bank funding programs, we're probably 3x larger than what it is today. During the quantitative easing this time around, we were actively reducing wholesale funding to make room for our clients to bring those deposits in. And the reason we were doing that, of course, is because, as our balance sheets were growing, we were seeing that SLR come into play and the G-SIB score being impacted. So we brought down that wholesale funding pretty aggressively. But as deposits perhaps slow, we're beginning to normalize and step back into those types of products. It's good diversification of funding. And so we think there will be some normalization in that space.

And the other area, when you think about this rising rate environment, it's had a big impact on investment portfolios. How are you guys managing your investment portfolio? And if rates continue to rise, what kind of strategies are you thinking of implementing?

Yes. It's a really important point because that investment portfolio, first and foremost, serves as a store of liquidity. That's your liquidity cushion. But it's a very valuable ALM tool or managing your interest rate duration mismatch. And in managing those activities, we've always been mindful of the fact that the change in value of those securities or that OCI impacts your CET1 ratio. So we always have to be mindful of the volatility that comes out of that portfolio. And so there's really 2 things that we thought in that regard. If you go back to 2017 and you looked at the portion of HTM securities that we held, it was probably 15% of our securities portfolio was in HTM. Right now, that's probably over 50%, more like 53%. So it's the mix of those securities from AFS to HTM to help mute that capital volatility. The other part, too, though, is that we've kept the duration of that securities portfolio pretty short. It's roughly 3 years. The other thing we do, though, is that the HTM portion of that portfolio, we allow -- right now, that's roughly 4 years. The AFS portion, that volatility that hits capital is only 2 years. And of course, keeping that short duration, especially as rates are rising, gives us the opportunity to reinvest. And so our view is that we're going to continue to stay pretty liquid in that portfolio. Our preference has been U.S. treasuries, agency mortgages. In the past, we've had spread products as well. But I would say, at this point, we're probably at this very moment not buying product that's going to draw capital in spread products. Of course, we're prioritizing that capital as part of our Investor Day strategy in deploying it to clients.

Many of us have heard, obviously, the strategies of moving in from AFS to held to maturity. We all know the risks about the AFS portfolio. You just described them. What are the risks when you move it into HTM? What are some of the risks of doing that? And what kind of environment would make that strategy a little more uncomfortable?

Yes. So the consideration with HTM is always about do you retain liquidity value despite moving into HTM, held to maturity. But the reality is that a lot of the liquidity that we think about in those securities is also in the financing market. So you can continue to finance that if needed. Now obviously, we have an abundance of deposits, so that is not an activity we engage in. But if need be, markets that deepen liquid for the types of securities we hold. So that's how we think about that portfolio.

And to this question, we get different answers, I think, from different banks. How strict is the HTM restriction on selling out of that portfolio?

Yes, yes, it's a really good point. Because there are -- you are able to sell out of that portfolio if certain conditions in that. For example, if there's some regulatory change or if there is a massive change in strategy in the balance sheet, if there's downgrades of those securities. But also, there is this notion of a rare event. And if there is a rare event, that allows you to unwind that security as well. So if I think about our portfolio today of liquidity, we've got cash, we've got securities that are in AFS, we've got HTM that could be financed. By the time you've taken all those steps, if you actually found yourself still with the need to sell, that would be extremely rare.

Yes, yes. Moving over to the income statement. Obviously, one of the beneficiaries of this rate environment is net interest revenue growth. Can you just share with us what are the drivers for Citi's net interest revenue growth and what it looks like through the end of the year?

Yes. And so maybe I'll take the net interest income aspect of that first. So look, we've had a good pickup in our net interest income. Just looking at the previous quarter, $1.9 billion year-over-year on the quarter. And when we think about the drivers of that, as you say, interest rates are higher. We've also been thoughtful about managing the pricing of our deposits and so that lagging effect, if you will. And then lastly, we've seen good volume pickup as well, especially in our cards business. So all of that playing through nicely and certainly with higher rates and is part of the benefit in our services businesses as well. When I think about the fourth quarter, at the earnings call, we provided a range of $1.5 billion to $1.8 billion. And our thoughts in [ FX ] markets. And part of our thinking there is that the interest rate environment is continuing to evolve, that deposit pricing of that beta is going to continue to evolve, certainly, as rates move higher. And then, of course, in this macro backdrop, how volumes will evolve is something that's on our mind, too. And of course, we've got FX in play happening, too. The last thing I would say is, when you look at the fourth year-over-year, you begin to take some of the impacts of those divestitures like Australia and Philippines. So there's a few things that we're seeing that play out in the fourth quarter.

Yes. You talked about changing in the IRE methodology. Can you share with us what you're thinking of when it comes to that?

Yes. So we've historically had an IRE that we refer to as the gap IRE, which a gap between the interest rate duration of assets and liabilities. And we thought of that as a pure risk analysis, if you will. And therefore, it included some runoff of the balance sheet based on things like repricing. But we recognize that for a lot of folks that think about those net interest income outlooks, it may not be as helpful. And therefore, when we stepped back and evaluated what you all look at for that net interest income outlook, when we looked at what our peers did, we thought it would be good to perhaps evolve to disclose a new type of metric. So we call it the static cash flow metric. And so it keeps that balance sheet static. It still has some simplifying assumptions. So it's still an instantaneous 100 basis point move up in rates. So how your net interest income will ultimately play out will be different than that exact measure given some of that simplification, but we thought you would all find that more useful as you think about our net interest income evolution.

And with that, how has that methodology over the last couple of quarters changed your positioning of the balance sheet?

Yes, I would say -- when I think about how the interest rate sensitivity has evolved, what I would say is a few quarters ago, we were talking about that being in the range of $2.5 billion to $3 billion, and that was the upward shift of 100 basis points, and that had been more weighted towards nondollar versus dollar. And of course, we're seeing that evolve as interest rates move and betas move around. The point I would make is, as interest rates have been moving higher and those betas are moving higher, we've seen some of that sensitivity, that asset sensitivity come down a bit. So we think at this point we're more like $2.2 billion as opposed to the $2.5 billion that I mentioned, still continues to be weighted towards the nondollar currencies as those betas are starting to move. You saw the weighting between nondollar sensitivity and our dollar position actually skew a little bit towards dollars. Because while the betas have been working through that dollar sensitivity, we've seen that come down, we've also preserved that position, if you will, with the expectation that the Fed would still be hiking rates. So we still want to position ourselves to benefit from higher rates. Now over time, as the rate cycle plays out, we would expect that asset sensitive position to begin to trickle down all else equal.

Yes. In fact, through the cycle, how do you see the NII contributing to revenue when you think about it through the cycle.

Yes. That's an important point. I mean that NII through the cycle, I mean, there's a few things I would say. Obviously, every cycle is going to play out a little bit differently, what are our client needs? How do you think about the peak to trough with interest rates the shape of the curve. There's many things that are going to factor in that determines how your NII plays out. But I would say, historically, we've been more, I would say, concentrated in that NII based on our business mix. And what I mean by that is we've been more lending-led in our cards portfolio as an example. And when I look at wealth management, we've had less activity in that space relative to our peers. So one of the things we talked about at Investor Day is the importance of, I would say, the revenue stream and sort of the sustainability of that, the predictability of that, and we want that to be robust. And so one of the things we want to do is complement that net interest income with fee income in both ICG and our PBWM business. And so we've seen good progress in that space, right? That is a key priority to generate that fee income, just in our services business year-to-date, we're up something along the lines of 9%. And some of the drivers related to that, it's going to be that cross-border activity and flow. It's going to be commercial cards. So there's a number of areas that are factoring in, including U.S. clearing. In PBWM, of course, fees are important as well. We'll see that come through in wealth management. Obviously, in this environment, there is a headwind there. But over time, we expect that to be an important contributor. So for right now, we're very happy with that net interest income uplift. We'd like complementing that with fee income. Because as that cycle evolves, ultimately, doesn't feel like it today, rates will come down at some point. But as rates come down, we want to make sure we have a good complement of net interest income as well as fee income contribution.

I mean you mentioned and touched on it with your investment portfolio comment about the markets obviously going through CET1. How do you see capital requirements evolving going forward for Citi?

Yes. The capital requirements evolution, it's really an important point because when we step back and think about some of the dialogue that even the Federal Reserve has had about this notion of thinking about capital holistically or even the notion that there's enough capital in the system, obviously, more recently, for different reasons, capital requirements are increasing. For some banks, SLR was a factor. For us, obviously, as quantitative easing unfolded, a lot of liquidity came into the system. We took on deposits. And that really began to put pressure on our G-SIB score. So of course, next year in the first quarter, we will be up in G-SIB score given our requirements because we're outside of what was that lower band. And importantly, we're also in that building capital mode for the stress capital buffer, which we're up 100 basis points in that buffer. So despite that sentiment around enough capital in the system, obviously, we've been building capital, other banks are building capital as well. I think, importantly, going forward, the question that I think is important is, what is -- how do all these measures work together? And when you think about G-SIB, when you think about SLR, when you think about the stress capital buffer, what are the drivers of what are creating the need for -- for banks to hold capital and more capital? And are they working together the way you would intend? And are they having the desired outcomes? I think those are important holistic questions that I know the industry you're asking, I know the Fed is thinking about as well. And it's especially important as you think about the finalization of Basel III or as many refer to as Basel IV, there will be a question about, okay, what does that mean for banks? Does it mean more capital, more RWA? So thinking about capital holistically continues to be really important to get at the right drivers for why banks are holding capital.

And speaking of that, Citi, I think, has targeted a 13% CET1 ratio for next year. Can you share with us what are the drivers to get you there?

Yes. First of all, we've had really good momentum building capital over the last couple of quarters. So if you go back to Q2, quarter-over-quarter, we built another 50 basis points, and that got our CET1 up to 11.90%. As we talked about on the earnings call, we also built capital in the third quarter. So at 11.90%, the preliminary number we talked about in the earnings call, was 12.2%. As we finalize that number and very soon we'll be releasing the queue, you see that number up a bit. So 2 good quarters of building capital. And then on the rest of the way to 13%, which we talk about in the middle of next year, it will be a lot of the same drivers. It will be the earnings generation. In addition, that pull to par on that investment portfolio. So that OCI, the fact that those securities are at a negative now as that pulls back to par, that will be capital-accretive as well. Of course, you have capital from the exits also playing a key role, too. And then, of course, the continued thinking around how we're optimizing capital and things like RWA. Of course, offsetting that will be the payout of dividends. But 2 really good quarters of building capital. The path will continue to leverage those, a lot of those same levers, especially in that earnings generation.

Is it fair to expect that -- you talked about the accretion coming back into capital from the unrealized losses. Is that over a -- because of the duration of the portfolio being around 3 to 4 years, we should expect most of it to come back in that period?

Yes. I mean it's a short-duration portfolio, and so you do have that pull to par, coming back rather quickly. Now that being said, that assumes interest rates remain where they are. So -- but yes, that is, again, a key driver of why do we keep that portfolio short. Because if you do have that capital volatility, it comes back to you very quickly.

You mentioned RWA optimization. Can you share with us some of the strategies you would use to optimize RWA?

Sure. RWA, and I'll take us back again to Investor Day, when we think about, first of all, capital more broadly, we talked about the strategic allocation of capital based on our strategy and the clients that we're going to serve. Within that, of course, we talk about that RWA optimization, in particular, where we focus on the markets business, as it pertains to that, but not only the markets business, of course. But within the markets business, one of the things that we focused on was building a simple revenue to RWA ratio, and we established a target of 5.5%. Over the course of 2021, that ratio was in the area of 4.5%. The team has done a really good job of being thoughtful about how they manage this, and we've made progress in that space. So we're probably about halfway to that goal at this point. And it really involves our businesses really understanding what we're trying to achieve as a firm, working with their clients. And there's things you can do. You could work on how you structure your transactions or your trades. You could think about your margin, your collateral. So you're thinking about the revenue associated with it. You're thinking about the capital. And so it's been a good set of dialogue that our business has been having in terms of serving their clients and improving that optimization of capital in that RWA.

And speaking of that, can you share with us your lending exposures in consumer and corporate and how you're managing that?

Yes. So the lending exposures, look, we feel good about our exposures. I mean the first thing I would say is those are -- those exposures are really a reflection of a very robust risk appetite framework that we maintain, the discipline of staying within that risk appetite framework. To double-click that a bit, within that, a great degree of focus is on concentration, and that could be concentration in terms of country, it could be sector, it could include ratings. So there's a good amount of focus on concentration in addition to stress testing. And the stress testing will run, we'll get at some of those deep stress tests, which look at credit. But of course, in this evolving macro environment, we'll be deploying stresses more rapidly to really understand what it means in this evolving macro backdrop how might you look at your underlying exposures. Getting to the exposures themselves in the ICG, of course, again, we are -- vast majority is investment grade. So when we look at that funded loan portfolio, 80% is going to be an investment grade. And those are going to be in sectors that we've operated in for a very long time. So we've got expertise, we've got experience, and we're working with a lot of the clients that are industry leaders in their space. If you look at in our personal banking space, again, very good credit quality. Because when we think about that portfolio, it's going to be heavily in the prime space. Getting into a bit more detail, when we look at the funded exposures, those are going to be, when I think in FICO score terms, roughly 80% of that portfolio is going to be in that 680 and above FICO score. So good exposures that we maintain operating within a robust risk appetite.

You talk about the consumer side, and there's a lot of discussion about consumer credit and credit quality. What are you guys seeing in the consumer credit quality side since, obviously, you got a very sizable credit card portfolio?

Sure. And of course, you've seen during COVID, with all the fiscal stimulus, you saw some abnormally low levels. But I would say, at this point, you're starting to see some normalization as we would expect. First, I would say, with the NCLs, the NCLs are still half of what they were pre-COVID. When I think about the cards portfolio, the branded cards portfolio, I'd say payment rates are still high. Delinquencies are still benign. So you're still seeing that portfolio in good shape, but some normalization beginning. I think in retail services, we're a bit deeper into credit, you are starting to see those delinquencies pick up. I'd say there as well payment rates are still high. Payment rates are still higher than they were pre-COVID. And the other part I would say is from a reserve to funded portfolio, that ratio is at 7.5%. So we're starting to see some normalization, as you would expect, but we feel good about the spaces that we're operating in, and we are well reserved.

And on those payment rates higher than the prepandemic area, have you guys been able to figure out what drives it? Is it just higher wage growth that consumers have that give them more money to make those payments? Or is it the low fixed rate mortgages that maybe people have from the 2020 and 2021 period?

It's a good question. And it's something that we've looked at a lot and trying to tease out what it is. And some -- it is as simple as all that liquidity in the system, the fiscal, the abundance of jobs, the wages that allows you to have excess savings and use that savings to make payments, [indiscernible] say is, is it the wealth effect? Quite frankly, that allows you more comfort to make those payments on the cards. And so one may be cause and effect, but we think the combination of those factors really play into why those payment rates have been high.

Yes. We heard at Investor Day, obviously, the transformation that Citi is going through. Can you share with us how that's affecting the treasury or organization that you're involved in?

Sure. Yes, transformation, of course, firm-wide, our #1 priority. We're going to be a simpler, more efficient organization when -- as we're embarking on this. And that is our ambition. It's a good question. Because as it pertains to treasury, and I think this transformation as we think about it, it is firm-wide, and it is something that it's a journey that we are all on together. When I think about the treasury organization, I think often about the abundance of data that we acquire for things like having visibility and reporting our capital and liquidity. And that abundance of data, for some users, you need on a daily basis. And so part of that transformation, as we simplify, as we leverage straight-through processing, you just create a lot of efficiency in those processes to acquire that large-scale data, especially on a daily basis. But I also mentioned the stress testing, and this is an important point, too. As we simplify, as we streamline, as we do more of these stress tests, especially in this type of market environment, as we're using that, that allows us to really see not just the underlying exposures, but how those exposures may evolve in this dynamic environment. So with those stress tests understanding what your liquidity needs may evolve to, which your capital needs may evolve to, staying out in front of that is so important. So I talk about making sure as we think about the holistic management of our funding profile always wanting to stay ahead, and that enables us to preserve that safety and soundness, but also gives us the flexibility with those resources to support our clients in an evolving macro backdrop.

Mike, obviously, you've been at Citi for a number of years. Can you compare and contrast this transformation to what you've experienced in prior regimes at Citi?

Yes. It's a good question. I would say I've not experienced something quite like this now, and that's a good thing.

A very good thing.

That is a good thing. And the difference of this transformation really is how it really encompasses the entirety of the firm. And as opposed to enhancements of capabilities being done in different parts of the bank, this is really the entirety of the firm getting behind what we're trying to achieve. So a common set of goals is key. I talked about that simpler, more efficient bank, something that is going to enable us to support our clients. That is key, but also thinking about that from an end-to-end perspective, right from the point of that client acquisition and how that data may flow throughout the organization. What's very different about it now is that the entirety of the firm behind it. We have the investments committed to the activity, and we're already seeing good results coming out of that.

That's good to hear. Maybe when we look out going forward with the risks that are out there, both on the macro side and in the geopolitical side, how are you today preparing for those risks over the next 12 or 24 months?

Yes. That is a good question. Because when we talk about the evolving environment -- we've talked about the vulnerabilities in Europe. We think that is key. This notion of rolling recessions, we think that would be perhaps the first place. The U.S. has been incredibly resilient, I mean, even looking at the [ inflation ] numbers this week, incredibly resilient. But again, the Fed is trying to balance that drive up rates, begin to get that inflation number under control. And some feel that the risk of some recession coming out of that is real. So that is another dynamic. We're looking at it. And of course, you have the impact in Asia and COVID lockdowns and whether there's going to be any pivot on that policy or not. Because that's having perhaps a deeper consequence in country than perhaps anticipated. So as we look out, we're trying to continue to look at a number of scenarios and how they play out. But the simple answer is, it's going to be hard to determine exactly what plays out, how it sequences. But our focus is, from a firm perspective, we're in really good shape. We're running multiple scenarios and we're running them often. And we're doing that in a way that's going to ensure that we could continue to serve our clients and help them get through this evolving environment. What's really important at this time is the strength of our balance sheet, capital, liquidity, credit quality reserves, each of those. If you think about capital, a couple of quarters of building capital, we're over 12%. Liquidity, we have just under $1 trillion of liquidity resources. In terms of our credit quality, again, I talked about in the ICG, the funded loan book, 80% in investment grade, in our consumer space up in FICO. And then of course, in the reserves, $18 billion of reserves. That reserve to funded ratio overall, 2.5%. The last thing I would say, too, is, if you think about the stresses during COVID in 2020, we built $10 billion of reserves. And at the same time, we still generated $11 billion of net income. So as a firm, we're in good shape. We're ready for a number of scenarios, and we're ready to serve our clients to help them get through those scenarios.

Great. Well, Mike, we've run out of time. I can sit here all morning with you, but we've got others that have to participate. So thank you very much, and join me in a round of applause in thanking Mike.

Thank you very much.