Citigroup Inc. (C) Earnings Call Transcript & Summary

All right. So thank you so much for joining us this morning. I have to read the disclosure first for important disclosures. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. Taking a photograph and the use of recording devices is also not allowed. This is meant to -- if you have any questions, please reach out to your Morgan Stanley sales representative.

Okay. Thank you so much with that out of the way. We are delighted to have with us this morning Vis Raghavan. Thank you so much, Vis for joining us this morning.

Betsy, thanks for having us, and thanks for hosting us all here, and a pleasure to be here. Good morning, everyone.

And for those of you who may not know Vis. Vis joined Citigroup last year as Head of Banking, responsible for investment banking, corporate banking and commercial banking. And he is also Executive Vice Chair, where Vis helps shape and drive firm-wide strategy. Now Vis, you are overseeing what I would call a renaissance in Citi's investment banking businesses with share gains in several businesses. And I first want to dig into your management style before turning to the numbers. So first off, what did you expect when you took this job? And what did you see? And how did that compare with what you expected?

So I've always admired Citi from the other side. I mean, they've been formidable competitors. You've come head-to-head with them on bake-offs and client situations. And I've seen some amazing deals happen, incredible idea generation and the like. So I always admired Citi from the other side. And when I kind of look back on my own journey and you look at the banking landscape, I felt Citi was kind of going through what every bank had been through in its kind of evolution, consent orders, remediation, transformation, et cetera. Every bank has had its own version of it. And in almost every instance, that institution has come out stronger. Jane's leadership has been remarkable. The way the progress the bank has made in kind of getting around a lot of the kind of the remediation actions, the transformation agenda has been truly, truly fantastic. And what is also remarkable is the way the leadership team has set up the building blocks for success. So you see a kind of a compartment of progress that is really getting the house fixed and stronger. But at the same time, what Jane has mandated is the businesses need to really get going. It's not kind of sequential. So while we are doing this, markets, banking, wealth, get going. So the strategy kind of really knits together. And then 1 of the kind of the key attractiveness of doing this has really been the kind of the -- just the scale of the bank. The geographical reach has been incredible, and it's really been validated since I joined. It's complete and it's global.

Okay. So 1 of the reasons I want to dig into this is because you do have some very interesting share gains in particular, in M&A for many of the last several quarters and '24 was a really strong year and 1Q '25 was strong. And I'm sitting here thinking, what happened, okay? What did you do differently? And is this a function of bankers being evaluated differently, paid differently? Is it a function of just hiring a lot more people? What's driving the share gain?

Hiring a lot of people. I mean, we're just getting started in terms of talent investment, et cetera, but let me come back to your point. If you look at -- when I joined the market share before '24 was around 4%. We ended up at 4.5%. At the end of last year, we had around 5.3% in the quarter go on. The gains last year were really driven by high-grade bond issuance. The whole investment banking market benefited from this was up to elections. You saw a lot of corporates prefund, et cetera. So there was a torrent of high-grade issuance, some acquisition financing, which was kind of brought forward and high grade typically tends to be what we call a bit more flow. So it has always been Citi's strength. It is linked to balance sheet. It's linked to capital that you deploy with clients and effectively, you have a high-grade bond issuance is kind of a byproduct of that plus, in this instance, clearly, was a lot of given elections, et cetera, folks wanted to kind of take money and access the market. So we were a beneficiary of that, that played entirely to what I always thought was a Citi's kind of really strong kind of competency. The bit that Citi kind of missed out on historically, and there is some math to it, which I'll come to later on. It was since the financial crisis, that entire financial sponsor boom and the leverage finance boom, Citi didn't partake in as strongly as some of the other banks did. So financial sponsors, for instance, grew AUM from, I don't know, around $2 trillion to around $12 trillion, $13 trillion today. And during that process, they bought, sold, bought, sold, financed, refinanced, and that entire boom was incredibly lucrative for the banking industry that Citi didn't play in, in part risk appetite because the crisis on the back of the loss leverage finance kind of boom was not particularly happy landing for the whole street. And also, clearly, I think from a risk appetite point of view, there was a general kind of retrenchment. What we did was, if you look at the AUM of this community, they have $2.7 trillion of firepower waiting to be deployed. If you look at any year of the overall investment banking is $80 billion of a fee pool, plus or minus 10%. And that's kind of except for '21, that's kind of been the steady state. Sponsors, left in, et cetera, account for between a quarter to 1/3 of the fee pool. If you look at Citi's rankings, they rank, I don't know, top 5 in investment banking fees. But if you look at Citi's rankings historically in sponsors and LevFin, it's 9 or 10. So in other words, if you're top 5, while not even addressing a quarter to 1/3 of the fee pool, just points to how potent that corporate -- the core franchise is, and all you have to do is if you modulate and you just become top 5 in the sponsor or LevFin community, there is a mathematical inevitability where your overall ranking has to be top 3. By doing what you're doing, continue to do keep doing that well and step up in this kind of the rest of the bucket. And that's kind of been proven because if you look at this quarter, KKR made 2 acquisitions. We advised Silver Lake and financed them on the Altera purchase. We advised Boeing on the sale of Jeppesen that Thoma Bravo bought. We advised Boeing there and then to the Apollo JV financed and Blackstone came along and financed Thoma Bravo. So suddenly, that pivot to M&A sponsors LevFin. And that, to me, has been really reassuring. I thought that will take longer, but that muscle memory is there, and we were able to do that.

So while we're on the private credit discussion, can you help us understand how you're set up for that industry group, if there's anything else to size that? And in addition, can you give us some more color on your partnership with Apollo and the opportunity set that you see there?

So the first point I'd make is private credit is mainstream. So it is no longer a kind of an exotic kind of buy to buy. If you have kind of pillars in the capital stack all the way from senior down their debt spectrum, mezz and then equity, private credit is a very kind of a key pillar now. And when we are looking at a capital structure, effectively, that is part of the overall offering. The key point, if you look at most of last year, there was simply no arbitrage between public markets and private credit markets. So the -- both markets were super competitive. They both markets, we're looking for opportunities to invest, that were not that many. And as a result, there was abundant liquidity and whether in public debt or in private credit. And that's kind of still true. But what you will see is that arbitrage will come back in. And that arbitrage really comes on the back of covenants. One is kind of buy to distribute and maybe hold a bit as opposed to buy to hold, maybe until maturity, mark-to-market, et cetera, cov-lite. So different nuances that make each attractive. The key kind of point here is the private credit market is not -- does not have a liquidity problem in that there is a wall of money waiting to be deployed. So for banks to commit scarce RWA, ring-fence that to create further pools of liquidity when the market is not suffering from a liquidity problem, it is really a supply problem. And everyone is kind of loves to kind of showcase I've got X billion, you've got Y billion to kind of say, I've got that firepower or dry powder. The dry powder there's an abundance of that. What the market lacks is supply, which was the reason Apollo wanted to team up with us because they wanted to partake in the origination in providing the supply for that wall of liquidity. And for us, what it does is you don't have to commit RWA. You don't have to ring-fence equity, et cetera. But if something is indeed you like it so much. There's nothing preventing Citi from owning it in our trading books or credit books or whatever it is. So it was really a very symbiotic partnership where you could lean onto this $25 billion of firepower, you could -- we have already worked with Apollo really well historically, and we also can bring others along. So in the Jeppesen instance that I talked about that Boeing -- the asset Boeing sold, it was Blackstone and Apollo that came together to provide the financing. So in short, it's a key part of the capital stack. It's here to stay. You're going to see more private public kind of get together. And what you will see is a kind of a real kind of drive where companies will choose. And this will go beyond sponsors, et cetera, to even corporates that may go down that route.

And so coming back to the talent that you mentioned, you're still acquiring. I wanted to understand, are there any other areas globally or product-wise that you're looking to build out further?

So first of all, I think the bench is remarkable in terms of the talent at Citi, very tenured. I mean, in all these LevFin deals I described, for instance, I mean, some of the team go back to the Solomon days. They've seen multiple cycles. They have bridge syndicated, underwrote, distributed multiple multiple transactions. And it was just remarkable. If you look 4 of those transactions were post Liberation Day. So not exactly conducive markets, a lot of volatility. We managed to kind of dissect it and underwrite it and distribute it incredibly well. So a lot of pedigree and talent within the system. There are pockets where we have white spaces where we will continue to build and invest in. In terms of the priorities, I think, tech health care are here to stay. I think the action -- between industrials, technology in health care, it's close to between 50% to 60% of the fee pool is in those sectors. When I say industrials, even industrials are adjacencies. So in other words, industrial company wants to buy in tech or in software or the like. So those are key focus areas. We'll continue to invest in the capital markets, LevFin businesses and really kind of really add more bench strength and capability. And likewise, geographically, U.K., Germany are kind of key -- the U.K. is a 1/4 of the European or the EMEA market. Middle East is really getting a lot of traction. That's been historically a super strong source of strength for Citi. There's a lot of tenure and a goodwill. And then clearly, China is going to prevail and stay relevant in whatever form and then you have Japan that is really getting reignited now as corporate Japan looks to focus streamlined. So I think Japan will be a key part of the IB wallet. And then India is a net benefit fishery of all of the stuff that is going on. Just 1 other point I would highlight is the middle market. So the Citi's Commercial Bank is really, really good. And clearly our investments are going to be mainly NAM, North America focused. And the idea of building the commercial bank to greater strength here. And marrying that and partnering more closely with the mid market kind of investment banking franchise is going to be incredibly busy, it's going to be incredibly fruitful. Also because the sponsors love to play in that segment of the market because the $2.7 trillion of firepower I talked about because that's -- the $1 billion to $5 billion deal size is perfect for that so.

And it's been a volatile year, obviously. Turning to the environment, if we could, just having had the tariffs scare and then the tariff pullback. And where are your clients now? What are you seeing today? And what kind of conversations are you having with your corporate clients on opportunities for growth and execution.

Look, there is -- stating the obvious, there's a lot of uncertainty out there. Folks, if you -- through our corporate bank, which is probably the best corporate bank out there, we get incredible real-time intelligence on the mood in boardrooms globally what clients -- how clients are looking at tariffs, their supply chains and the like. And look, there is a lot of anxiety. The sense we get is at 10%, which almost feels like a floor or a baseline tariff between 10%, 20%, folks are thinking, can I absorb this, how do I absorb this and basically put it down to kind of my cost of goods sold. Anything higher than that. The question is, how do I rejig my supply chains and the like. And all of this really plays into Citi's geographical reach, footprint, et cetera, because this is talking about -- you're talking FX hedges. You're talking about trade finance, you're talking supply chain. You're talking about how do I make sure that I'm not putting all my eggs in 1 basket and I'm kind of rejigging, redistributing my business model. And a lot of advice in terms of what all of this means for my global footprint and my global network. So point one, anxiety and bracing oneself for further uncertainty. To give you an example, what investment banking likes is clarity. So either it's really bad or really good, whatever it is just give us the news, but it is that middle area of not knowing that really freezes market activity. I give you an example. In April, in debt plus equity financing, there was about $1.6 billion of fees. And the run rate in debt and equity financing is around $3.8 billion a month. And that lack of -- so April just everyone froze, everything was on pause hold. We got -- we had cross-border deals. The Board had approved and the night before the board goes, we don't have to do anything. We don't have to do it now. Let's pause, let's revisit. So is that -- that is what kind of the freezing is what worries us. On the products, M&A continues to be super active. There's a lot of dialogue, a lot of engagement. And I go back to the sponsor firepower because they are a big driver of that, too, in addition to corporate M&A. And in corporate M&A, what kind of really pleases me about Citi is just the quality of the deal flow. So if you take last year, the largest M&A deal was Mars buying Kellanova. So we advised and financed Mars. This year is Charter Cox. So Citi is in Charter Cox. We talked about Boeing Jeppesen. We talked about Silver Lake, Altera, CDNR buying Sanofi's assets. So it's just the quality of -- these are the best of the best deals that are happening in the market, and it's really reassuring that Citi is featuring in all of that. Just 1 -- 2 final points. The financing market, the debt market is going to be more of a function of how the M&A market manifests itself because there's going to be a little by way of just pure flow, but more by way of acquisition financing and the takeout even though there's a wall of maturities waiting for redemption from the 2021 financing boom, but that's kind of more '26, '27. In equities, the IPO market, the IPOs that are getting done, and we've seen a few have been ones where there is less -- if I can use the word less of a cost of goods sold question mark. So in other words, to the extent you have any kind of geography, tariff, supply chain, cost of goods sold model. The question is, how do you -- with clarity and certainty, put out a 3-year forecast on this is how I'm going to do. So give me this valuation. And so what are you seeing is deals like in tech, in digital assets, et cetera, which are really kind of -- we added some recent deals that have done really, really well. But generally, the minute you put in it. So that IPO market is kind of a bit stagnant to the extent that there is a manufacturing or a supply chain aspect to it, which means what happens with those assets, some of them are sponsor held is do they go in an M&A route. So do they go P2P, there's a strategic come and buy them and that will once again feeds back to the M&A costs.

So I'm hearing there's a little bit of unlock going on relative to where you were in April. Is that fair?

It is. I think April was -- you saw the stats, I think you're seeing a bit more clearly, valuations are back at pre-Liberation Day kind of levels. Macro, we can't -- we don't have time to go through it there, but then you see the equity market, credit market, kind of in a bit of a disconnect, et cetera. But in terms of volumes, both in primary and secondary, I think you are -- it's healthy now.

So can you give us a sense as to how the quarter has been trending so far? 2Q '25 is pretty close to done. How has that been for banking and trading?

So let me start with banking. So I laid out the context. So clearly, M&A is the catalyst in the wild card. I think debt and equity slower. So overall, in banking year-on-year, we expect to be up mid-single digits. If you take markets, the activity both across the FI and the corporate space has been strong. Also, FICC and equities have been strong. And year-on-year in markets, we are expecting to be up in the mid- to high single digits. Clearly, we are still early in June. There are a few weeks still left to go. On expenses, clearly, Mark guided last quarter. As he mentioned, this quarter, expenses are likely to tick up around $200 million for this quarter, quarter-on-quarter. But overall, full year expenses will be -- we expect to be in line with guidance. And then finally, on cost of credit. Once again, given the macro environment, et cetera, cost of credit compared to last quarter, we expect to be up a few hundred million dollars. Once again, this is reserves. And once again, on cost of credit, a lot of the work is currently still being done. We still have a few more weeks to go this quarter. But on the credit overall, I'm incredibly reassured on the quality of the credit book. So if you take corporate exposures, over 80% or 80% or thereabouts of our corporate exposures are high grade. If you take our international exposure, 90% or thereabouts is high grade or it is exposure to subsidiaries of multinational corporations. So a lot of comfort. And then as you know, our card book [ skews ] prime. So overall, a lot of kind of comfort on the quality of the exposure of the credit book.

Okay. So just putting it together 1 more time, if you don't mind for folks who might have missed that. So you're banking year-on-year.

Up mid-single digits, markets year-on-year, up mid- to high single digits, $200 million up quarter-on-quarter in expenses, but expect to be in line with full year guidance for expenses.

And that's for the whole company?

For the company. And then you have a cost of credit is a few hundred million dollars up on last quarter in reserves. This is just the reserves.

Right. So provisions is up Q-on-Q due to reserve build?

Correct.

Okay. While we're on credit, could I just ask your opinion on the lending to other lenders. So also known as non-depository financial institution lending. And we get a lot of questions from investors on how should we think about the credit cost associated with nondepository financial institution loans.

I think you have to look at as with every loan, you have to look at it in the context of the firm's cost of capital, the excess return that capital generates, and then the opportunity cost of deploying that capital. And this is something which we have -- 1 of the questions you asked earlier was what metrics have you put in that are different? And NBFIs are very much whether it's a corporate NBFI or whatever, the overriding mindset. And this is something which internally is also a cultural shift is the -- if I take -- if you're a banker and you're making $30 million and your fee pool is $100 million.

What's the name of that banker?

No. So if you're making a revenue of -- no, I'm not making comp on $30 million. I meant revenue of...

Okay. Thank you for clarifying...

If you are a banker that's making $30 million of revenue with a client, and the client has $100 million fee pool, then I bow to you. If you're a banker that makes $30 million and the fee pool is $1 billion, then you're leaving a lot of money on the table. In both instances, you may meet your bogey or your hurdle or whatever, 15%, whatever the number is, and basically justify that credit that you're extending, whether it's a corporate or a financial institution, NBFI, any client of the firm. I think the discipline that is we are really now embedding in the organization is it is not just absolute. You cannot look at 30 in a vacuum. It is 30 in the context of the entirety of the opportunity. And the entirety of the opportunity is linked to what is that fee pool that the client is -- and the Street is partaking in. And the second very important thing that ties back to your question, NBFI or otherwise, is when you look at that $30 million, a banker that generates $30 million of revenue and has a $2 billion lending outstanding to a company. That $30 million is not the same as a banker who creates $30 million of revenue with a client, with no capital outstanding to the company. So in other words, that -- and I think the Street and a lot of banks sometimes just have a revenue focus. The pivot has got to be revenue less cost of that revenue, which is really a bottom line ROTCE focus. And that is something culturally we are really, really driving our guys to is what is the bottom line so that the marginal opportunity cost of every dime or dollar of capital you deploy is perfected to the entirety of the fee pool. So -- and that's when you have to make capital allocation decisions to see, okay, where is the best excess return for that dollar of capital that you deploy. So that's a big focus right now so.

So Vis, thanks for bringing up ROTCE because that brings me to my next question. As I think we all know around the room here, Citigroup has a goal for ROTCE driving that up to 10% to 11%, I believe, right, in the next year or so, a couple of years in the medium term. And I'd be interested in understanding where the drivers are for you and your business to help contribute to that. Because I think the ROTCE in your business was around 7% in 2024. And I know Mark said, "Hey, this should get to a bit under 15%. So that's a doubling. So how do you do that? What's the plans, goals time frame?

So look, I think all of the above in terms of what we've discussed so far, but let me kind of quickly a couple of key points there. One...

We have 7 minutes. You don't have to be quick.

A couple of points. It's a numerator and the denominator. So let's talk about the numerator first. One is earnings momentum, driving revenue growth, and basically, this is really going to come through share gains in investment banking. And there is a portion of that is the inevitability piece I talked about. So we are top 5 globally. You are 9, 10 in pockets, which is sponsors LevFin. We don't -- we've got to grow LevFin responsibly. So because this is typically sub-investment-grade et cetera. We will grow that. If we even get back to a top 5 landing with that grouping and we preserve and do better with our core corporate franchise, that is mathematically an inevitability where we should aspire to be top 3. So one. I think the second point is in pockets, which are going to be very defining going forward. So sectors I talked about tech, health care, industrials, which is a core strength of Citi's and then a whole bunch of others where Citi is very, very credible. So we'll keep investing and growing there. Geographically, North America is a key market. Let me give you an example in corporate banking, for instance. Citi's geographical depth and spread in terms of servicing clients is incredible. So we are in remote locations. We are in countries because multinational American multinationals, European multinationals want us there. So we are servicing their needs there. Typically, these locations are more difficult to navigate. There's KYC, AML and a whole bunch of other costs, et cetera. And the reason we are there is because our clients want us to be there. What we cannot have is clients giving us business in those markets, and we accept that as a reward. The reward is the easy juicy, G7 markets, dollars in the U.S., euros in Europe. And what you cannot have is we are sitting there servicing their needs because they want us there in these far-flung locations. And then the easier stuff goes elsewhere. And I think we need to bring together the opportunity is and this is a big focus for us is that global network inbound into the easy, what I would call the easier markets per se, in corporate banking.

This brings up really a question a lot of people are asking today in our multipolar world as we shift towards this or as we're in it now. How are you dealing with customers who might be leaning to an institution that's headquartered locally? Are you finding any of that dynamic entering the conversation?

Absolutely. And this is a huge strength for Citi because Citi is global, but in a lot of these countries, it's a centuries old. It's kind of local, local, is embedded in the fabric of these countries. And the corporations within these countries. And what you are seeing now is that know-how as you reroute supply chains, as you diversify as you are rejigging your thinking, that know-how is incredibly valuable. And that leads to -- before if it was unipolar flows, maybe dollar alone, you're now seeing cross-currency multipolar flows in currency, whether it is in hedging, whether it's in swaps, whether it is custody of assets. And all of this really plays to Citi's strength because it really knows these markets. So our value added in terms of educating clients and you've seen this already just in understanding what there is -- just in terms of clarity what clients are seeking, around leaning on each other and wanting to find out more. They're relying on the Citi intelligence infrastructure to really get a handle on what are others doing? What -- how easy is it for me to readout this into India. And Citi is one of the leading banks in India, so you say, hang on a second, this is what we can do for you. So those discussions are exactly to your question, it's been before there were maybe unipolar, those are multipolar, and not everyone can play those other kind of adjacencies. So that's a huge strength. Just going back to your question again on how are we going to turbocharge returns because I want to come to the denominator, too. And then the other point clearly is really on the commercial bank, the middle market, once again, focus into NAM is going to be a key piece. And in all of this, this is really ownership accountability, getting a mindset for excellence and really getting the muscle memory back of winning again and again and again. And in the denominator, clearly, we will get -- there will be a transformation dividend. There's good progress being made there. And I think a lot of that...

A transformation dividend.

Yes because you will -- the firm will come strong -- come out stronger on the back of that. Already you're seeing the business lines are super joined up. There is a very tight, high-quality leadership team that Jane has put around with very clear visibility, lines of responsibility. There is nowhere to hide. And the key is the expenses that are being -- when I say that -- when I talked about transformation dividend, a lot of those expenses will gradually kind of tail off as we remediate and deliver. And also on capital, we are optimizing. So we are really looking at excess return, how much extra return that capital is getting. And clearly, as we grow, we will use more, but we will also return more on the capital we deploy. So it's both. So it's really work on both sides. One is the numerator in terms of revenue and earnings momentum and then clearly optimizing capital in the denominator.

Okay. Excellent. Well, thank you so much, Vis, for joining us this morning.

Thank you.