Citigroup Inc. (C) Earnings Call Transcript & Summary

Yes. No, very pleased. I think Shahmir and the team are doing a terrific job. And I look at the -- I'm quoting the second quarter because it's the most recent, right? But the business for several quarters, not just in the second quarter, they have been performing very well. NII up 18%, NIR up 16% for the quarter. And I attach that to 2 or 3 key drivers. The first one is that this is our moat, right? We have a global network in the rails of most of the global corporates around the world. We're highly embedded, and that's a critical capability that gives us the ability to drive these results. The second piece is the commercial intensity, how focused Shahmir and the team are on gaining new business and the mandates that we're winning. The win rate is up more than 30% year-on-year. We're seeing market share gains. So that commercial customer intensity is really key. And the third piece is investing in that first moat and making sure that we're not asleep in terms of ensuring that we put the right investments behind it. So when you look at our technology platform, we invest about $2 billion every year in our platform. And just to make it more tangible, let me give you a couple of examples. And these investments, by the way, they run in parallel between investing in our core to protect our moat and our position and at the same time, offensively innovate, right, in terms of new capabilities so that when customers or the market is ready, we're the first port of call. So in terms of core capabilities, as an example, we continue to invest in 24/7 U.S. dollar clearing. We just announced in the last couple of weeks, Custody Plus which is a capability to move a lot of the asset manager custody capabilities from the batch processing into near or real time for events and other pieces across 62 markets. Nobody has that across that many markets. So these are a couple of examples of investments. Also deploying AI for CitiDirect Assist so that we can be more responsive to customers on a faster clip. So all of these are things that continue to propel and augment the core. And then in addition, you've probably seen us, I think this year, we've made a number of announcements and investments on our digital asset capabilities, whether it's Citi Token Services, which is now in 5 countries and a couple of currencies, and we're seeing good volume pickups year-on-year. We announced a little bit earlier capabilities to -- for private companies to drive digital depository receipts. We've just tested as a pilot, the first U.S. bank that did a transaction with OCBC and Abu Dhabi Bank for the SWIFT blockchain ledger. So you're seeing us really lean into digital assets, too, so that when the market and when the customers are ready, also we're there to support them. So far, obviously, we are investing a lot in the core as well at the same time. Those things really anchor is the customer intensity, the investments we're making in the platform in order to make sure that there's perpetuity to our model.

Before we talk about the wealth business, and we've seen significant progress, returns now over 14% in the second quarter. Maybe just talk to some of the drivers of continued revenue growth and improved performance.

Yes. Maybe to recap for everyone's benefit, our near-term target of returns, the ROTCE for our wealth franchise is 15% to 20%. And it's one of our business where we know we need to show that return improvement. So Andy and the team very focused on that. Just to play back kind of the sequential journey for everyone, if you look at the returns in this business a year ago in 2025, 7.6% ROTCE against that goal of 15% to 20%. The first quarter, 10.8%; the second quarter, 14.4%. So you're seeing sequentially that we're making that progress. And that's on the back of seeing double-digit revenue growth with a good degree of consistency through several quarters. And at the same time, a lot of expense rigor that Andy and the team are bringing. Second quarter is a good example. That 14.4% return came on the back of 13% revenue growth, coupled with a 3% expense growth. So the more quarters that we can string together, the much easier you can see the path to getting within the 15% to 20% real soon. Now maybe to speak for a second about that revenue growth, and that really is anchored on 2 primary vectors that Andy is focused on. The first one I mentioned a little bit earlier, which is really driving the net new investment asset momentum. That's growing at about 9%. The client investment assets, which are kind of the denominator, those are growing at 14%. So we're seeing a lot of focus from Andy very much weekly, and that's what anchors the NII growth. And then on the deposit side, maintaining the discipline, number one, in offensively trying to grow volumes in deposits, which we're seeing about 4% but also and very importantly, managing the mix and managing the pricing and doing that with a lot of discipline. And that's why you're seeing a lot of the uptick in the NII that we saw in the wealth business over the last few quarters.

And maybe turning to markets. That's been another area you talked about investing, particularly on the equity side. Maybe just talk about where you're investing and just the progress you've seen.

Yes. Obviously, in a constructive market, we're seeing very good performance, but the -- just to go back to what we talked about at Investor Day, 2 big vectors of Anchor our strategy in our markets business. The first one is around, number one, maintaining our leadership position in FICC and at the same time, scaling equities. And that's what we spoke about at Investor Day and Andy was very clear on how we are really investing on that business for growth because we're starting a little bit later. And so making sure that we're driving that scale in the business. And that's why we're pleased with the momentum that we're seeing so far in the year and into the quarter as well. The second big vector of our strategy is continuing to leverage the diversification benefit that we get from the franchise that we have. And you actually saw proof of that in Q1 and in Q2, right, where you had strong equity performance, good spread performance in the second quarter, especially, not as great performance in rates in the first and second quarter. And still, we were able to produce record performance in the business and record momentum. So it's good to see how that diversification allows us to not necessarily have to have every single engine performing at full speed in order to drive good performance. So that's the second vector. And as part of that, we're also very focused on driving stable sources of revenues more and more as time goes by. So in the equity space, it's prime, in the spread space, what we're seeing with financing and what we're driving with financing and securitization. And the same thing in our leading FX and currency franchise as it relates to the corporate flows. So as you see those 3 engines come together, you're seeing more and more annuity-like behavior in some of our revenue profile.

Helpful. And then maybe shifting gears to capital. You're going to buy back more stock this year than last year. Can you maybe talk to kind of your framework for capital deployment, just expectations for share buyback going forward?

Yes. Our capital framework, just to play back for a minute, is priority #1, obviously, continuing to be the source of resilience that we have been for our clients and for the system over the last several years in terms of any disruption and dislocation that you can think of. That's our #1 priority. And once you get past that, it's for us finding the constant balance between ensuring that we're supporting our clients and our business with accretive return opportunities and at the same time, returning capital to shareholders. And hopefully, if you look closely at our first and second quarter, you can see us managing that balance, right, where we were able to support record performance in markets, in banking, in services by deploying balance sheet for our customers in those 2 quarters. And at the same time, we bought back about $10.3 billion across both quarters of our stock. So hopefully, you're seeing us manage that principle in real life. As it relates to the buybacks, we're pleased that we announced our $30 billion new program at Investor Day a couple of months ago. And also pleased that we closed the prior program of about $20 billion. So that is good. To your point, we are expecting this year in 2026 to be ahead of what we did last year, which was about $13 billion. for all of last year. And maybe the last piece I'll mention is as it relates to our CET1 ratio, we broadly have been operating within the range of our targets. So we don't expect to make very sharp movements over the next couple of quarters. We expect to be more or less around where we are.

I guess on the capital front, just maybe give us a brief update on where you are with the Banamex and just remind us of the expected timing and impacts and how to just think about that.

Yes. So Banamex, we are -- I'm glad with the speed of execution that the team has shown us for -- just to recap for everyone, we have -- just in the last few weeks, we closed the last 1.4% of the second tranche of the sell-down that we had spoken about externally. That puts us today as owners of about 51% of Banamex and so 49% we've already dispositioned. We've said before that for the remainder of this year, we're not going to have any more transactions because we want to make sure that we give our partner investors enough time to continue to drive value creation. When I look at the second quarter Banamex results and I strip out the FX impact, the revenues have been growing 19%. So really good growth in revenues, really good momentum in deposits and loans. And so we think that time is worth it for us. We have also said that we expect early next year to trigger the deconsolidation. That is when we own a bit less than 50%. So that should happen early next year. And then depending on market conditions and timing and value, we will look for an IPO as the following step. Now to recap for a second, upon the deconsolidation, and I know we've spoken about this before, and we'll provide more updates and details during earnings. When that happens, we expect to see a currency translation adjustment flow through the P&L as a loss of about $9 billion. And as we've also said before, that shouldn't have an impact neither on regulatory capital nor on TCE on a cumulative basis, given how things go. But that's -- so we're ahead of our schedule. We're making sure that we have discipline in terms of value creation and value capture, and we feel good about what's going to happen early next year.

Maybe talk a little bit about your AI strategy and where you expect to see benefits going forward?

Yes. So of course, with such a disruptive technology, I think you would expect us, and we are very disciplined, very intentional, very strategic and also very prudent. So those 4 things are key. And so -- but let me spend a second on the 4 pillars of our AI strategy. The first is going after client growth and revenue growth and really driving that. The second piece is operating efficiency and being able to help on some of those structural efficiencies that I was talking about that will help us self-fund those investments through automation and AI. That's the second pillar. The third pillar is defensive capabilities. So when you think of cyber, when you think of fraud threat vectors, when you think of risk management, being highly productive there. It's very clearly a very sharp focus that we have on that. And the fourth piece is our workforce. Making sure that we help our teams navigate the upgrade of knowledge that needs to happen and how do they leverage the tools so that we can hit both the benefit bottom-up of everybody's innovation coming to the fore. And at the same time, we're able to capture the value from some of the top-down capabilities that we're driving from the top of the house, right, with full funding at full speed and through the model. So when I step back across each of those four pillars, we're starting to see really good benefits play through. So for example, on the client front, some of the client experience progress that we're seeing, whether it's in our cards, our wealth and retail capabilities or our services franchise with CitiDirect Assist where we're cutting down response times by more than 20%. So we're seeing upside in terms of the client experience. And at the same time, you're seeing upside in terms of controls and in terms of efficiency. So you get a little bit of a triple win, right, in some of these early innings for many of the benefits. So that's the focus for us. The top-down focus married with the bottom-up innovation that we want to unleash as well.

Got it. And maybe give us an update on where you are with kind of the transformation program at this point.

So we are -- right now, we are at Citi's target state as it relates to our risk, our compliance and our control programs. And as we've said recently as well, we have a bit more work to do on our data program, especially as it relates to regulatory reporting. So that's the focus. Now of course, the consent order and the timing of that being lifted, that's completely at the discretion of our regulators and their review protocols as well. But then the other thing that I usually talk about for clarity is as we complete those programs, we take out the temporary costs. So just to recap for everyone, we talked last year about how our transformation costs in totality were about $3.3 billion. Now about half of those are temporary in nature. The other half are more structural. For the temporary ones, those are the ones that as we complete programs, we don't wait, right, until the very end. As we reach program completion, we start taking those costs out. So you don't expect really any cliff effect, right, of those expenses coming off because we have already started to do it along the way as we've completed some of our programs in risk, in compliance and controls and so on. Now the other half of them, the structural ones, they become part of our functional fabric. And as we go forward, pursuing automation, AI initiatives across the whole set of those costs, those are going to be obviously looked after as well.

Got it. You mentioned earlier that you're going to be above the 10% to 11% ROTCE target for this year. On the July call, you're very reluctant to make that statement. I guess, twofold. Why -- what makes you more comfortable today with that? -- despite the pull forward of investments? And then given the fact that you pulled forward those investments, how does that impact the return trajectory going forward?

Yes. So thank you for the question. And yes, the short answer is a couple of months have gone by, and now we can see the third quarter momentum. So -- which is always what we said, by the way, we didn't -- we are doing exactly what we said we were going to do. We were -- we wanted to see what the next 6 months look like and have a bit more proximity to that and keep that option to do some of the pull forward. So obviously, now that we are sitting here and we have seen really good momentum in the third quarter, we want to exercise that option. Now maybe to step back on the returns picture, we talked about the 10% to 11% for this year and where we expect to land, which is a bit north of the 11%. When we look at the near-term targets for us, it's 11% to 13%. Near term for us is '27 and '28. Reminder, in '28, we expect to be on the top half of that range of 11% to 13% -- and thereafter, in the medium term, the 14% to 15% is our range. Now when you look at the drivers that will enable that journey from where we are to where we want to go, 3 things are the key drivers there. The first one is client-driven momentum, right? And that is us enabling deploying the $5 billion of incremental investments in order to continue the momentum that I was just talking about going business by business and make that stick and make that sustainable. So that's kind of the primary one of the 3. The second vector is not dropping the focus on structural efficiencies. And so we -- for us and for me, financial discipline is super important. And so we spoke about at Investor Day how those investments on the first pillar are going to be self-funded via the second pillar, and that comes from 3 sources. The first one is that half of the transformation cost that I spoke about a minute ago. So those coming down. The second one is stranded costs. Stranded costs a year ago were $1.3 billion. If you look at our last quarter, those were about $200 million a quarter. So you can already see them in real life coming down. The third one are structural efficiencies that we expect to get from automation, digitization and AI across our functional expenses and our operating expenses. Now because that sounds generic enough, I want to give you the comfort that our execution discipline is very sharp on this third pillar as well. This is something that a couple of our executive team leaders, our COO, Anand and Tim Ryan, our Head of Technology, they meet every single week. And we look at each one of the 100-plus processes that we're mapping end-to-end. So these are processes that have been prioritized. They've been funded on their technology. So it's not just some PowerPoint thing that we are aspiring to. It really is something that we have rigor behind in terms of execution so that we can be very clear about that ability to self-fund the investments. And the third piece is capital optimization. As I think most of you know, we have a portion of disallowed DTA, which at the end of last year was about 13.9%. This is an area that I've been very clear, is an area that we need to show you that we can make the progress. The first bite of that should come this year so that we don't have you waiting for very long. And that's about $800 million of burning down of disallowed DTA. We are on track for that. A lot of that comes primarily from being able to drive U.S. profitability. So it's a little bit of a positive double whammy of our strategy working. As we become more profitable, as we drive more returns across the whole company, a good portion of that happens in the U.S. as well, and you get the additional benefit of not only the better returns, but in addition, the fact that you're burning down DTA. So we expect to make good progress in the near term, and that is the third leg that will anchor our progress towards that sequential improvement.

I think it's important maybe to confirm this, right, the 14% to 15% you talked about, that's on the current capital regime. As we think out to the potential new capital regime, it's potentially on a lower CET1.

Yes. Thank you for that clarification. Exactly right. So as we laid out the targets for the near term and the medium term, both the 11%, 13% and the 14% to 15% thereafter, they're both based on current capital rules as they are. I have mentioned in the past externally as well that obviously, we're expecting what the new rules will finally look like. But our expectation with the ones that have been published so far is a moderate tailwind in terms of the RWAs and the G-SIB. And then we expect also hopefully some benefit from the SCB piece as well, where we have been showing progress, but a lot of that progress has been on the back of our strategy working. And we continue to expect to see that, right? We've been able to reduce our SCB for the last 3 years in a row. This current year, even though it doesn't count, we also see another 30 basis points improvement. But that to me is a good signal for me of whether our strategy is working because we're becoming more resilient given the fact that we're opening the aperture on our earnings power.

And I guess as we come to a close here, just maybe what are the key points you would like investors to take away from the session today? And what do you think is still underappreciated about Citi?

Well, first, mission one. Mission one for us is driving sustainable, consistent return improvement on a long-term basis. We are not after shortcuts. Jane and I have been very clear. We're not after being a one-hit wonder. We really want that sustainability that comes from doing things right and thinking of the long term. When you look at the performance that we're having and the momentum that we have with our clients, we're very clear eyed about where we are. We know we made progress. We know we have good momentum, and we're not satisfied. We're not done. There's no celebrations at 388 Greenwich because we know we have more work to do, and we know we have this potential to unlock and really close the gap to peers in terms of returns. So what I think you can all expect from us is you can expect us to be very prudent as it relates to risk, capital, liquidity management. And at the same time, you can expect us to have a lot of execution urgency and execution discipline so that we can hold ourselves accountable to do exactly what we said we're going to do. Thank you.

Great. On that note, please join me in thanking Gonzalo for his time today. Thank you.