Citigroup Inc.
Q1 2020 Earnings Call Transcript

Published: 15 Apr 2020

[Operator:]

Hello and welcome to Citi’s First Quarter 2020 Earnings Review with Chief Executive Officer, Mike Corbat and Chief Financial Officer, Mark Mason. Today’s call will be hosted by Elizabeth Lynn, Head of Citi Investor Relations. Also as a reminder, this conference is being recorded today. If you have objections please disconnect at the time. Ms. Lynn, you may begin.

[Elizabeth Lynn:]

Thank you, operator. Good morning and thank you all for joining us. On our call today are CEO, Mike Corbat will speak first. Then Mark Mason, our CFO will take you through the earnings presentation which is available for download on our website, citigroup.com. Afterwards, we will be happy to take questions.

[Mike Corbat:]

Thank you, Liz and good morning everyone. Today, we’ve reported earnings for the first quarter of 2020, with net income of $2.5 billion, we had earnings per share of $1.05. Our earnings were significantly impacted by the COVID-19 pandemic, we had strong revenue performance as the economic shocks caused by the pandemic weren’t felt until late in the quarter and we continue to show expense discipline. However, as you would expect, credit costs reduced our net income. The significant loan loss reserves we took also reflected the Day-2 impact of the new CECL accounting standard. In our Institutional Clients Group, we had strong performance in our markets business as we help clients navigate severe volatility that led to trading revenues that were higher than last year and what is typically a strong quarter for that business as it is. Treasury and trade solutions was impacted by the cuts to interest rates, but client engagement stayed very strong throughout the quarter. Investment Banking matched last year’s solid performance as we continue to gain share among our target clients. Global Consumer Banking also fared well from a revenue perspective, considering the environment. In the US, and its strong revenue growth in cards with branded in retail services of 7% and 4%, respectively. We grew average deposits 8% with another solid portion acquired digitally. In Asia, we saw a slight revenue decline as the economic impacts of COVID-19 first materialized in that region. In Mexico, revenues rose modestly, excluding a one-time gain from 2019 as the virus had limited impact on that country’s economy during the quarter. Our tangible book value per share increased to $71.52 at the end of the quarter, up 9% from a year ago. We ended the quarter with a common equity tier 1 ratio of 11.2% as our risk weighted assets increased significantly due to increased client demand. As I’ve said, this isn’t a financial crisis, it’s a public health crisis with severe economic ramifications. Although we did have good revenue performance this quarter, we exited the quarter in a dramatically different environment. While we’ve built significant loan loss reserves, no one knows what the severity or longevity of the virus’s impact on the global economy will be. That said, we entered this crisis in a very strong position from a capital, liquidity and balance sheet perspective. We have the resources we need to serve our clients without jeopardizing our safety and soundness.

[Mark Mason:]

Thank you, Mike and good morning, everyone. Starting on Slide 4, Citigroup reported first quarter net income of $2.5 billion. Results included a $4.9 billion increase in credit reserves this quarter. This reserve increased reflects the impact of changes in our economic outlook due to COVID-19. These builds are larger, given a significant impact this change in our economic outlook has on our estimated lifetime losses under the new CECL standard. Revenues of $20.7 billion grew 12% from the prior year, primarily reflecting higher markets revenues and the benefit of mark-to-market gains on loan hedges in our corporate lending portfolio. Expenses were roughly flat year-over-year, and we were able to deliver positive operating leverage and a 27% improvement in operating margin. Credit costs were $7 billion this quarter. Our effective tax rate was 19% for the first quarter, below our full year outlook, reflecting a small benefit associated with stock-based incentive compensation. The ultimate economic impact of this health crisis and our performance will continue to evolve over the coming quarters. The impact that we are already seeing varies across our franchise. We saw the earliest impact on consumer behavior in Asia as spending slowed in response to restrictions on travel and other commercial activity. We’re seeing the same pattern today here in the US and now beginning in Mexico, which is likely to put pressure on loan balances. However, deposit growth remains strong across regions and we’re leveraging digital channels to engage with our client. The rate environment has changed significantly. Our accrual businesses reflect the impact of the three US rate cuts seen last year, as well as some impact from additional cuts seen this quarter in response to the crisis, with an expectation for a more pronounced impact going forward.

[Operator:]

Your first question is from the line of Glenn Schorr with Evercore.

[Glenn Schorr:]

Hi, thanks very much. I’m curious if you’d give us a little bit more of the assumptions behind the reserve build and – because card is – is a little bigger for you guys. I’m curious if you could talk about the reserve and how you think about it from a branded versus retail services partner card perspectives? Thanks.

[Mark Mason:]

Sure. Good morning, Glenn. So you know, you can turn to page 20, we’ve broken out some additional you know, details here and you can see you know, we started or ended the year, I should say with about $14 billion in reserves, you’re right the lion’s share that is in cards in split between branded you know, and retail and you know our focus obviously is tends to be on the higher – the higher FICO scored you know, clients and that skews certainly the case in cards and tends to be higher on retail services, but not quite as high as on the cards’ side. And so that’s going to you know, impact a little bit the split between the two. You can see in terms of the day one impact that was about $4.1 billion. We talked about that on the last call, and we built another $4.9 billion, so that gets us to a total reserve balance of almost $23 billion. What it point out is you know, the cards piece obviously is at roughly $9.5 billion, but again – I mean 9.5%, excuse me of LLR to loans. But again you know, we tend to you know, to think of this as a higher quality book. In terms of the factors that become important you know, there are a host of variables that we run through our model, as well as combined with severity of a recession, probability of a recession, I would say that the two most critical as it relates to cards and again, they’re all important in understanding how they work together becomes important. But two very important ones become obviously GDP and unemployment, and how that affects the underlying behavior of the consumer in each of those instances. Obviously, the retail services there, our partners that we have that are you know, more directly impacted by the COVID-19 situation, but we also have the $2 trillion relief stimulus that’s been introduced and a little bit unclear as to how that ultimately plays out and impacts the behavior. So lots of puts and takes going you know, through the model, the – those economic assumptions change kind of straight through the end of the quarter, but the short of it is that you know, based on our outlook as have been you know, this additional build of $2.4 billion per cards you know was the appropriate amount for us to take.

[Glenn Schorr:]

Okay, that’s a very helpful side. Thank you. Maybe just one follow-up on, I’m curious your view, because you’re in the midst of all of it of how much has the financial plumbing been improved by some of the government actions, and then where you, most importantly, where you see that we need the most improvement less to come on the plumbing things like, money markets, CP, I’m talking about reserve banks?

[Mike Corbat:]

Yeah, Glenn, I would say that the actions that we’ve seen out of the combination of the Fed and the Treasury are truly extraordinary, not just in terms of the volume of dollars and programs, but I think the breath that’s there and the speed at which they’ve implemented them I mean, whether it’s it's been the CP facility, the money market liquidity facility, the repo facilities, the broader corporate pieces, the SBA loans and now not something that’s being talked about that much, but this main street program that’s there. And I think from a plumbing perspective, your question’s a good one, because obviously the real economy doesn’t have direct access to the Fed or to the Treasury. And I think if the banks and in particular, the big banks role, one of many roles that we played to be that transmission mechanism between fiscal monetary and the real economy. And I think you can just see in terms of in the early days, how the markets were trading, a lot of the fears and concerns that were there and whether it was the early fears of draws, whether it was the early fears of money funds that being able to get liquidity across the board, and I think the programs have gone a long way. I think that there still a few things out there that probably need some work. And certainly, as an institution, as an industry, we’re in constant dialogue with the Fed and the Treasury on those. And again, as I suspect as those things create challenges, it’s likely that we will see a reaction come out of those bodies to be able to address it. So I think the plumbing is actually working pretty well that in spite of working remotely and the numbers that Mark and I spoke to, and we had in late March record volumes of trading in terms of settlement, clearing, margin – margining in the system. And again, most of that done remotely and you know, we all would have said to each other 6, 9, 12 months ago you know, we’re going to model for this type of stress, we probably all would have been skeptical in terms of how the system performs. So I’m proud of how we’ve performed and I’m quite pleased so far, how the system has performed.

[Glenn Schorr:]

Excellent. Thank you, both.

[Operator:]

Your next question is from the line of Erika Najarian with Bank of America.

[Erika Najarian:]

Hi, good morning.

[Mark Mason:]

Hi, Erika. Good morning.

[Erika Najarian:]

I just wanted to –

[Mike Corbat:]

Good morning, Erika.

[Erika Najarian:]

Thank you, Mark. Hi, I wanted to clarify your statement on card losses. So just want to make sure I was interpreting it correctly. You said that the losses today, the cumulative losses today could be 20% lower than the global financial crisis experienced. And when I look back at the regulatory data, ’09 and 2010 would add up to a 20% loss rate. So wanted just to make sure I – we were interpreting that correctly that you know, you could see losses of 15% to 16% in card in a cumulative loss scenario, which is about in line with both the company run DFAST and the Fed stress test?

[Mark Mason:]

Yeah, sure I mean, what I said was that you know, if you take the cards portfolio we have today which is of a better quality, then it was back in ‘08, and you were to stress it for the ‘08 financial crisis that yes, our pro forma loss rates would be 25% to 30% lower than what we experienced in the last crisis. That is – that’s what I see.

[Mike Corbat:]

And I think to be clear, Erika not – that’s not a prediction, it’s just a level setting based on historic data.

[Erika Najarian:]

Got it. And one of your peers noted in a call yesterday, that they were comfortable going below their regulatory minimum of 10.5% to serve its clients. And I’m wondering what Citi’s stance is ongoing below that 10% bright line, especially since that’s where the automatic distributions on dividend and other payouts kick in?

[Mark Mason:]

Yeah, why don’t I start, Mike or?

[Mike Corbat:]

Sure, go ahead.

[Mark Mason:]

You know look, I think our view is, we are clearly living in an uncertain period of time. The crisis we’re facing is unprecedented. And you know, if I think about our objectives, you know, primary objective ensuring the safety and wellbeing of our employees, second to that or an addition to that ensuring that we are positioned to serve our clients, our customers and to play an important role in stabilizing the economy. And so when I think about the combination of those things, we want to be there for our clients. And I think we’re expected to be there for our clients in a period like this. And you’ve seen our CET1 ratio dropped to 11.2% this quarter and as the needs of our clients evolve, we’re going to be there for them and that means that our ratio takes more pressure than we’ll manage through that. If we were to drop you know, below the 10% that you referenced, there’s still plenty of room between that and the use of the buffer that the - you know, that the regulators have authorized. And so we’re managing it thoughtfully, diligently but in the context of those priorities that I mentioned.

[Erika Najarian:]

Thank you.

[Mark Mason:]

Yeah.

[Operator:]

Your next question is from the line of Betsy Graseck with Morgan Stanley.

[Betsy Graseck:]

Hi, good morning. How are you?

[Mark Mason:]

Good morning, Betsy.

[Mike Corbat:]

Betsy.

[Betsy Graseck:]

Question on – as it relates to the use of that capital part of it is coming from the drawdowns and I wanted to understand how you think your clients are going to be using those drawdowns. Do you expect them to persist for you know, many quarters, many years or do you think that you know, we will, over the next 12 months see some pay down of that through terming out in the capital markets and maybe also give us a sense as to the associated deposits, how much of the drawdowns came back into you know, your liquidity via the deposits and persistency there as well would be helpful? Thanks.

[Mike Corbat:]

Yeah, so Betsy I would say kind of looking at the numbers, we had roughly right around about $30 billion, $32 billion worth of draws in the first quarter, so somewhere 10% or 11%, 12% of our outstanding, but unfunded. So I wouldn’t call that an overly meaningful number. And I think going back to my earlier comment to Glenn, I think that the extraordinary actions taken in the CP facilities in terms of some of the corporate facilities, some of the SBA or probably more likely the main street lending facilities alleviates a lot of that pressure. I think we saw two things there, there were clearly those industries that were under stress and those were pretty easily identifiable along the list that Mark had described. And then I think there were those that just believed that it was a good time to bring in liquidity. And I think as the Fed programs and the Treasury programs came into place, the bond markets reopened, you saw record issuance of debt in the late first quarter. And again, when you look at our portfolio, it’s predominantly an investment grade portfolio and that investment grade portfolio in times with those programs in place has access to the capital markets. And so we saw people shift there. Obviously something we were paying attention to. We’re in constant dialogue with our clients. But again, I think you know, certainly coming into the second quarter, we’ve actually seen really de minimis draws on the facilities and I think in our dialogues, we don’t see or feel that pressure right now.

[Betsy Graseck:]

Got it. And then on the deposit side, can you give us a sense as to, you know, the percentage of the draws that went into deposits and how you think about the persistency of those deposits as well?

[Mark Mason:]

Yeah let me comment a little bit more broadly on the deposits. So you know, the ICG deposits that we saw come in the month of March, we’re about $92 billion our deposits grew pretty significantly just in the month of March. And if I break that down about a third of that were from corporate clients that built liquidity through draws or issuance. And it’s not you know, necessarily just liquidity you know, just draws from us, but about a third of it, we would attribute as being tied towards that increase in liquidity draws or issuances that they’ve done. About a third were from brokered dealers and clearing houses and financial institutions as they bolstered kind of their liquidity buffers. And then a third were from investor clients derisking and moving to cash. And so that gives you a little bit of a sense for a mix. We obviously look at the persistency of the deposits and you know, some of those are certainly operating deposits. And I think part of what will inform the view to some extent is, as Mike described you know, the additional you know, channels that are now available for clients to access additional liquidity as needed. But also how long this persist and there’s a fair amount of uncertainty as you’ve heard us reference as to how long you know, this crisis we’re managing through persists. So hopefully it gives you a sense.

[Betsy Graseck:]

Got it. And you know, the fact that the drawdowns have slowed dramatically you know, de minimis in your words, Mike, the pressure, I would expect going forward on CET1 is going to you know, pull back as well. So maybe you could give us a sense as to how you’re thinking about that? And then you know, in the context of that how you’re thinking about the dividend? Thanks.

[Mike Corbat:]

Sure. So you know, I think as Mark described, the way you know, we thought about, you saw us kind of put a balance sheet to use and you saw the CET1 move from the 11.8% to the 11.2%, clearly leaving us lots of room, lots of buffer. And again, we’re early in this, you know, we don’t know and where this will go, but our gut or how we’re thinking about this is – this recovery is going to be uneven. I would say that as a team, we’ve pretty well discounted, a uniform V-shaped recovery. The question, is it U-shaped? Is it W-shaped or parts of it L-shaped? And I think we want to retain a lot of flexibility and capacity to be able to step into the situations that count. And again I think as we said that, if there’s two roles, one is, how do we use our own balance sheet? And then how do we actually use and bring to life a lot of these programs and continue programs that have been put out there by the Fed and the Treasury. So in the right situations, we’re prepared to let that ratio go down. We’re in conversations with our board. We are in conversations with our regulator and I think Mark said you know, we feel that we’ve got a lot of capacity in terms of capital and things that we can do before we get near triggering any conversations around dividend, but again, we’re going to treat that as a time when it comes. But you know, to be clear, in our capacity here and the way we’re looking at things you know, we remained committed to paying our dividend.

[Betsy Graseck:]

Got it. Thank you.

[Operator:]

Your next question is from the line of Ken Usdin with Jefferies.

[Ken Usdin:]

Thanks. Good morning. A couple of more questions on the card business if you don’t mind. So if you kind of separate the branded cards from the retail services and just can you help us talk about just what you’re seeing – you know, relatively speaking in terms of we can see it in the rate of change that happened in the first quarter, but would you expect divergence in either spending trends, volume balances and credit as this evolves or any color you can help us with there? Thanks.

[Mark Mason:]

Sure, I don’t – why don’t I start just in terms of the spend. And so you know in the quarter if I think about kind of the last week of March, the card spend activity you know, just broadly for us was down about 30% US spend, you know, by category down total of 30%. The big you know, categories, if you will, impact it are not going to be of any surprise to you travel down 75%, dining and entertainment down some 60% you know, discretionary retail which would include you know, apparel, the department stores, et cetera, down 50% you know, essentials were up 10%. And so, as you would – as I think you would expect and again, that got us to a total of down about 30% in just the last week. We all have seen what has continued to happen over the past couple of weeks. And so, I would expect, we would expect there to be continued pressure on purchase sale volumes through most of the second quarter, in light of the way this is persisting, and that you know, should play out as well on ultimately loan volumes in which we expect to see some top line pressure there. You know, similarly as you referenced that we have a large retail services business and we have partner clients who we advise in that regard and we’ve been working with them to help drive sales digitally. But obviously the shutdown in most of the economy and the stay at home orders as well as the temporary store closures across most of the country will certainly impact our partners and our results, including a slowdown in new customer acquisitions as well as again, a lower purchase sales volumes – volume through you know, through that part of our business. You know, that said you know, we’ve got a number of partners who do operate or a large partner I should say who do operate you know as essential resources to you know, to the economy and while they’ll have lower store traffic, they will be able to continue to kind of serve. And ultimately you know, as I said, we would expect the second quarter to have some of that top line pressure play through and over the course of the year to see a pickup in NCLs subject to, of course, how things like the $2 trillion relief package and some of the other customer relief offerings that we put out take hold.

[Ken Usdin:]

Yeah, and thank you and just a follow-up and you know, should and if you know balances come down, just given that card is such a bigger part of your balance sheet. This – is there a positive offset that comes through with regards to the reserving needs. Just wondering how cards specifically for you guys in that in and out with regards to you know, spend and outstandings informs how the ins and outs of card reserve builds? If that’s a fair question.

[Mike Corbat:]

Yeah. So I mean, if you think about CECL and how it works in the idea of building expected lifetime losses in any given quarter, there are number of factors that come into play, you know, so your probability of recession, your severity of recession, our view on the important economic variables and how they’re going to play out as well as balances. And so, as the balances you know, shift and the mix and makeup of those balances shift, that’s going to have an impact on what we would expect in the way of those lifetime losses and therefore, what we would expect in a way of how that reserve balance would move.

[Ken Usdin:]

Got it. Okay, thanks a lot.

[Mike Corbat:]

Thank you.

[Operator:]

Your next question is from the line of Matt O’Connor with Deutsche Bank.

[Matt O’Connor:]

Good morning. So in the US there’s obviously a lot of efforts underway that kind of soften the blow to the consumer as we think about credit losses, there’s the fiscal health, there’s payment deferrals. Maybe you could just talk about kind of what’s going on in Mexico and Asia and some of your bigger markets there in terms of you know things that might soften the blow for the consumer. And you know is that as meaningful as kind of what we’re seeing here? Or how do you factor that into your thought process on potential losses?

[Mike Corbat:]

Yeah, Matt, I think that’s a great question. And I think as you think about it as, we think about all the places we come to work, I think we’ve got to use a series of lenses to really look at where these countries and these economies are, I would say, one is that you’ve got to look first at the health crisis response. Have the government’s taking it seriously? Have they put measures? Have they put social distancing? Have they put stay in place types of things and what’s the trajectory of that look like? I think the second piece is around what you see in terms of both monetary and fiscal response. And not just what’s been to-date, but what’s been the capacity of those economies to be able to implement those and more things, potentially into the future. And I think the third important piece that we look at is the underlying demographics of the economy as an example, do they have big exposures or are they dependent on oil exports or other commodities or other types of things where there’s concentrations around that. And so I would say that that it’s not by region, it is really and we are taking really a country-by-country approach to what that is. And I think you’ve seen it all over the map in terms of very strong responses out of the US, out of Japan. You’ve seen some responses out of Europe and I think you’ve seen some of those that are slower. In particular, to your question on Mexico is, we know the President has labeled himself a fiscal hawk and I think he has been reluctant to use any type of outsized spending to go at this crisis to-date. And obviously we’re watching that carefully. We’ve tried to be pretty prudent in terms of our credit standards there and the things that we’re doing and we’re obviously watching it closely.

[Matt O’Connor:]

Okay. And then just want to follow-up on that. I mean remind us, I think your targeted customer base in Mexico you know, is much higher than I would say, the broad-based customers. So maybe just remind us about some of the credit metrics in the card portfolio in Mexico specifically? Thank you.

[Mark Mason:]

I –

[Mike Corbat:]

Mark, do you want to –

[Mark Mason:]

I don’t have the credit metrics available. What I would say is that, you know, while we do appeal to the broader population there, we do tend to focus on the higher and certainly relative to our peer players in that Mexico market. And so, we do skew to the higher end in terms of the credit profile. They have a different system and the FICO system per se. And we actually have been you know, very closely monitoring as you’ve seen over the past number of quarters our loan volumes have, in fact, trended lower than that of the broader industry as we’ve you know, been and quite vigilant about focus and staying inside of our risk parameters, which again, do skew higher than most of the peers in that country.

[Matt O’Connor:]

Yeah. Okay. That’s helpful. Thank you.

[Operator:]

Your next question is from the line of Mike Mayo with Wells Fargo Security.

[Mike Mayo:]

Sorry if I missed part of this. In terms of additional reserve builds ahead, another $5 billion in the second or third quarter. Yes, no, maybe.

[Mark Mason:]

Hi, Mike. Let me make a couple of comments to that. One, you know, again, a lot of uncertainty here dealing with a significant crisis as you well know. Even as we have closed out this quarter, the variables you know, that we look at continue to shift you know, meaningfully. I would expect that you know, with that as a backdrop, and again, subject to a lot of things including how customers respond to the relief programs that are out there, so on and so forth that we would see additional builds in the second quarter. And that’s kind of where we are. I mean I – I’m not going to you know, we’ve got the rest of the quarter to play out. We’ve got you know, analysis and models that we have to do. We have you know, consumers that have to respond to much of the stimulus that’s out there. We’ve got to understand how it continues to impact the different businesses that we’re in. it’s way too early to give you any sense for what that number is.

[Mike Mayo:]

Okay. And what lessons have you learned from Asia? I mean, the virus was there first. You should have a little more of a head start than other banks that don’t have that experience and what are you seeing in terms of you know, volumes and credit losses and your ability to work with the clients?

[Mark Mason:]

Yeah.

[Mike Corbat:]

Yeah, so I think that –

[Mark Mason:]

Go ahead, Mike sorry.

[Mike Corbat:]

I would say that you know, in some ways, Mike, we you know, if you want to call it that have been fortunate to have lived that. And I think you know, we took a lot of lessons and I think you saw in our actions in terms of the moves we took in terms of getting people – remotely getting people home of the types of client engagement. And I would say, less than one that we’re watching very closely is the resurgence of cases as people start to come back in. And so I think we’ve got to be very mindful about how and when or when and how we, in fact, do that. You saw us in very early March go, I think is the first US bank to go out and engage around in particular, our consumer customers in terms of opening up channels and talking about some forbearances and some forgiveness on fees and other things to get them engaged. And I think to Mark’s point and you can see it in the credit numbers that so far relatively benign and we’ve been putting programs in place in most, if not all of our Asian countries in terms of similar types of forbearance programs and really trying to engage around that. So it’s early, but again you could – you can see the numbers that would probably 60 days in or so that we probably had a reasonably full February and March in terms of COVID in terms of Asia, but you know, again we’re watching the numbers closely, but it’s around the engagement and the programs and you know, some of it was dusting off the playbooks from ‘08 and in some of the things in between.

[Mike Mayo:]

And if I can just follow-up. You talked about the resurgence of cases and people come back in, in Asia. I mean are your employees coming back yet? Are you seeing this or is this just third-party you know, medical advice that you’re receiving? Are you seeing this firsthand? And when do you plan to open Asia back up? You know, in Citi Asia? I mean, how many people are working remote? How many people are in the office?

[Mike Corbat:]

Yeah, you may have missed it. But we talked a little bit earlier, Mike in terms of the unevenness of this, that when you think of this virus that you know, it’s not only uneven in terms of pacing in terms of where we are in the world, we’ve got at least a two to three span just in the United States in terms of where the virus is. And you know, within Asia you know, we’ve seen probably the most concerted efforts to get people back in in terms of China and I would say, we are largely back there. I think the last numbers I looked at as of yesterday, we were about two-thirds back in terms of Hong Kong and I would say, most of the rest of the region at lower levels than that. And so we’re taking a very specific or very site-by-site view in terms of how we bring people back. So, you know, first criteria is where is the virus in its trajectory? Second criteria is, what are the things that happen at a site that are very difficult to replicate in a remote environment? And then in terms of addressing that, what’s the safest way we can begin to bring people back? So that I think that –

[Mike Mayo:]

But that’s pretty remarkable two-thirds back in Hong Kong. So that’s you know, cautiously optimistic for what’s ahead here or don’t read too much?

[Mike Corbat:]

Again, I think it’s place-by-place so I think we’ve you know, we’re taking a kind of a site-by-site and – but at the same time you know, understanding again, you probably missed this part of it, you know, we’re absolutely open for business. We’re just working differently, right. If you look at the things that we’ve accomplished just in the month of March, it’s not that we’re not at work. You know, as an example, yesterday you know, we had over 180,000 people accessing our systems remotely at one time our peak search was 132,000 of those people on simultaneously. You think about the things that have accomplished Mark and his finance team, you know, closed the quarter on a $2 trillion balance sheet. You look at this submission of CCAR, you look at all the things that remediation efforts, the small business programs, all being applied remotely. So again, it’s going to be bespoke in terms of how we do it, as Mark said, with an eye towards making sure we keep our people safe. And at the same time doing everything we can do to service our customers and clients through this extraordinary time. And it’s going to be case-by-case.

[Mike Mayo:]

All right, thank you.

[Mike Corbat:]

Thank you.

[Mark Mason:]

Thanks.

[Operator:]

Your next question is from the line of Saul Martinez with UBS.

[Saul Martinez:]

Hi. Hey, good morning guys.

[Mark Mason:]

Hey, Saul. Good morning.

[Saul Martinez:]

A couple of CECL questions, so please bear with me. But you know, first I want to get your perspective on the DFAST stress losses and whether you think it’s a good reference point to judge reserve adequacy under CECL, because we do get a lot of questions asking why allowance level are so much below, what the nine quarter stress losses are in the severely adverse scenario in the adversary. And I think that’s true for you guys. And you know, my personal view is that, DFAST is a useful data point, but that there are fundamental differences you know, obviously beyond the differences in the economic scenarios used. The point of DFAST is to estimate loss absorbing capacity in a severe downturn. And maybe estimates are going to be on the conservative end of losses where as under CECL, like these are point in time estimates that you’re – are your best guesses of what your losses will be over the life of the loans under an economic scenario. So, let alone the lot of methodological differences in terms of how you calculate those things in terms of things like you know, weighted average remaining life or whatever it is. But I’m curious if you have a perspective and whether you think you know, there – the stress losses should be sort of a reference point or you know, or how useful they are to measure whether you know, a given bank or your bank has adequate reserves?

[Mark Mason:]

Look, I think you said a lot there. I think that it is a reference point, I think you’ve highlighted you know, some meaningful differences in the approaches and perspectives everything from you know, the modeling, the assumptions like et cetera, et cetera. And so I think it does serve as a reference point. But I think what we’re experiencing now and even as we submitted a plan from a CCAR point of view, is that you know, that’s a scenario. It certainly is a stress scenario, but we’re now living through a real life stress situation. And I think you know, that scenario is meant to – those scenarios are meant to inform you know, a firm’s ability to withstand stress, but we’ve got a real test here that has put us and I think the industry in a position where we are constantly you know, modeling and demonstrating our ability to withstand real-time pressures and the prospect of real life losses. Now with that said, you know, CECL, you know, a new approach I think that the timing is interesting in that we get to see a – we see a meaningful shift between transition and day one, which I would think in a normal environment, you wouldn’t see that type of dramatic shift. But again you know, that’s informed by you know, a view – a forward looking view of what is now a crisis in a stressed environment. And so that magnitude of the change that we see in the day two is a direct byproduct of that. And I think what we’ll see is, that continues to you know, that what we do in the way of forward reserves will continue to be informed by that. And what we ultimately experienced in losses, however, will be informed by how much of the uncertainty that I talked to plays out. So again, no stress scenario that’s been created you know, thus far you know, would have contemplated the amount of fiscal response and monetary response that we’ve seen in short order. You know and so that’s not modeled and how customers or consumers react to that is not part of any CCAR DFAST model that we would have run. How that offsets the impact of you know, unemployment or ultimately losses is completely unclear. And so, there’s a fair amount, you know, yes, it’s a data point you know, but there’s a fair amount of uncertainty and now differences I would expect in light of now managing through a real life scenario.

[Saul Martinez:]

That’s helpful. If I can follow-up, you guys use one scenario, most large banks use these multiple scenarios in calculating their reserves. But – sorry if I missed this, but can you just outline you know that the sort of big picture, some of the big picture assumptions you’re using whether it’s you know, global growth or US growth or unemployment that underlie that scenario. And I guess it’s sort of an adjunct to that. Does using one scenario create more volatility, because if you’re using the scenario analysis you know, you can kind of calibrate between different outcomes, whereas it’s more of a a big change if you change your outlook, it’s just one scenario to another in your case as opposed to maybe a grade of different outcomes if you were to use sort of a weighted average scenario analysis that most banks use. So does it – do you think it creates more volatility and more jumps and releases than you otherwise would have?

[Mark Mason:]

Yeah, so we do use a model approach, where we use a scenario, but what I would say is that, that scenario was informed by kind of a further management adjustment and the factors that are considered are not only thousands of variables like GDP and unemployment and many, many, many other stats given the nature of the business that we do, but also the probability of recession and the severity of the recession and we can toggle in our management adjustment degrees of severity that we would expect in a recession, whether that’s 25%, 50%, 75% and a 100% in terms of the severity relative to an ‘08 recession or whatever the case might be. So, while we do use a model and one scenario, there is flex there, if you will, in terms of ensuring that we capture what we think best reflects the forward view of the economic outlook in our analysis. And in terms of as we – as I may have mentioned – I think I mentioned earlier at some point you’ve got to put a stake in the ground at the end of the quarter and look at the assumptions that we have to work with in terms of those thousands of variables and certainly the key ones that I mentioned. And this quarter in particular, we’ve seen things continue to move and so even the view that we would have taken at the end of the quarter around many of those metrics – the outlook on them have been – has continued to shift. And so we find ourselves running various scenarios to understand the impact on our ratios and on our estimated losses, including ranges of unemployment from 10% to 15% and GDP declines from 20% to 40% we’re constantly kind of running those scenarios to understand the implications on our CET1 ratio and other important metrics that are required to properly run and manage and plan at the firm.

[Saul Martinez:]

Got it. Okay, that’s really helpful. Thank you.

[Mark Mason:]

Okay.

[Operator:]

Your next question is from the line of Brian Kleinhanzl with KBW.

[Brian Kleinhanzl:]

Great, thanks. Mark, just quick question first on the ICG and the reserve coverage there. I hear that you said that you’re comfortable with it. When you kind of look at the reserve that you have against the total exposures. It’s about an 80 basis points against all the exposures, but yeah, you’re looking at non-investment grade being 21% of the portfolio. So what kind of metrics are you keying on to get comfort there? It doesn’t seem like it takes a large amount of delinquencies also and have a large increase in losses?

[Mark Mason:]

You know, look we’ve got, there are series of metrics that we use in the case of the ICG, GDP is an important metric, obviously a view on downgrades is an important metric, a view on energy prices, oil prices is an important metric and as you – we don’t have the entire portfolio parsed here. But that 81 basis points is going to be a mix of where we feel as though we need to have more –more reserves and so one example is that when we built additional reserves and you can look at kind of our reserve ratio for the energy sector for example and that’s closer to 2%, 2.1% in terms of the funded reserve ratio. And so, I highlight that as just a simple example of obviously there going to be some higher, some lower and in terms of the broader non-investment grade similar to that example, I just gave you, the broader non-investment grade bucket is closer to 2% in terms of the reserve ratio. So, again, I can understand the question given the 81 basis points, but we are – obviously are using good judgment as we look through the different risk profile of the portfolio.

[Brian Kleinhanzl:]

And then with regards to the guidance that you’re giving about how March and April could trend out to the rest of the quarter, I mean, is there any given update on kind of – I’m sorry if you gave it already, but how purchase sales were trending in April and how the revenues in TTS were trending in April. I mean, you said March they were down 9% in TTS, is that gotten worse in April? Thanks.

[Mark Mason:]

Sure. I don’t have the spend activity at hand. If I look here for April. I’m not sure if you call it, I said earlier, but the card spend activity towards the end of March, the last week in March has been around 30%, down 30% with a mix across the difference across the differences in the different categories. In terms of TTS, again, I don’t have the April stats, we did see kind of pressure in the month of March and what I was referencing there was the rate pressure playing through in terms of commercial card activity just as another proxy for spend similar to the retail card or consumer card spend levels that was down pretty meaningfully, which says a lot about our corporate client base in terms of T&E, commercial card spend was down almost 60% and kind of B2B, business-to-business, commercial card activity was down some 19% in the month of March. And so, but likely those trends continue. However, I would kind of just note that we continue to see very good engagement with our TTS client base and we see that in the higher volumes that we saw in Q1, we expect as that will continue, we see that in the new accounts that we’re opening with them, we would expect that to continue, including utilizing many of our digital capabilities there. And frankly, as this continues to evolve with all of the uncertainty that it comes with, we would expect that we’re going to be a critical partner to these large multinational clients as they think about what the new norm looks like. And so the metrics will move, the top line will move in light of the rate environment, but I think those underlying drivers, if you will, say a lot about what the future prospects are for the firm here. Mike, you want to comment on –

[Mike Corbat:]

If I can just quickly, Mark before we close out here. I just want to go back to Mike’s question and apologize for having flipped my numbers. We’ve got globally over 80% of our staff working remotely and the number in Hong Kong is that we’ve got about a third back and two-thirds still working remotely. So Mike, I apologize for getting that one inverted. Operator with that, I think that concludes the call.

[Operator:]

Thanks for today –

[Elizabeth Lynn:]

Thank you all for joining us today. Please feel free to reach out to us in Investor Relations if you have any follow-up questions. Thank you and have a good day.

[Operator:]

This concludes today’s conference call. Thank you for your calling. You may now disconnect.