Citigroup Inc.
Q3 2006 Earnings Call Transcript

Published: 19 Oct 2006

[Operator:]

Good morning, ladies and gentlemen, and welcome to Citigroup's third quarter 2006 earnings review featuring Citigroup Chairman and CEO, Chuck Prince and CFO Sallie Krawcheck. Today's call will be hosted by Art Tildesley, Director of Investor Relations. We ask that you hold all questions until the completion of the formal remarks, and at which time you will be given instructions for the question-and-answer session. Also, as a reminder, this conference is being recorded today, October 19, 2006. If you have any objections, please disconnect at this time. Thank you. Mr. Tildesley, you may begin.

[Art Tildesley:]

Thank you very much, operator, and thank you all for joining us for our third quarter 2006 earnings presentation. The presentation we will go through today is available on our website. So, if you have not a chance to download that, please do so now. We will follow our usual format. Chuck will start with some opening comments, and then Sally will take you through the presentation. Then we will have some question and answers. Before we get started, I'd like to remind you that today's presentation may contain forward-looking statements. Citigroup's financial results may differ materially from these statements, so please refer to our SEC filings for a description of the factors that could cause our actual results to differ from our expectations. With that said, let me hand it over to Chuck.

[Chuck Prince:]

Art, thank you, and good morning to everybody. Welcome to the call. Thanks for joining us. As usual, I am going to talk for a few minutes before I turn it over to Sally, and I would like to give you some candid thoughts on how I think we're doing. The bottom line, of course, is that we earned $5.5 billion or $1.10 a share, $5.3 billion from continuing ops, that's up 6%; and $1.06 EPS from continuing ops, up 9%, with ROE of 19% or just about 19%. Now, I set out some very clear strategic direction for the Company, as all of you know who focused on Citigroup Day last December, and on some of those areas we executed very well this quarter. Now, I would like to describe those, and there are a couple of areas where we didn't execute as well, and I would like to describe those as well. Where we executed well, I would like to start with US consumer. US consumer had record profits this quarter, but that is really not the issue I want to focus on. The issue I want to focus on is revenue growth in US consumer. As most of you know, I have been very pretty candid about this, in the sense that, with 40% of all of Citigroup in US consumer, and roughly one-quarter of the whole Company in US cards, we have to drive revenue growth in this business. After a number of years of no real organic revenue growth in this business, driving organic revenue growth is absolutely key for Citigroup to be a growth company. In fact, at a macro level, we really have two goals, which is to drive revenue in US consumer and to diversify away from our weighting in the US consumer business that we have today. Now, a year ago, I changed the organizational structure of the consumer business in the United States, and I also changed the leadership. This has been a big focus for us over the last year. I would say that, based on the third quarter, I am cautiously optimistic that the trend is a very positive one. We have got, on page 5 in the deck, some sequential revenue growth numbers. This is not credit, this is revenue growth, compared with flat expenses. This is a hard ship to turn, because it's so big, especially in a flat yield curve environment. By the way, I'm projecting personally that the flat yield curve is going to last for a while. So in our planning for this business, we're planning on the current conditions in terms of interest rates continuing. If you look at that sequential revenue growth on page 5 and if you look at the dis-aggregation of net interest revenue ex-capital markets and banking on page 13, you can see that there are some trendlines over the last several quarters which we think are positive. Again, it's taking longer than I wanted, certainly longer than I expected. But the trendline is positive, and this is really the key for us, in terms of driving growth for the whole Company. Other things that worked well this quarter that we executed well on

[Sallie Krawcheck:]

Thank you, Chuck, and good morning, everyone. Thank you all for joining us. Let me turn you first to the deck on page 1. Chuck has gone through a lot of the bullets on this page, so I will just start very briefly by reiterating that we earned $5.5 billion, bottom line, net earnings per share of $1.10. Continuing ops were $1.06, which is up 9% from last year. Our return on common equity was 18.9%. He's mentioned the businesses, and I will get into more detail on some of them in a bit. So I'll pick up about halfway down the page, where we mention net interest margin. That declined for us 11 basis points quarter over quarter. Like last quarter, the biggest driver of that is the trading business. I will show you a little bit of detail on that in a bit. We view the credit environment, which is the next bullet down, as being generally stable. You will see there are some ins and some outs and some pluses and some minuses through the business. But essentially, it is a stable environment. But I will tell you what we have been telling you for the past three years which is we certainly don't expect credit to be better from here. We plan for it to be worse from here, and we watch it just as closely at Citigroup as you would hope, as the owners of the company, that we do. Chuck mentioned the three one-time in nature financial types of items that we saw

[Art Tildesley:]

Operator, we are ready to begin the question and answers.

[Operator:]

(Operator Instructions) Glenn Schorr. Please state your affiliation before asking your question.

[Glenn Schorr:]

Just on the excess spread in the non-interest revenue line in US cards, my gut is that's the just lower loss environment that we're in. But is that a lump sum, true it up and we move forward from here? In other words, I am just trying to figure it out on a go-forward basis.

[Sallie Krawcheck:]

No. I would not say that's all of it, Glenn. Certainly, credit on excess spread is helpful, and was helpful for us in the quarter. But we also had good improvement in the revenues on the portfolio as well. We have worked with pricing a bit, jiggering pricing through the cards portfolio, as well as for the securitized receivables. So on this basis, I wouldn't necessarily define, and clearly these things are very volatile. So there's nothing in there where I look in and say this is a one-time lump of any type.

[Glenn Schorr:]

Then, in the loan loss reserve increase in the investment bank, part of it was portfolio growth, as you mentioned, and part was changing credit rating of certain counterparties. Could you expand on that?

[Chuck Prince:]

Autos.

[Glenn Schorr:]

Then, I just noticed on the balance sheet there was a monster $57 billion increase in the quarter in investments.

[Sallie Krawcheck:]

Yes, in terms of investments, I think part of that has been that we have been moving some of the loans in our consumer lending portfolio into mortgage-backed securities. What the team has been doing, and we have found it to be very helpful, rather than necessarily sell to whole loan, to turn some of them into mortgage-backed securities, which we then sell a good portion of, but we can hold on the balance sheet. So, movement in that has been causing some of that, as well as an increase in mortgage-backed securities overall.

[Glenn Schorr:]

Also, on balance sheet, you saw $10 billion or a 7% sequential increase, and then approximately 30% year-over-year increase on the corporate loan side. Is a lot of that leverage finance side, or is that actual loan growth?

[Sallie Krawcheck:]

My feeling on this is it is actual loan growth. A couple of years ago, they slowed down the growth in that portfolio. They really went through it and made sure that the loans made a lot of sense, the clients made a lot of sense, that these were very good return loans for us. They have returned to growth over the past couple of years, and I think in good part, that has driven the growth there. So we feel like it's very good growth in the portfolio, and I think they are very proud of what they and we are accomplishing with clients.

[Operator:]

Your next question comes from Andrew Collins.

[Andrew Collins:]

Another question on the US cards. Margins were up to 10.3% from 9.9% last quarter. I guess some of that was Federated-related, but I was wondering kind of what the AAA rating might do for your funding costs going forward, and if you could elaborate any more on the increase in the NIM this quarter on that line of business?

[Sallie Krawcheck:]

If I were characterizing the increase this quarter, I wouldn't characterize it really as being Federated. While we did have an additional closure of some additional Federated receivables, they were not big enough to swing that to that degree. But as I mentioned, the team has really gone through the portfolio and taken some very targeted pricing actions that have had some benefit for us in the quarter as well as, of course, working very hard on the cost of funds and managing through that. In terms of the upgrade, we were thrilled with it, and we are very pleased with the hard work people have been doing. In terms of the cost of funds, we really already have been able to borrow very well, so we are pleased with that. Of course, we'll talk to our treasury folks about wanting to borrow at better and better rates. But you did not see in our credit spreads, for example, an enormous change on the upgrade. So we felt very good about that before. In terms of looking at this going forward, I will warn you that in the fourth quarter, we do tend to see a seasonal downtick in the cards portfolio, as we bring and a lot of receivables as people are buying their Christmas and Hanukkah gifts and so on. So I wouldn't look for that to continue into the fourth quarter on a seasonal basis.

[Andrew Collins:]

What about in the investment banking area? You mentioned record pipelines. I was wondering if you could give us some color on that as well as, at the same time, the comp ratio went down linked quarter, and if you could kind of discuss that?

[Sallie Krawcheck:]

Two comments

[Andrew Collins:]

Real estate lending in the US consumer, there's about $1 billion in revenue there. It was up 20% year over year, 26% linked quarter. I don't know what's going on there, but I'd love any clarity.

[Sallie Krawcheck:]

We had, I think, better hedge performance in the business, as well as we did have some sales of some securities, in the quarter as well.

[Andrew Collins:]

So, it's no change in your appetite for real estate lending?

[Sallie Krawcheck:]

Our guys in real estate lending love the business, and they do a very good job in the business. It is a business that has been growing versus the industry for us. But in terms of have we had a significant change, no, we like the business. We, like everyone, are watching credit, of course, here very carefully, and are very conservative in the credit in the business.

[Operator:]

Your next question comes from Jason Goldberg.

[Jason Goldberg:]

With respect to fixed-income markets, Sallie, I think you talked about commodities rates and FX driving the year-over-year decline. I was wondering if the same drivers kind of forced a linked-quarter decline. If you could maybe just talk to maybe how that performed during the quarter on an absolute or from a VAR standpoint? I guess, any initial thoughts on how this quarter is progressing?

[Sallie Krawcheck:]

Sure. So, a couple of things, I think, in answer to the first part of the question -- were the components in the sequential growth rate and the sequential revenues the same as the annual revenues? I think the answer is pretty broadly yes. If you were to ask me, I'd say definitely the same. In terms of the progression through the course of the quarter, July was the weakest of the months for us. In fact, July was down about 36% over June. August actually rebounded a bit, and of course, August is usually the weakest. September rebounded again for us, so there was an improving momentum that we saw during the course of the quarter. It started off badly, and it ended up better. In terms of where we are this far in the quarter, I think it's awfully early to say. There's nothing we see in the quarter in the trading business to date that makes us do back flips one way or another. Now, this can change in a minute, of course, given the volatility of the business. The VAR for the quarter for us versus the second quarter was as you would expect, and I think it was down in the course of the quarter. So for the corporate investment bankers, about let's call it $85 million-ish, which is down about 25% over the second quarter, as the business pulled in the risk.

[Jason Goldberg:]

That's helpful. Secondly, with respect to alternative investments, I think you said if we have a couple things hit, it will be more like a $300 million number, and if we don't, it will be more like a $100 million number. But I guess that line is consistently running in the $300 million area previously. Is $100 million kind of a new base? I know it's lumpy but how should we think about that?

[Sallie Krawcheck:]

Yes, it is very lumpy. While it looked so stable there for a period of time, there were an enormous number of lumps underneath, as the sales or the mark-to-markets occurred. So, as we look at it, I don't know that we at the point of wanting to define sort of a new high or a new low for it. But instead, if I were you and I were modeling it, I would look over a period of time as you think about modeling it forward, rather than any one quarter.

[Operator:]

Your next question comes from Guy Moszkowski.

[Guy Moszkowski:]

I wanted to ask a couple of questions about some of the international initiatives that you talked about. First of all, just with respect to the acquisition in Turkey, how do you reconcile yourselves to the issues of not having operating control, or the ability, at least for the time being, to fully deploy the brand? Is this just sort of the way it is now, with trying to get involved in some of these attractive acquisition opportunities, that you're going to just have to be very patient? Or do you think it's a special situation with respect to this particular acquisition?

[Chuck Prince:]

I think the real answer is the former. In other words, this is a very attractive bank. It wasn't available for sale at 100% or 51%. In some of these markets, they are attractive enough that we have to be patient, and we have to see a very long-term scenario here. I think that's much better than buying a tiny little bank and then trying to compete against the larger, more established institutions. So, in some markets like Korea, we will have the opportunity to do something on a 100% basis, and in some markets a majority basis. In some markets, it will be an interest like this, which ends up being a kind of a partnership for a period of time.

[Guy Moszkowski:]

Do you have any sense for what kind of timeframe the family may be thinking about?

[Chuck Prince:]

I don't. It's a great family. I'm very impressed with them. This is not going to be six months or a year. It may be that our partnership, our relationship, goes on a good, long while. Again, it's a great market. It's the right way for us to get into Turkey, instead of having a tiny little franchise or buying some little broken-down thing. But again, we're not looking at this with the fixed timeframe, and I don't think the family is, either.

[Guy Moszkowski:]

With respect to the credit card acquisition in Brazil, Credicard, it seems from looking at the way you phrased what was going on with the revenue versus expense progression, that integrating the unit looks like it's a drag on the margin. Is that something that's temporary, or is some margin reduction in the international cards business the cost of growth here?

[Sallie Krawcheck:]

I pause as I start to answer that, because I tell you, there's not a business that we are in and not a businessperson who is here who doesn't always tell us business is tougher today than it was yesterday, and it will be tougher tomorrow than it was today. Of course, the margins in all of our businesses are really very good, and we are very proud of them, and particularly some of these overseas businesses. In terms of the integration of Credicard, though, however, you are correct, which is that we did take some credit for Credicard this quarter as we're bringing it into the business. So we have seen some weakness in credit there. So that's part and parcel of doing the business in the business we do overseas, where it will be good in one place, it will be a little bit tougher in another. We work to sort of manage through and bring the return to the bottom line.

[Guy Moszkowski:]

But then, it does sound as if that's somewhat temporary, and that over time you would expect the margins there to normalize to something closer to the rest of your card business? Or am I misinterpreting what you said?

[Sallie Krawcheck:]

I don't see any reason why our Latin American cards business should have any different type of margin than the international cards business overall, no.

[Guy Moszkowski:]

With respect to the Japanese consumer, the finance business that you were talking about, as you reprice, do you see the opportunity to gain share by being proactive on repricing, especially given that you have lowered your cost base? Or are there reasons to be cautious in that regard?

[Chuck Prince:]

I think there are reasons to be cautious in at least the short and medium term. We all should remember that the legislation here is not yet fully effective. That is, there is a proposal for legislation, but the Diet has not passed anything formally. That probably will happen in the fourth quarter. So until that is fully resolved, the notion of expanding market share, I think, has to be put aside for at least the moment. Once it's resolved and we know exactly what the playing field looks like, then we can re-examine whether or not it's important to grow market share in that business or in a different line of business in Japan or in a different country. We have a pretty broad palette to play on.

[Guy Moszkowski:]

Just on the US retail side, you gave us pretty good color on where the office build outs were during the quarter outside the United States. But maybe you can give us some geographical flavor for where you're opening the new branches in the US. Is it more build outs in existing markets?

[Chuck Prince:]

Right now, it's mostly a fill-out of the existing footprint. So we maximize the benefits upfront of the synergies that come from advertising and that sort of thing. As we roll through the balance of this year and into next year, we will begin to expand into newer markets. The one area where we are expanding into new markets this year, right now this year, is in Boston and Philadelphia. You've heard me talk about those as test markets for different ways of integrating our various businesses. But except for Boston and Philadelphia, it's mostly in the existing footprint.

[Sallie Krawcheck:]

I would say, as we look at that, as I am looking, scanning down some of the third quarter branch openings, with the consumer finance branches, they really are all over the United States.

[Chuck Prince:]

I was talking about retail.

[Sallie Krawcheck:]

Yes, for retail bank. With the retail bank, a handful in Connecticut, a handful in Illinois, Texas, New Jersey, some markets we are in or right next to them.

[Chuck Prince:]

Florida, Texas --

[Sallie Krawcheck:]

Where we can take advantage of the advertising and marketing and the infrastructure that we have in those markets.

[Operator:]

Your next question comes from John McDonald.

[John McDonald:]

In the US consumer lending segment, you mentioned security gain helping on the sequential revenue growth in non-interest income. Could you tell us how much of the security gains were in there, and what drove that realization of those this quarter?

[Sallie Krawcheck:]

Yes. I think, if you look at it on a sequential basis, I'm just turning to the page. I know we have also got some good head hedge performance, as well. Last quarter on page 14 of the supplement, we had a negative $11.7 million in the net servicing and gain/loss. So we had some hedging effectiveness in that quarter, and then we had a combination of that being more effective, as well as the sale of some securities, as well as better gains on sales of some of the home mortgages that we hold, which really drove that turnaround. But I wouldn't say, if you eyeball it, the net servicing and gain/loss on sale is a better number this quarter versus the past couple of years. It's not a number that's extraordinarily out of the ordinary.

[John McDonald:]

So the $296 million?

[Sallie Krawcheck:]

I was referring to the net servicing gains and losses that we have, which are on the second page, which is a good chunk of that, again.

[John McDonald:]

The $296 million seems outsized relative to the last couple of quarters, $93 million last quarter and $50 million. I was just wondering if there was some way to quantify how much gains contributed to that, so we can have a sense of the go-forward?

[Sallie Krawcheck:]

The biggest single part of it is going to be the sales of the securities.

[John McDonald:]

Is that on one of the pages?

[Sallie Krawcheck:]

No, it's not.

[John McDonald:]

We can follow up, maybe, and get that?

[Sallie Krawcheck:]

Art stands ready to speak.

[John McDonald:]

The other thing was you had good improvement in the corporate/other segment. Could you explain some of the dynamics there, in terms of expense improvement in treasury and what the results were?

[Sallie Krawcheck:]

Sure. Now, remember for our corporate/other segment, typically if I look over the past two years, just more than half of it has really been treasury that's been in there, although there is volatility in this line, both in treasury and in corporate treasury, where we have about a $300 billion balance sheet and fund some parts of the Company, as well as the other parts of the business. So I would say treasury was okay this quarter for us, not a lot of difference in that, certainly, sequentially. As you may be aware, we had a lot of attention to expenses during the course of the quarter. So a tight look at expenses as well as some of the FAS 123 R. The other side of the expense, for folks who leave and forfeit, runs through the corporate/other line here. So we had a benefit from that, too.

[John McDonald:]

I know it's hard to predict, but would this level of corporate/other, given the attention on expenses, be a good baseline for us to model going forward, do you think?

[Sallie Krawcheck:]

I've got to tell you, it is hard to predict, because we do have moves in corporate and it does tend to be a bit of a grab bag on occasion, with some of the inter-company eliminations coming through here as well. So, I would look for, as with many of the other lines, what I would look for is watch this over a period of time. To the extent that interest rates are increasing around the world, you would see pressure on it. To the extent that they are declining, all things being equal, you would see it get better.

[John McDonald:]

Then maybe just one last thing, a comment from you or Chuck. The business as usual expense performance was significantly better this quarter versus last. I think it was up 10% year over year last quarter and down 2% this quarter. Maybe just some color on what that reflects, your efforts over the summer to really change things, and where that was focused?

[Chuck Prince:]

I think there are two things, really. I would like to take credit for the whole thing, in terms of good focus and so forth; that was clearly part of it. But Sally mentioned the mix. Obviously, in the second quarter, we had a terrific capital markets and banking revenue quarter, and that comes with a higher incentive comp charge, as it were. So, part of it was the mix issue this quarter, but I would say a good part of it was a renewed special focus on business-as-usual expenses.

[Sallie Krawcheck:]

But I would also note that the investments that we're making in the business have not taken a hit at all, and, in fact, picked up in the third quarter over the second quarter.

[Chuck Prince:]

We're going to do the investments. I have been very clear about that. It's driving revenues. You saw, without this, we would have had negative revenue growth, without these investments.

[Operator:]

Your next question comes from Mike Mayo.

[Mike Mayo:]

The fees in US consumer were up $279 million, linked quarter. Otherwise, the spread revenues were down. So it seems like all of the growth has come from fees there. I guess fee revenues in cards were up 11%, linked, even with sales volume down. US consumer lending fees were up threefold. So my question is, are those some of the sales of loans or gains on sale?

[Sallie Krawcheck:]

I think we already talked about consumer lending, right? We talked about some of the hedge performance. I also talked about in US card, the excess servicing, which is driven by very good management of that portfolio by the businesspeople. So I think you've gotten some chunks on what's going on there. But all in all, I think we're pretty happy with how that's evolving.

[Mike Mayo:]

So, kind of expect that higher level of fees in US consumer going ahead?

[Sallie Krawcheck:]

I'm pausing. We showed you the trends that we're seeing in the revenues in US consumer, and I think we said that we're feeling cautiously optimistic about what's going on there. So, the idea is in the business, to grow it, not to shrink it.

[Mike Mayo:]

I guess I'll tee up your conference call for next week, but Chuck, you said that you're disappointed with revenues, they've fallen short, and you continue to have record investment spending?

[Chuck Prince:]

Yes.

[Mike Mayo:]

So, I'm just wondering if there's a little disconnect there, and specifically like international consumer, linked quarter, it didn't have growth despite all the new branches. So, at what point do you as CEO say we need to cut back some?

[Chuck Prince:]

That's a perfectly legitimate question. As you know, these investments don't pay off in 90 days. So, the fact that in this quarter we didn't have linked revenue growth, to me, is not the determining factor. I'm sure it isn't for you, either. These investments take different periods of time to pay off; some are shorter, some are longer. As long as we feel good about the payoff trajectories, and as long as we feel good about our ability to deliver a bottom line, then we are going to power ahead on these investments. If we ever felt badly about either one of those, that is, if we felt that the investments were not tracking according to our planned returns, or if we felt that we were in a position where the bottom, bottom line wasn't able to sustain the investment spending, then I as CEO would immediately look at what we could do to cut back. Right now, we're in a position where the investments are tracking very well; again, not over a 90-day period. It takes, sometimes, a year or two for the investments, some of them, to get to the right point. And where we're able to sustain 9% continuing EPS growth, I feel pretty good about this.

[Sallie Krawcheck:]

Let me remind you, as you are looking at it sequentially, we talked about what's going on in Japan consumer finance, that there was a pulling back there. We talked about Taiwan, so there was a pulling-back there. We have been opening the branches. What we're going to show you next week, and what I know you know -- it's intuitively obvious -- is that the retail bank branches, those take a longer period of time to pay off. The consumer finance branches are smaller, but pay off more quickly and are adding very nicely to international consumer finance revenues right now. In fact, the branches that we have opened, a lot of branches, and the ones that we have opened in international consumer finance added $75 million in revenues for us in the quarter, which is a big increase over last year. So, these are all getting layered in. I keep calling it the layer cake analysis. They are all getting layered in and you'll see consumer finance adding first and most quickly, international cards then and retail bank coming afterwards. The retail banks have really yet begun to add. Quite the opposite, they are more of a drag on us right now overseas. So, it's important that we sort of line these up so that the growth will come in over time.

[Chuck Prince:]

I've said this before, so I'm just repeating myself from earlier in the year. If we don't invest, we're just going to sit here, and we're not going to have any revenue growth unless everybody wants us to wait for the yield curve to change. I'm not prepared to just sit and wait. So, the investments are paying off and are paying off very well. Again, as long as we're able to deliver the bottom-bottom line in a positive way, we're going to make these investments.

[Mike Mayo:]

To the extent that you are feeling better about US consumer, does that mean your appetite might be one notch higher in the US? You said not Western Europe.

[Chuck Prince:]

I'm laughing because, of course, people always want to talk about deals. I think I would say no, it is not one notch higher. I think that in a long-term sense, we want to diversify not further into the US but further into international. So what everybody likes to talk about, the classic big bank acquisition in the US, would not only be a very hard thing to justify in a financial sense but would re-weight us very significantly more towards the US, which is counter to what I want to do. So these trends in consumer, with the sequential growth in revenues against flat expenses, that feels pretty good. Some of the repricing we've done in the cards business, that feels pretty good. But does that let me say, okay, now I really went to shift my focus inorganically back to the US? The answer is no.

[Operator:]

Your next question comes from Mike Holton.

[Mike Holton:]

In US cards, the expense control that you showed in the quarter can you talk about the sources of that and how sustainable you feel that is?

[Sallie Krawcheck:]

Looking at the US cards business, some portion of it is the marketing and the advertising. So you will, in the fourth quarter, see a bit of a pickup there. You want to the advertising to greater strength. But some portion of it is very much sustainable. So, for example, you may remember last quarter, we talked about converting some of the private label cards we had in one of the portfolios onto our platform, which cost us last quarter but will drive nice savings for us going forward. So, that and combined with the work the folks in the cards back-office area, along with Kevin Kessinger and his team in Operations and Technology are doing, will be driving some sustainable expense growth for us, and then marketing will move around on top of that.

[Mike Holton:]

Getting at the securities gains question, how much were securities gains in the quarter, and how did that compare versus last quarter within US consumer lending?

[Sallie Krawcheck:]

We sort of worked around a little bit there. There were more this quarter than there were last quarter; we haven't given out the number for it.

[Mike Holton:]

That's why I'm asking.

[Sallie Krawcheck:]

Why don't you give Art a call afterwards, and we can see if we can follow up.

[Operator:]

Your next question comes from Joseph Dickerson.

[Joseph Dickerson:]

You've answered the question. But additionally, I'm glad to hear you're not interested in SocGen.

[Chuck Prince:]

Well, I guess you weren't the source of the rumor, then. But it's a very fine institution. I don't want to get letters from our friends in France. It's a nice place.

[Operator:]

Your next question comes from Meredith Whitney.

[Meredith Whitney:]

You guys have given some nice detail on your reserve releases and et cetera. I'm just wondering, since your businesses are largely not dissimilar from other trends that we're seeing with other companies in the industry, you guys are the only ones who are notably taking your allowance to total loan commitments outstanding. I'm looking at page 35 of the supplement. I'm just wondering directionally if you can tell us why? I know you are cautiously optimistic, but so, too, are others, and they are still taking their reserves up. How soon can we expect to see operating leverage? You said, of course, not in 90 days in Europe. But is it possible to run those businesses, those consumer businesses, off of sole platforms as opposed to off of country-by-country platforms?

[Sallie Krawcheck:]

Let me talk about the credit first. I think as you look at us versus others, I think there always is an issue of mix in the business. I don't want to put aside, too, that I think there's some very hard work that is being done as well. One area that I would highlight, in terms of the hard work that's being done, is for the minimum payment, the minimum due, which as you know, we in the industry were quite worried about it last year, and I know some folks are talking about taking some sizable hits for it. This is one that the team in the cards business has worked very, very hard on and has put in place some forbearance programs, for example, with some of their consumers to really help them work through any credit issues that they are having. I think you're seeing a little bit of spread compression as a result of it, but overall, the credit, because of their work, has really done quite a bit better on the minimum due than we had expected. So, I think you can pick that up. You can pick up in Taiwan, where the performance was really significantly better than the industry. You go around the world, and I think we have to be very pleased with and very proud of the professionals here who are doing a very good job on credit. Beyond that, I think you need to look at mix. In the US, we are seeing very good performance, whereas in Asia consumers, we mentioned, we do have some of these spots where it's been a little bit more a challenge for us. You combine all that together and you can see the NPLs this quarter versus the provision for loan loss reserves, you can see that we were really net releasing for a period of time. This is a bit more stable. We are increasing the allowance for unfunded lending commitments, which is down a bit more on the page, and because of some of the securitizations. Again, not the securitization incremental and not up versus last year, but we do have some relief from that. That's a different issue, of course, because the receivables are no longer on our balance sheet. All in all, we feel like this paints a picture of a pretty stable credit environment for us right now, which comes out of one mix but too, I think, more importantly, the very hard work of the professionals around here. Do you want to talk about operating leverage?

[Chuck Prince:]

Yes. I apologize; I'm not sure I understood the question, whether it was just Europe or in general. Could you just repeat it for me, please?

[Meredith Whitney:]

Specifically, Europe, because I know you guys are running country by country. If you could potentially collapse that, find operating leverage there. Then, more generally, I know you had answered Mike Mayo's question about when do you get to operating leverage, and you said not in 90 days. But can you give maybe a more general outlook?

[Chuck Prince:]

Sure. I thought Mike's question was not about operating leverage, but in terms of the investments and the fact that we had not had a sequential growth in one aspect of that. In terms of Europe, you're talking about the consumer businesses in Europe. Our consumer businesses in Europe are not a significant, right now, part of the mix. We have a new leader there, and I'm hoping that we can do much better. I don't think that the real upside for us in Europe, from an operating leverage standpoint, is to have a single platform. The real opportunity for us is to have more robust businesses, and to get out of some of the hobbies. As you know, earlier this year, we withdrew from retail banking in France, because it just wasn't a big enough business for us. So, that is the way I think about it. Obviously, around the world, we're trying to move to common platforms and we are trying to move to fewer data centers and a number of things we have talked about. That's a general, not a European focus. But I would not answer your question, I think, correctly if I said we have a specific focus in Europe, as compared to everywhere else, to do something from a platform standpoint. It's more of a general standpoint. In terms of operating leverage, I said last December, I would be disappointed if we didn't get it this year. I was disappointed when the SEC, a month later, said they were going to add 2 points a quarter to our expense base, not in an economic sense but in an accounting sense. I was disappointed when the yield curve didn't turn, and I was disappointed when the consumer business didn't pick up quicker. So, I'm a disappointed guy, but the reality is that the trendlines are all moving in the correct direction. Even with a flat yield curve, and even with the investment spending, we're making pretty good progress. So, I wish it was today. I wish it was yesterday. These are not the best questions for me. This is something that's a sore point, but I think we're headed in the right direction. I think the only way to get there is to have a better revenue picture. You can't cut your way to greatness, and we are doing the hard things that have to be done. It takes a little while, and a little while longer than I had hoped. But it's clear. The trends are clear. As long as that's case and, again, as long as we can deliver the bottom-bottom line in a healthy way, I feel very good about direction we're going in.

[Operator:]

Your next question comes from David Stumpf.

[David Stumpf:]

Most of my questions have been answered, but just one kind of general one, Sallie. When you look at the significant growth in the balance sheet this quarter, you continue to actively buy back stock. Where are you with your capital ratios, in terms of their targets, number one? Or, maybe more specifically, how much excess capital do you sit on now, as we look at things?

[Sallie Krawcheck:]

I appreciate the question. The ratio that has been a constraint for us for as long as I have been CFO is our tangible common equity to risk-managed asset ratio. That ratio in this quarter was 6.9% for us, and if you work through the calculation, the implied excess capital for us is in excess of $4 billion. We have been buying back stock for the past few quarters at a rate of about $2 billion. First of all, I really like the idea of offsetting the impact of dilution from some of these compensation programs as a sort of a get-go. Then, after that, I would say the stock buyback decision is really an outgrowth of all the capital management decisions we make before that. So, we look at where the capital would best be deployed in the businesses, either in investments, be they in some of the opportunities they see in the training businesses or downtown or in global transaction services. We obviously settle that when we do the budget for ourselves, but we work to make those decisions more dynamically, too, during the course of the year, such that if you had some capital allocated and some investments allocated to a market where the credit doesn't look so good, or where the spreads are really thinning, that we can move that to other places. So, we've set up a process by which we look at that on a more regular basis than just a major outlook or a budgeting process. Once we determine that the businesses are using the capital at our average return on equity or, certainly, in most cases, above that return on equity, and we recognize and we think of our costs of equity as being about 13%, once we made those decisions, the outgrowth of that or the output of that is what we have left to return to you as stockholders in the share buyback. So I think we have a pretty rigorous process around here. We want to keep very good ratios. We like our ratings. We like our low cost of borrowings they give us. We like having a very, very strong balance sheet. But we also like being able to return the capital to you as our shareholders.

[Operator:]

Your next question comes from Jon Balkind.

[Jon Balkind:]

I'm all set, thank you.

[Chuck Prince:]

If I can, then, I'll say thank you again, as we close the call. Thank you to those of you who are on the call who are our owners. Thank you to those of you on the call who are on the sell side, for all of your effort following us. And especially to all of our Citigroup colleagues around world, thank you for all your hard work. Art, thanks very much. Back to you.

[Art Tildesley:]

Thanks, everyone, for joining us today. Please give us a call in investor relations with any other questions you have. That concludes the call.

[Operator:]

Ladies and gentlemen, this does conclude Citigroup's third quarter 2006 earnings review.