Citigroup Inc.
Q3 2012 Earnings Call Transcript

Published: 15 Oct 2012

[Operator:]

Hello and welcome to Citi’s Third Quarter 2012 Earnings Review with Chief Executive Officer, Vikram Pandit and Chief Financial Officer, John Gerspach. Today’s call will be hosted by Susan Kendall, Head of Citi Investor Relations. We ask that you please hold all questions until the completion of the formal remarks at which time you will be given instructions for the question-and-answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Ms. Kendall, you may begin.

[Susan Kendall:]

Thank you, operator. Good morning and thank you all for joining us. On our call today are CEO, Vikram Pandit will speak first. Then John Gerspach, our CFO, will take you through the earnings presentation, which is available for download on our website citigroup.com. Afterwards, we’ll be happy to take questions. Before we get started, I would like to remind you that today’s presentation may contain forward-looking statements which are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results in capital and other financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our SEC filings including without limitation the Risk Factors section of our 2011 Form 10-K. With that said, let me turn it over to Vikram.

[Vikram Pandit:]

Susan, thank you and good morning everyone. Thank you for joining us today. As you know, we reported earnings of $468 million for the third quarter of 2012. Excluding non-operating item such as the mark on MSSB, CVA and a tax benefit, net income was $3.3 billion and that amounts to $1.06 per share. Our businesses gained momentum during the quarter while the impact of Citi Holdings lessened. Loans and deposits increased and in all three of our operating businesses, we had positive operating leverage for the third straight quarter. We also had positive operating leverage in Citigroup as a whole. We gained wallet share again in Investment Banking, while our markets businesses performed very well. Although, Transaction Services has been impacted by spread compression, both trade loans and deposits continued to grow and the pipeline appears to be strong. Our Institutional businesses showed growth and resilience in the emerging markets, where we have our unique, where our unique footprint gives us a meaningful competitive advantage as we can see by several noteworthy transactions whether they are in China, India, Russia, Mexico or Brazil. Transactions ranging from the Cnooc-Nexen deal to the Santander IPO in Mexico are a reflection of our broad and deep capabilities. Net income increased in Global Consumer Banking, as the drivers for the business remained strong internationally, especially in emerging markets such as Latin America. North America benefited from increased mortgage refinancing. Overall, these earnings highlight the continued execution of our strategy and show the strength of our core businesses and our diversification both by product and geography. We also made progress winding down Citi Holdings. Last month’s price agreement on MSSB has given us more certainty on our exit. Citi Holdings assets were reduced by $20 billion in the quarter and now total $171 billion or 9% of our balance sheet. Holdings assets are down 31% from the end of third quarter of 2011. Citi continues to maintain significant liquidity with roughly $400 billion in highly liquid unencumbered assets, primarily cash and government securities. Our Basel III Tier 1 Common Ratio increased to an estimated 8.6% and is among the highest in the industry. We continue to generate solid returns for Citicorp and Corp/Other, excluding CVA/DVA and the sale of minority interest. Our year-to-date return on allocated tangible common equity is 17.2% and return on Basel III Tier 1 Common on a fully implemented 9.5% basis is 18.7%. For Citigroup as a whole, the year-to-date return on tangible common equity supporting the businesses is 11.8% and return on Basel III on a fully implemented basis is 10.7%. Regarding the macro picture, market sentiment improved during the quarter as a result of the moves made by the ECB and Fed. However, GDP growth remains uneven globally and interest rates remain low. In the U.S., there are promising signs that more robust economic growth is within reach assuming the resolution of the fiscal cliff. Lack of a resolution of the cliff situation will be highly disruptive. The housing market has shown improvement, while capital, labor, energy and technology are all very affordable and in healthy supply. In Europe the actions by policy makers appear to have set a path for preserving the Europe, but more needs to be done to create deeper market confidence for a better GDP picture. In the emerging markets, policy makers have been quick to act and we expect growth there to substantially keep outpacing the developed markets. In light of these factors, we’ll continue to manage our risk carefully using the deep knowledge we have of the markets where we do business. John Gerspach will go over the slides now and then both of us will come back and we’ll be happy to take your questions. John?

[John Gerspach:]

Yeah, thank you Vikram and good morning everyone. To start, I would like to highlight some significant items affecting our results this quarter. This will be on slide three. First CVA and DVA were negative $776 million pretax and $485 million after tax in the third quarter for a negative impact on EPS of $0.16 per share. Secondly, the loss on Morgan Stanley Smith Barney was $4.7 billion pretax and $2.9 billion after tax for a negative impact on earnings per share of $0.94. And finally, we recorded a tax benefit of $582 million related to the resolution of certain tax audit items which had a positive impact on EPS of $0.19. Adjusting for these items, we earned $3.3 billion in the third quarter or $1.06 per share. Throughout today’s earnings presentation, I will be discussing our results on this basis to provide comparability to prior periods. In addition, as shown on slide four, there are a few other significant items which are included in our third quarter results. First on the revenue side

[Operator:]

(Operator Instructions) Your first question comes from the line of Glenn Schorr with Nomura.

[Glenn Schorr:]

First a quick one on risk weighted assets; I know there has been no real change the last four or five quarters. Could you talk through some of the moving parts, the plusses and minuses and what you think might happen over say the next four or five quarters?

[John Gerspach:]

Glenn, are you focused on the risk weighted assets on a Basel I or Basel III basis or…?

[Glenn Schorr:]

Well, in the slide you gave us Basel I, so I guess I’ll stay with Basel I, just because I noticed….

[John Gerspach:]

So we have also given you Basel III at least you know on slide 23. So you know the Basel I risk weighted assets, as you know they are not necessarily risk sensitive, they are really linked to the overall size of the GAAP balance sheet and so with the overall GAAP balance sheet remaining fairly stable, you are not going to get a great deal of up or down movement in the Basel I assets. If you look at Basel III, I think what you see there is overtime continued reductions in the Basel III risk weighted assets as the rate of risk asset decline in holdings, outpaces any growth that we would otherwise see in Citicorp. And I think you see that reflected in the difference between the two multipliers, where you're looking at the multiplier from Basel I to Basel III for Citicorp being about 115%, where as the Holdings risk weighted assets are close to 1.9%.

[Glenn Schorr:]

That makes sense. Okay, that leads to the next one on, I think the comments just now in your outlook was you need sustainable housing improvement to see maybe further releases. Does that mean the releases this quarter were driven by the housing improvement that we've seen and then that feeds in to the model and what spits out a lower loss rate over the life of those loans.

[John Gerspach:]

Yeah, let me be specific about the mortgage reserve releases that we had in this quarter. there was roughly $600 million that was specific related to the incremental charge-offs that we had to take on the new OCC guidance related to borrowers that had gone through Chapter 7 bankruptcies. So that is merely, we were forced to recognize higher NCLs. We had reserves established against those assets. And so we released those reserves. The other change has to do with, as I mentioned, we sold $750 million worth of mortgage loans in the quarter. And so therefore we took down the reserves that were set aside against those specific loans. So both reserve releases were very specific in nature.

[Glenn Schorr:]

Got it. I appreciate that. And then on page 10 of the supplement, there -- inside North American Consumer Banking, there is a net servicing and gain on sale I'm just thinking out loud, this is not necessarily this quarter, but it's over the last four quarters, you've seen a big pickup and gain on sale and obviously that's, we've seen that trend in the market, but I'm curious, it happens when no big change in mortgage originations or the servicing portfolio. Is that strictly gain on sale and can we continue to operate at that level?

[John Gerspach:]

You know, I think that that's one of the big question facing a lot of institutions at this point in time, as far as the, the ongoing pace of mortgage originations, quarter-on-quarter we definitely saw an increase in our originations, but a lot of that is clearly being driven by mortgage refi’s. So, as I mentioned, we can see the mortgage refi’s continuing fairly strongly into at least the beginning part of next year, but that's about as far as I'm willing to go at this point in time.

[Glenn Schorr:]

Okay, one last very quick is the repurchase claims were down 25%. Do you feel like you've been through most of the pipeline, it's definitely; it's a standout versus your peers? I'm just curious on how you feel on that.

[John Gerspach:]

The, you know, when you take a look at the repurchase claim activity, I'd say that we're seeing, we certainly saw in this quarter increased activity on the part of Freddie Mac, you know, I'd say that it's a little difficult to gauge the overall level of claim activity between Fannie and Freddie and so, I would say it's still a little bit volatile in that area and I wouldn't draw any conclusions as yet.

[Glenn Schorr:]

Okay, thanks for all your help. I appreciate it.

[John Gerspach:]

Not a problem, Glenn.

[Operator:]

Your next question will come from the line of Jim Mitchell with Buckingham Research.

[Jim Mitchell:]

Hey, John; just on the deposits, you guys were up $30 billion on a purine basis sequentially. Can you talk about the drivers, if you think that was sort of end of the quarter issue, or if that's pretty sticky and if that is somewhat sustainable, can we expect to see the long term debt footprint come down or accelerate given that deposit growth which helps your margin. I know you don't like to talk about your margin but your margin was up this quarter. So maybe you could talk about that interaction?

[John Gerspach:]

Okay. Let me try to redress your first question, regarding deposits, which again as you know they were up fairly, fairly strongly being $30 billion quarter-over-quarter, I would say that roughly you know almost 40% to 50% of that increase I would put on episodic quarter and deposits.

[Jim Mitchell:]

Okay.

[John Gerspach:]

So I wouldn't read that into a continuing trend, however when we do look at each of our businesses whether they be transaction services on the corporate side or the consumer businesses, we do continue to see strong momentum in our deposit gathering activities, particularly and what we would refer to this core operating deposits. So the deposit franchise is certainly strong but it was impacted by some episodic growth at quarter end.

[Jim Mitchell:]

Okay, fair. And could you disclose or give us the benefit from the trust preferred buyback on the margin and if we can expect to see at least some additional benefit as you pulled back your long term debt footprint?

[John Gerspach:]

Yeah. If you recall at the end of last quarter, the guidance – in last quarter our NIM I think was 281 basis points and the guidance that I gave last quarter, which incorporated the retirement of the troughs would be that I would expect you know net interest margin to be flattish perhaps plus or minus 2 or 3 basis points. So we actually came in a little bit higher than the upper end of my range we came in about 2 basis points higher than that and that's primarily being driven by lower cost of deposits than -- what I would have had built into the earlier guidance.

[Jim Mitchell:]

Okay thanks and one last question switching up on fixed income, you guys -- we only have one other comparison but you guys did pretty well relative to one of your other peers. Is it a function of mix in terms of your global footprint or is it -- do you think there is some evidence of market share gains or is it just hard to say at this point?

[John Gerspach:]

It's a little hard for me to say that we've had -- to pin market share gains quarter to quarter I will say that I do think our results really demonstrate the diversity of our franchise both from a product offering as well as from a geographic distribution and our model really is focused on serving our core customers.

[Jim Mitchell:]

Okay that's it from me. Thanks, John.

[Operator:]

Your next question comes from the line of Brennan Hawken with UBS.

[Brennan Hawken:]

Hi thanks for taking my question quick one first on the REPO cost and we were just sort of talking about the funding cost, John, and I know you mentioned about deposit costs coming down. But it also looked like the REPO line in average balance sheet dropped pretty significantly was that due to some sort of change in the funding portfolio there reduction in tenor or something like that?

[John Gerspach:]

Our tenors has been fairly constant; I think we talked in various calls over the course of the last year is to how we either actually extended some of our REPO tenors I guess going back six to nine months ago. So I wouldn’t say that there was any impact this quarter on the extension of tenors and you know our repo line tends to move in accordance with our overall customer related business, so I wouldn't draw too much into what's going on, on the repo one.

[Brennan Hawken:]

Okay. So then, switching gears a little bit on credit and in charge-offs; is there a home price sensitivity for you guys in the charge-off number and could you maybe help us out a little bit on understanding there and obviously I would think it would be, is there a difference when we think about the LCL book versus the rest of it?

[John Gerspach:]

Well, I would say that all mortgage charge-off activity has got an element of HPI sensitivity built into it, just based upon the mechanics of what you go through in order to recognize the losses. So you know, when a loan gets to 188 days past due, you take your initial write-down, which of course is influenced by what you think the realizable value of that property is going to be. So there is an HPI component in that charge-off. Then as the loan stays on your books and with the extension of the foreclosure timeline, this is becoming an increasingly longer period of time, you need to go back, you know, two or three times a year and reassess where you have that property marked against what your new estimates as far as realize-ability would be and of course that is heavily influenced by the expectation of HPI. So when it comes to those severity type of losses, especially I’ll call it the secondary, you know the catch up severity losses they are on the subsequent writedowns, there we’ve seen some real improvement, the overall volume of subsequent writedowns last year was probably running in the $60 million a quarter, this quarter it dropped down closer to $50 million, a lot of that being driven by volume related, we just have more inventory in our book, but importantly you know at least what I’m seeing is that, the average subsequent writedown for severity factors year-over-year has probably dropped by a third for each of the properties. So you’re starting to see some level of that recovery of HPI enter into the numbers.

[Brennan Hawken:]

Yeah, sounds like it; while around LCL and taking a slightly different tact, when you think about the negative carry that you guys have there, the negative spread. How much rate sensitivity is there in that LCL business and I mean, I know that, I think in your disclosures you indicated about a third of your consumer loans float. How many of those were in LCL and how much of a function of the negative spread might be due to low interest rates?

[John Gerspach:]

Yeah well, a lot of that is obviously is due to low interest rates, but don’t forget a lot of that LCL portfolio is in our mortgage business. The LCL, we break that out for you on slide 16, the LCL portfolio is about $134 billion and of that $95 billion of the $134 billion are U.S. residential mortgages in holdings.

[Brennan Hawken:]

Yeah.

[John Gerspach:]

There is not a lot of incremental yield that we’re going to get on that portfolio, so it is really dependent on cost of funds, it’s highly rate sensitive from a cost of funds point of view.

[Brennan Hawken:]

So there is not a lot of IO in that mortgage?

[John Gerspach:]

There certainly isn't a lot of IO that is currently repriced, those resets on the IO’s normally have got, you know they are periodic and so you will catch up on some of those, but it’s highly rate sensitive I would say at this point in time.

[Brennan Hawken:]

Just on the funding cost side rather than the asset side?

[John Gerspach:]

Exactly.

[Brennan Hawken:]

Okay. So then secondly, isn't a big factor there either for it, okay fair enough. And then last one from me, on the LCL business of the second lien mortgages, the HELOC’s, how many of those have started to amortize at this point, is there any sense we can get on that front?

[John Gerspach:]

I don't have that I front of me, I can tell you that of the HELOC portfolio, the bigger, we have more targeted to reprice and to reset in beginning of like 2015. So we’re getting some level of amortization right now, but the bigger step function really starts in 2015.

[Operator:]

Your next question will come from the line of Moshe Orenbuch with Credit Suisse.

[Moshe Orenbuch:]

Great, thanks. And John you had kind of mentioned some degree of general optimism about kind of seeing growth restart out of the emerging markets. Can you talk a little bit about where you would like to see it, which counties and regions and how are you going to see it, how that patterns are going to shake out over the next couple of quarters?

[John Gerspach:]

I am not sure I recall saying that it was going to restart; we are seeing growth in the emerging markets today. Vikram I don’t know if you’ve got………

[Vikram Pandit:]

Yeah, I think we can break it on variety of different ways Moshe. Obviously, we think that Mexico is extremely well poised for growth; we have seen that in our numbers; I was just there not too long ago and with the leadership change there in addition to prospects for reforms and what you are seeing on the ground that’s a high spot definitely. We don’t have much of a retail business or large business in Brazil, so that’s less relevant to us. But we are seeing that in Colombia; we are seeing that in Peru, we are seeing that in Chile, so if you want to think about it, the Western Coast of Latin America is something we’re quite constructive on in terms of growth. When you get to Asia, as John said, for us there really have been two issues, one is the regulatory changes in Korea which have driven the restructuring of the business and the charge we took there and I think that’s something that’s going to continue over the next quarter at least as John said and that business kind of grow in line with Korea growing beyond that. But more generally speaking, when you look at the underlying drivers in our consumer businesses, they continue to do well and they continue to do well in our businesses across Hong Kong, Singapore, India, Southeast Asia, all across there and so based on all the policy decisions that we have seen being taken in these countries and based on my having been there multiple times in the last couple of months and based on what we're seeing in our own volumes, we think that it's going to lead to revenue growth just the way that John talked about it for next year from here about 4% to 6%. That's our current thinking. So we're very much aligned with that growth pattern. Don’t forget as well that the emerging markets to us are not only consumer, they run across our entire business line and one place where we really saw it this quarter was in our Securities and Banking business. There's a lot more activity, lot more activity even on the retail side on the asset sale side but across the board, there is a lot of activity going on in Asia as they build up their capital base, but [also] Asia looks to the western world for acquisitions and you saw that with Softbank-Sprint. We're on the Sprint side on that one as an example. So when you look at the entire diversified portfolio, what we have, we think that the emerging markets are going to be a bright spot going forward.

[Moshe Orenbuch:]

Great thanks, just on a different topic. John, you did say again that you expected slower draw down of the assets out of Citi Holdings and yet, by the same token, you also referenced that the mortgage business to the extent there's improvement in the housing market, you could start to accelerate sales you know, and use the reserve like you did a little bit of this quarter. Could you -- I mean, how would that take shape in terms of what it mean for the balances in the Local Lending business.

[John Gerspach:]

When you take a look at the sales activity, this quarter we were able to conclude $750 million worth of sales. Even if in a favorable market, with buyers that had access to liquidity, if we double that, you'd be looking at $1.5 billion of sales. It's still not likely to be at some sort of an amount that is going to significantly drive the rapid reduction in the real estate loan portfolio.

[Moshe Orenbuch:]

And just a last one from me is that, the branded cards particularly in North America still a little bit sluggish in terms of the overall volume and balances, revenue was better. But what are there any things you can highlight about the steps you're taking to try and kind of jump-start that a little bit?

[John Gerspach:]

Yeah, I'm not quite sure, you're going to see a loan growth in anybody's portfolio, because, there still is certainly an element of consumer deleveraging going on, I think we do see pockets that consumers are spending, now, those products in our consumer portfolio where we have already worked through the repositioning of the product, most of our rewards programs for instance, we are now seeing, purchase sales growth year-over-year. But, we're working through the entire portfolio at this point in time. So, again that's probably something, don't forget we were a year late than everyone else in reprising the portfolio. And so, we're still working our way through repositioning each one of our products, simplifying our product offering, retargeting the product offering and re-enhancing as you were the rewards aspect of each of the products.

[Moshe Orenbuch:]

Thanks. Thanks for the answer.

[John Gerspach:]

So we're beginning to see it. Okay?

[Moshe Orenbuch:]

Thank you.

[Operator:]

Your next question will come from the line of Jason Goldberg with Barclays.

[Jason Goldberg:]

Thanks. John, I thought you hit on the kind of TCE supporting the DTA was interesting. Can we talk about in terms of the timeframe of which we can [sense] to that DTA come down and as that TCE, I guess, getting redeployed into obviously much more profitable areas?

[John Gerspach:]

Well, I think as we've said before the reduction of DTA is going to be a multiyear project and so certainly is going to take a multiyear timeframe. We had indicated earlier this year that we didn't expect the DTA to come down this year. And clearly with some other things we talked about earlier the loss on the Morgan Stanley Smith Barney JV that has actually caused the DTA to go up. So once we began to see, I think a better U.S. economic environment you'll see growth in our U.S. earnings and at that point in time, the DTA will come down. But again as it starts to come down, it will come down in smaller increments, it's not going to be coming down in big chunks of $8 billion to $10 billion, it will come down related to the size of our North America income. So you need to think about it coming down almost as a pay-down of an annuity over several years, and I'm not going to give you a range right now but lower single digits per year would be, I think the best way to think about it.

[Jason Goldberg:]

I guess ultimately if you end of releasing reserves tied to Citi Holdings, the mortgage portfolio, would that I guess help the utilization of it?

[John Gerspach:]

That would definitely have an impact on it, yes.

[Jason Goldberg:]

Okay, and then just lastly remind us where is the DTA sits at Q3?

[John Gerspach:]

Yeah, Q3 we ended with the DTA at $53.3 billion and if you think about you close the second quarter DTA was $51 billion so we got a $2.3 billion increase and you know you basically look at the tax reserve release that we had that has added $600 million to the balance Morgan Stanley Smith Barney that loss added $1.8 billion to the balance. We had about $200 million worth of FX impact on the balance and you CVA added about $200 million to the balance as well so overall, the combination of our operations and the OCI for the quarter brought it down by about $0.5 billion but you know clearly the pressure was on the upside of this quarter.

[Jason Goldberg:]

Got it, thank you.

[John Gerspach:]

Not a problem.

[Operator:]

Your next question will come from the line of Matt O'Connor with Deutsche Bank.

[Matt O'Connor:]

Just a follow up on some of the NIM discussion, sorry if I missed it but did you provide an outlook for the net interest margin from here?

[John Gerspach:]

No. I don't think I did.

[Matt O'Connor:]

Do you care to?

[John Gerspach:]

I'm sorry I was just playing with you. We're at about 286 right now and I would say I still see that you know yields are going through loan yields and investment yields are going to remain under pressure you know clearly out into the fourth quarter. And it will get some offset to that by what I think will be continued improvement in our cost of funds but you know as a result of those two factors I think we'll likely see a small reduction in our NIM in the fourth quarter. You know, so I would say it's probably going to be in the upper band of the previous range that would have given you, so say somewhere in the say 282 to 284, so just down a couple of basis points from where we are in the third quarter.

[Matt O'Connor:]

Okay. And I guess just a bigger picture; as we think about the impact of QE3 on banks, should we think about Citi having a less risk since you're not a big agency RMBS buyer or could there be some spillover affects that maybe we're not thinking about globally here?

[Vikram Pandit:]

Yeah, that’s a tough one to work through, obviously to the extent that we’re smaller part of the mortgage business, the direct impact is likely to be lower. Having said that, I think the real question to me of QE3 is sort of a bridge to the cliff and we got to get through the cliff on the other side and that could start creating kind of growth that we think is really pent-up in the U.S. and if that happens, anything that happens on the other side of QE3 will be married with a stronger growth rate and better economy, so again, very difficult to predict. In any case, generally a stronger economy is a good thing for everybody, but for us particularly, given that about half of what we do is in the emerging markets stronger growth and that part of the world probably dominates for a period of time.

[Matt O'Connor:]

I guess specifically within your securities portfolio, I mean again, thinking if you don have a lot of agency RMBS; as we look across all the other asset class that you’ve been buying; it's a little hard for us to track externally, you know, have you seen as much spread compression there in terms of your reinvestment rates, you know, what they are now versus what they were say in 2Q?

[John Gerspach:]

Yeah, we’ve certainly seeing the impact of spread compression on the investment portfolio and it was one of the factors that I’ve put into my answer to the question as far as forward NIM guidance. I continue to see the fact that we will have spread pressure, yield pressure on both loans as well as investment securities into the fourth quarter, I don’t see that abating.

[Matt O'Connor:]

Okay, just switching gears here; we’re a couple of quarters into HARP, I think there has been some changes to the FHA refi fees, and as you think about that $95 billion of mortgages you have and I realize some of that second lien, but are there any that could be HARP-ed or refi-ed, I mean do you literally go kind of loan-by-loan and proactively try and refi or have you done that or think about doing that?

[John Gerspach:]

Yes. We, I mean we are refi-ing the loans that are eligible to be refi-ed, we’ve got, a lot of the portfolio has already gone through HAMP, that portion of the portfolio that was not eligible for a HAMP, we’re putting through HARP, so we’re working our way through the portfolio as you put it literally on a loan-by-loan basis.

[Matt O'Connor:]

And do you have any sense of how much of, the $60 billion of first could be HARP-ed; I mean obviously it takes time to figure it out and reach the people?

[John Gerspach:]

I can’t tell you how we’re progressing on the HARP-ing of the U.S. mortgage portfolio and holdings, I am sorry.

[Operator:]

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

[Betsy Graseck:]

A couple of questions; one on [FIC] line; I guess I am just trying to understand how much of the FIC line was a function of marks that you had obviously several asset classes that are increased in value during the quarter?

[John Gerspach:]

No, there is not a lot of marks that are impacting the FIC line; it’s not like that it will suddenly had a position that we just took a big mark on and it’s going to disappear, it really is being driven by client volume. As I’ve said, I came and if I sit on this call or some other call, overall I think the market that we encountered in the third quarter was an overall better market; volumes may have been down slightly, but certainly compared to other markets that we saw last year, we weren’t facing a market where every customer was moving in the same direction at the same time. And so that certainly puts you in a better position from a revenue generating capacity; but the business that we’re running is really based on client flows.

[Betsy Graseck:]

Okay. So you also have in the portfolios some, in the past some non-agency RMBS assets that appreciated significantly in value this past quarter, would you have take any gains on this, would you have sold any of that and realized some benefit with that as flow through any of the FIC line or the Corporate/Other line?

[John Gerspach:]

I am not aware of any outsized gains Betsy that would have impacted the FIC line at all.

[Betsy Graseck:]

Okay.

[John Gerspach:]

And when it comes to Corporate/Other, almost everything that we have in Corporate/Other is an AFS security. So the extent that there were any gains on the securities that we have got in Corp/Other it would really be flowing into OCI.

[Betsy Graseck:]

And then, separately on the NIM outlook that you discussed a little bit ago, clearly one of the benefits of the NIM that you had this quarter was the reduction in your long term debt, right?

[John Gerspach:]

Yeah. As I said, that was baked into the guidance that we would have provided you last quarter.

[Betsy Graseck:]

So I think you have got about $25 billion in long term debt coming due over the next couple of years; any color on how much of that debt you will be refi-ing versus rolling off?

[John Gerspach:]

We have actually, we certainly haven’t gone out a couple of years Betsy, but since I think that when we have -- we certainly we are indicating that this year we would only expect to refinance something less than $15 billion to $20 billion of the long term debt that was coming due and we are on-track to be in the lower end of that range at this point in time. We haven’t given any guidance yet out to what you might do in 2013.

[Betsy Graseck:]

Okay; and one of the reasons asking the question is there is some discussion to be amongst some fixed income investors around the requirements that after you have seen others might have for larger institutions talking about how much senior debt through equity as a percentage of assets; banks might need you know the bailing debt and I mean then they are still bearing the plusses at for 3% senior debt through equity, I mean it sounds like the idea haven’t really gone away and wondering if that factoring into your thought process on how much debt you are going to roll versus not?

[John Gerspach:]

We still have, but I think take a look at our overall capital structure; we have got a reasonable amount of long term debt remaining. I think we are all trying to await some guidance on many of these issues and you know the topic that you are really getting into is really one that’s being driven by the Title II approach to recovery and resolution. So that’s something that's being work through as far as what level of debt you would need. Certainly, the levels of debt that we've got in our forward planning would be such that again we think that we would be writing [lock] step was what we think the requirement of that Title II resolution regime would be.

[Operator:]

Next question will come from the line of Ed Najarian with ISI Group.

[Ed Najarian:]

So, in the last couple of calls you've outlined the ROEs coming from Corp being quite high. And then that obviously gets dragged down by Holdings. So it kind of begs the question, and it's sort of outlined on page 18 of the slide deck where you go through the operating cost of Holdings and especially breaking them in to core number and then legal related number. Any sense of how fast, just thinking about the next couple of years, we can get those operating cost out of Holdings. You got the assets coming down nicely but obviously the markets looking for those operating cost to come down in conjunction with that so that we can get closer to the core profitability of Corp. So could you give us a sense of that in any way?

[John Gerspach:]

Yeah, the Holdings, I think that we've been pretty true to what we said which was that we would bring down the operating expenses in Holdings in relation to the reduction in assets. Now, if you focus on the operating expenses in Holdings, I mean obviously Holdings is also being impacted by higher amounts of legal and related, put that off to the side. So let's just focus on the billion dollars or so of operating expenses that are in Holdings. If you look at in total right now, those operating expenses are running about 2.3% of the assets this quarter and that's basically flat to what they would have been last quarter, so that's, and it's up just slightly from 2.2% in the fourth quarter of last year. So again, we're pretty much on spot as far as having the operating expenses come down in relation to the assets. Now, at this point in time though, what's going to happen is that, that operating expenses they're going to be impacted now by the mix of the portfolio, the portfolio was shrunk so much that, you can now look at it, at almost very bite sized chunks. Obviously the specialized asset pool -- assets have the absolute lowest amount of operating expenses associated with them, they're running at about 0.5% or so of assets. So to the extent we can drive down SAP, we drive down the SAP assets but we don't necessarily relieve a lot of the operating expenses. For us, it's really the operating expenses get heavily focused into the LCL assets and the LCL assets are running at a rate that is certainly higher than the average of 2.3% is probably closer to 2.6%, 2.7% and so that really becomes the area that we're looking to drive down. Interestingly, it's not concentrated in the U.S. mortgage business, the U.S. mortgage business, they only constitutes about a third of the operating expenses that are in Citi Holdings. So, it really is our ability to drive down, get rid of the assets in LCL outside of the U.S. real estate loan. So there it's the businesses that we've got remaining in the international book and then some of the other businesses that are still in Holdings.

[Ed Najarian:]

Well, I guess that's what I'm driving at though, as those assets come down, do you have a plan or vision of how those costs will come out in conjunction so that 2.3% number doesn't lies too much or conversely are you telling us that it will rise for a while?

[John Gerspach:]

No, I am saying that we will bring down the -- we are bring down the expenses as we're bringing down the assets, what I was trying to give you is a flavor add of the mix. If you see, most of the assets coming down in SAP you're going to get less of an expense benefit than you would have, if we drive down the international assets in local consumer lending. So we are very focused and making sure that as we bring down the assets, we are taking down the operating expenses associated with those assets.

[Ed Najarian:]

Okay, okay, thanks. And then to follow up, I think the market is very pleased with clearly the increasing your B III Tier I common equity ratio and overall increasing your capital ratios in general. And with the start trading still at a fairly large discounted tangible book, it seems like investors would really love to see more return of capital next year, both the dividend increase and stock buyback. So going into the (inaudible) with much higher capital ratios this year, would love to hear from Vikram as well any sense of how you guys are thinking about the (inaudible) and thinking about capital return for 2013?

[Vikram Pandit:]

I think the sense we still so have similarly we haven't seen the scenario, yet and we're not going to see it for year or so I mean not – sorry, so. And as we look at that and then we'll decide what we request from the regulators on capital and obviously this is not a question of our ability to generate capital, as you know we've shown you that, it's now a matter of looking at the full picture, which we won't know for a little bit of while.

[Ed Najarian:]

Right, we haven't seen the stress scenario yet but if I guess if we can right now just go on a base line assumption that it's not going to change dramatically from last year's stress scenario how would you think about that?

[Vikram Pandit:]

Well I will not presuppose what the stress scenario is going to be, one, we wait on that and if you don't mind, it's not that far away we'll get the real scenario and we'll go through it then.

[Ed Najarian:]

Okay all right. Thanks a lot.

[Vikram Pandit:]

Sure.

[Operator:]

Your next question will come from the line of John McDonald with Sanford Bernstein.

[John McDonald:]

Yes, hi, a couple of follow ups just to what Ed was just asking, John you kind of crashed through your Basel III 8% target. Do you have a revised outlook for where your Basel III capital Tier 1 might get to by the end of this year or end of next year?

[John Gerspach:]

I don't think we're going to be publishing any guidance near term I still feel pretty confident that will above 8% by year end but John if you just take the current consensus estimates for our earnings over the next five quarters if you just take that level of income that in and of itself would add about -- roughly 135 basis points to our existing 8.6%. So you could argue that we could be approaching 10% of those estimates came through. You know now obviously there is a lot of other factors that can come into play but subject to all the usual caveats we should be able to achieve a 9% Basel III Tier 1 common ratio, sometime next year, maybe 9.5%. What would you say?

[John Gerspach:]

You said 9%.

[Vikram Pandit:]

I said 9% or 9.5% sorry.

[John McDonald:]

And that’s just you’re using a consensus net income that’s not including any other additional third party sales or anything like that right?

[Vikram Pandit:]

No nothing; nothing as far as Smith Barney sales or you know, any other impacts that the additional capital could have on reducing some of the threshold deductions that were subject to etcetera, etcetera.

[John McDonald:]

Okay. And then on the expense drag of Holdings as you were just discussing with Ed, the perception that we’ve had is that default servicing expenses around U.S. mortgages has been the majority. So it sounds like, do you see that that two-thirds of the kind of expense drag is not in U.S. mortgages that are in Holdings?

[Vikram Pandit:]

If you look at the $1 billion of expenses, the operating expenses that we have in Holdings, it's roughly a third of that would be the U.S. residential mortgages.

[John McDonald:]

Okay. Just to put a little more tangible sense, what are these other kinds of expenses are we talking about, the other two thirds, is it branches or servicing, personal, what goes away when the other assets go away?

[Vikram Pandit:]

Well, the other assets, let’s say, we’ve got two consumer operating businesses over in EMEA. We’ve got a consumer business in Spain. We’ve got a consumer business in Greece. We’ve got the continued operations of OneMain Financial, that's an operating business.

[John McDonald:]

Lots of branches there, yeah.

[Vikram Pandit:]

Yeah.

[John McDonald:]

Okay, that’s helpful, thanks. And then on the reserve release question in Holdings, John, what specific metrics are you watching when you debate internally about a more general release of reserves? Is it more your delinquencies what you are seeing sometimes when you speak about it, it sounds like you are talking about more macro. Is it a combo of your own delinquencies in the macro, can you give us anything there?

[John Gerspach:]

Yeah, you know it’s very much a combination of both our delinquencies and the macro environment; I mean you, and so, it’s both.

[John McDonald:]

Okay. And then, but nothing specific you could give us in terms of metrics you’re watching?

[John Gerspach:]

You know, we watch everything from unemployment to the HPI, again our delinquency statistics, almost anything that you could dream up, we watch.

[John McDonald:]

Okay. And the idea, it sounds like you’re getting closer to the idea where the models would make your release reserves, but you’re not quite there yet, you want to see a little more out of the macro before you start doing that, is that fair?

[John Gerspach:]

I think it’s fair that we want to see, as either both Vikram and I have said, I think the most important thing right now is to get through the fiscal cliff and then the secondary factor would be that you’d like to see an economy that has got some real legs to it, one that’s capable of creating jobs and actually driving down the real unemployment rate. I don’t think we’re in an economy where you’re going to have housing lead the economy, I think you need the economy right now to lead the housing market and I’m not quite sure as to exactly how much of a robust nature we’ve got at the underlying economy at this point in time.

[John McDonald:]

Okay, that just sounds a little more macro than a couple of more quarters of your own delinquencies improving or that kind of thing, but okay, I think I got it. Just one last thing, on international consumer credit, you mentioned the regulatory changes have impacted you in Korea, are there any signs of increased regulatory scrutiny or changes around consumer lending in Latin America, either in Brazil or Mexico where you have pretty high yields and everyone has high yields, is there any concern about changes there?

[John Gerspach:]

We constantly watch the developments in those markets, especially in Brazil; Brazil, it has got an active program now with the government encouraging institutions to lower the lending rate, so that’s something that we are clearly watching at this point in time. And again, we have repositioned our Brazil franchise so that we think we appropriately positioned, but it’s something that we watch all the time.

[Operator:]

Your next question will come from the line of Vivek Juneja with JPMorgan.

[Vivek Juneja:]

Hey, John a question for you, a couple of questions. Firstly VAR, so can you tell us what your VAR was for the quarter?

[John Gerspach:]

I don't have that with me, Vivek I am sorry.

[Vivek Juneja:]

Do you any sense of up, down anything?

[John Gerspach:]

Sorry.

[Vivek Juneja:]

Okay. Second question 90 plus a fair amount, did I hear you right, you sold $750 million of delinquent loans from LCL?

[John Gerspach:]

I believe they were primarily delinquent; there may have been a few non-delinquents in there, but yes primarily delinquent.

[Vivek Juneja:]

Okay. So that would imply that then if I adjust for that your past dues were actually up linked quarter by $300 million or so assuming whatever the precise number is and that’s both 90 plus were up and early delinquencies were also up?

[John Gerspach:]

The answer is you are right, they would have been up, don’t forget you have got a continuing ageing book, a lot of those delinquent loans actually came out of the 180 day bucket, I don't have the break down in front of me Vivek, but lot of the portfolio actually came from loans where we would already taken the initial writedown. And so I’ll see what we can do by getting you some more detailed information, but, I just don't have the bucket-by-bucket breakdown of the delinquent loans, but a lot it as I said came out of the 180 day plus bucket.

[Vivek Juneja:]

And so your point is that the reason the early delinquencies are still going up is just ageing of –these are all borrowers are now falling apart from falling behind or is there…?

[John Gerspach:]

Actually, the blip that you see in the 30 to 89 bucket, it’s actually, that’s an internal impact; we’ve changed some payment schedules and so we got a blip in our early bucket right now. I expect that to dissipate by the time when you see the fourth quarter results. So I wouldn’t read too much into that early that increase in the early bucket delinquencies.

[Operator:]

Your next question comes from the line of Erica Penala with Bank of America Merrill Lynch.

[Erica Penala:]

Hi good afternoon I just had a few quick follow up questions. And the first is on capital return, do you get a sense of percent has gotten, a better sense in the actual risk profile of your international credit portfolio coming into this year’s SICAR; is it feels like is that sort of where the differences with regards to what’s actually happening at Citi versus what they were assuming what happened in a stress scenario?

[Vikram Pandit:]

I don’t want to say whether or not they have got a better feel for to better understanding; but what I will say is that, since the time of the last SICAR submission we’ve spend a lot of time with representatives from the Fed and importantly the Fed has been very gracious with their time allowing us to get some access to the people who actually run the models, so that I think each side has got a better understanding now of what is driving things and what data is needed. So I'd say it's been a very constructive process that has continued over the course of the last six months or so.

[Erica Penala:]

Got it and my one -- last follow up question. I apologize for another Holdings related question, but in terms of your reserving model, on a go forward basis, if you think about new frequency and incremental severity, are your assumptions on a go-forward basis for flat unemployment trends and continued declining home prices?

[John Gerspach:]

I'm not going to comment on individual variables in our assumptions in our various loan loss models but obviously both of those are factors that had come in to play but I am not going to comment on exactly how we maybe modeling that.

[Erica Penala:]

Okay, thanks for taking my question.

[John Gerspach:]

Not a problem.

[Operator:]

Your next question comes from the line of Mike Mayo with CLSA.

[Mike Mayo:]

Hi, how much of the $53 billion DTA is for the U.S. only?

[John Gerspach:]

You know, Mike, I don't have that number in front of me. The last number that I have and we can follow up with you to get you some more specifics would be that about roughly $5 billion or so would have been international and then the balance would be both U.S. Federal and State and there's obviously some state and local that comes in to play as well.

[Mike Mayo:]

Alright or maybe you can just help me with what I'm trying to get to. If the corporate tax rate is reduced, let's it was reduced by one fifth what sort of write down would you have on your DTA?

[John Gerspach:]

You know Mike, as we've discussed in other calls, you've got to break. Let's us assume for argument's purposes now that of the $53 billion roughly $45 billion is U.S. Federal, okay.

[Mike Mayo:]

Okay.

[John Gerspach:]

Then in that U.S. Federal $45 billion there's a component there, that would be a tax credit, so foreign tax credits. Most people when they're looking at the prospects for tax reform are the working assumption anyway is that those tax credits would stay in place, you're entitled in those tax credits, that would remove the tax credits from the equation as far as the impact on of the rate reduction. So there you'd be left with say $20 billion to $25 billion of Federal related DTA that could be subject to tax reform, you then have to think about what year would we have Federal tax reform, but if it was at the current point in time and you actually had a 20% reduction then you would be looking at the FTA would be -- the DTA would need to have a evaluation or write-off actually of somewhere around $4 billion to $5 billion.

[Mike Mayo:]

All right, that was clear. And moving onto the $95 billion of mortgages in Holdings, you said do not expect a rapid reduction in those mortgages, but why not? You said that you feel better about the housing market; you're not willing to call the turn that you feel so much better why not more aggressive sales?

[John Gerspach:]

The ability to sell requires willing buyers and the buyer -- the biggest stumbling block, I think that we've got right now from a buyer's point of view would be liquidity. Most of the sales that where people want to buy mortgages are very specific MSAs where you get specialty servicers that are looking to take on some of the delinquent mortgages because they've got a real in depth understanding of the local market. And so you're looking at sales packages of $200 million-$300 million. It's hard to build that up to some substantial volume where you would see a rapid reduction in the overall mortgage book, they just aren't a great deal of big national buyers in the market right now.

[Mike Mayo:]

Maybe you can help me connect the theory to the reality, I mean theory would say simply lower the prices and at a certain price there's always buyers. So what's wrong with that theory?

[Vikram Pandit:]

What's wrong Mike, is very simply we also have to look at our net present value decision. One of the reasons why you don't have buyers out there is there is still not funding available, you haven't seen a residential securitization market yet? Have you? Not quite. So the point on this is a very straight forward one which is it's the funding that's causing the issue not necessarily the valuation levels only on the mortgages. And we have to do what's right for our shareholders. We have the funding base, we have a clear perspective on what these assets are worth and we're going to sell them at prices we think are in the interest of our shareholders.

[Mike Mayo:]

Okay. And then switching gears again, back to the theory, the theory says slowing economies therefore more credit concerns and to the extent that Asia is slowing, would you have more concerns there and you saw little tick up in your Citicorp International Credit the [NCL] ratio went up from 1.8 to 1.9, not a big deal, the other metrics are fine. But as you look ahead, are you starting to take some extra precaution?

[Vikram Pandit:]

I would tell you again the quality of our portfolio is very strong we are an urban lender we have a more affluent portfolio it's diversified and yes there are questions about what rate the growth is going to be at but the rates are still very significant out there. So as we look at the situation in Asia the question to us is really is more about what's the rate of revenue growth not so much issues about the quality of the books that we have.

[Mike Mayo:]

And then last question as it relates to LIBOR investigation, last quarter you've seen pretty fine with the question when you think you'll hear about the LIBOR investigation and how do you feel today?

[Vikram Pandit:]

As we say – I'm going to repeat what I said last time, which is that we're cooperating with the authorities that have asked for information and we'll work on their timeline.

[Mike Mayo:]

And do you have any sense of when you'll hear anything?

[Vikram Pandit:]

We will wait to hear from them when they are ready.

[Mike Mayo:]

All right, good enough. Thank you

[Operator:]

Your next question comes from the line of Matt Burnell with Wells Fargo Financial.

[Matt Burnell:]

Good afternoon. Just a couple of quick questions John you mentioned some of the trends in the securities businesses and in the third quarter and I realized it's very early in Q4. But I'm curious if you're seeing any reduction in activity levels from clients who might be a little more cautious heading into the election in the fiscal cliff?

[John Gerspach:]

I don't think I'm going to give a comment on the early stages of the fourth quarter market.

[Vikram Pandit:]

Now but having said that, there's no question uncertainties are good for the economy. It's never good for the markets and at some point it's not about what happens to the cliff. It is leading up to cliff that can have an impact as well. All of those are uncertainties still ahead of us.

[Matt Burnell:]

And then just a quick administrative question, John you targeted our estimated debt effective tax rate going forward last quarter moving forward would be about 22%, any change to that guidance?

[John Gerspach:]

Yeah, I would up it probably to 24% right now, you take a look at our tax rate this quarter, it's certainly very noisy given some of the things that have happened. If you strip out the Morgan Stanley Smith Barney loss and the $580 million tax reserve release. That gives you a rate that's more in line with what you would normally see. And you strip out those two and our rate becomes, something a shade under 24%, I think it's like 23.6%, 23.7%. So that's just a shade over the guidance that I gave last quarter, about 22% and I would expect the fourth quarter to be more in line with that 23% to 24% range that you see in the third quarter.

[Matt Burnell:]

Okay, thank you very much.

[John Gerspach:]

Not a problem.

[Operator:]

At this time, there are no further questions.

[Susan Kendall:]

Alright, thank you all for joining us today.

[John Gerspach:]

Thank you all very much.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thank you all for joining and you may now disconnect.