Citigroup Inc.
Q4 2012 Earnings Call Transcript

Published: 17 Jan 2013

[Operator:]

Hello and welcome to Citi’s Fourth Quarter 2012 Earnings Review with Chief Executive Officer Mike Corbat 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, our CEO, Mike Corbat, 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 Mike.

[Mike Corbat:]

Susan, thank you and good morning everyone, and welcome. As you know, we reported earnings of $1.2 billion for the fourth quarter of 2012. Excluding DVA and our repositioning charge, net income was $2.2 billion, or $0.69 per share. These earnings were below expectations, reflecting the high level of legacy costs, most notably in legal and related expenses. We also had a reserve release which was significantly smaller than in previous quarters as our credit trends are normalizing and we’ve not yet begun to release mortgage reserves. To be clear, we’re not satisfied with these bottom line earnings, and our focus is not only on putting the drag of legacy issues behind us, but also on optimizing the efficiency and returns of our business as a whole. Despite the disappointing bottom line, our businesses generally performed well during the quarter. Investment banking increased its wallet share, loans grew in our core businesses, such as Latin American consumer, where we saw double digit growth. In addition, we decreased Citi Holdings assets by 9% during the quarter for a 31% reduction for the year. Our capital strength improved during the quarter, with the tier 1 common ratio increasing to an estimated 8.7% on a Basel III basis. Although the environment has shown signs of improvement, we believe it’s likely to remain challenging, with continued spread compression, the introduction and implementation of new or evolving regulation, as well as the costs associated with putting legacy issues behind us. This puts even greater importance on getting our operating efficiency to a level we’re satisfied with, and on allocating our resources to opportunities with the greatest risk-adjusted return. Regardless of the environment, Citi needs to be recognized globally as an indisputably strong and stable bank. We believe the proper essentials are the combination of a strong balance sheet, made up of high-quality assets, supported by the appropriate levels of capital and liquidity. Along with our risk profile, our necessary levels of capital and liquidity are a function of the consistency of the quantity and quality of our earnings, and as a company, we need to deliver on our commitments. When I became CEO in October, I stated three main objectives to accomplish by early in the New Year. First, conduct business reviews and prepare the 2013 budget, which drove our repositioning charge in the fourth quarter. Second was to structure my management team, which was announced on January 7, and third was to finalize and submit our CCAR, which was submitted on the same day. Throughout this period, I spent a good amount of time meeting with stakeholders, our clients, investors, regulators, and of course our people. Let me make a few points based on those conversations. First, our strategy is to focus on our core banking businesses by trying to provide best in class products and services to people and institutions leveraging our global footprint, which includes the world’s growing fastest markets and cities. We believe our strategy is aligned with the dominant secular trends. Second, we’ll continue to seek ways to refine and optimize the execution of our strategy and focus on operating efficiency. As a company, we need to show expense discipline and we can be smart allocators of our resources, driving them where they can catalyze strong, risk-adjusted returns. For example, the $900 million in expense reductions we expect to realize in 2013 from the repositioning actions we announced in December, was driven by a bottoms-up review of where and how we’re going to allocate our expense dollars. That said, improving our operating efficiency needs to be BAU, not just an annual event. Third, we’re very focused on Citi Holdings, considering the disproportionate drag at places on net income and returns. In 2002, we reduced the size of Citi Holdings by 31% and it now makes up 8% of our balance sheet. That being said, there is no silver bullet which will immediately resolve Holdings. We’ll continue to manage these assets and our associated expenses in an economically rational way while taking advantage of any reasonable opportunities to reduce them more expeditiously. And as you know, our North American mortgage portfolio makes up the majority of Holdings’ assets. Trends in that portfolio were favorable in the recent quarter and we continue to watch the US economy and housing market very closely. But before I turn it over to John, I’d like to emphasize that we recognize our net income today doesn’t yet reflect either the amount or caliber of earnings our shareholders expect and that our franchise is capable of. It’ll take some time to work through the challenges of the current environment to realize the potential. Improving our operating efficiency, returns on assets and tangible equity in a risk-balanced manner and returning capital to our shareholders are critical goals going forward. I’m a believer in you are what you measure and I intend to set clear goals and hold my management team accountable for them. Similarly, we’ll share key metrics with you in the coming months so you can hold me accountable as well. Now, John will go over the slides and then we’d be happy to answer any of your questions. Thank you.

[John Gerspach:]

Thank you, Mike, and good morning, everyone. To start, I’d like to highlight some significant items affecting our results this quarter. First CVA and DVA were negative $485 million pre-tax and $301 million after tax in the fourth quarter for a negative impact on EPS of $0.10. In addition, as previously announced, we recorded a $1 billion pre-tax repositioning charge in the fourth quarter, or $653 million after tax, for a negative impact on EPS of $0.21. For comparison purposes, in the fourth quarter of 2011, CVA and DVA had a minimal impact at negative $40 million pre-tax and repositioning costs were $428 million pre-tax or $275 million after tax for a total negative impact of $0.10 per share. Adjusting for these items we earned $2.2 billion in the fourth quarter of 2012 or $0.69 per share as compared to $0.41 per share in the fourth quarter of 2011. Throughout today’s earnings presentation, I will be discussing our result excluding both CVA and DVA as well as the higher than normal repositioning costs in the fourth quarters of 2011 and 2012 to provide comparability to prior periods. I will also discuss prior quarters excluding the impact of gains and losses on minority investments as well as the tax benefit in the third quarter of 2012. A full schedule of repositioning charges by business is included in the appendix. In addition, as shown on Slide 4, there are a few other significant items which are included in our results. First, operating expenses in the fourth quarter included legal and related costs of nearly $1.3 billion compared to $529 million last quarter and $832 million in the prior year. Legal and related costs in Citicorp including Corp other, increased significantly from prior periods to $735 million driven primarily by U.S. consumer-related matters. And, Citi Holdings legal expenses were roughly $550 million, including the previously announced $305 million charge related to the foreclosure review settlement. Second, the net loan loss reserve release of $86 million this quarter, was significantly lower than prior periods. Year over year, about half of the decline in the reserve release was driven by Citicorp, mostly in North America cards, and about half was driven by Citi Holdings, reflecting declining loan and reserve balances versus last year. In Citi Holdings, we recorded a net reserve build in the fourth quarter as a significantly lower net reserve release was more than offset by the impact of losses on loan sales. This compared to a reserve release of $663 million last year. On slide five, we show total Citigroup results for the quarter. Revenues of $18.7 billion were up 8% from last year, while operating expenses of $12.8 billion were roughly flat as higher legal and related costs were offset by a 3% decline in core operating expenses. Credit costs of $3.2 billion increased 11% versus last year. Net credit losses of $3.1 billion declined by 25%. However, as I just discussed, the net reserve release of $86 million was down significantly from $1.5 billion last year. We earned $2.2 billion of net income in the fourth quarter, or $0.69 per share, up from $0.41 per share last year on a comparable basis. This was driven by loan growth, lower core operating expenses, and lower net credit losses, partially offset by the increase in legal and related expenses and a lower net loan loss reserve release. Citigroup end of period loans grew 1% year over year to $655 billion, as loan growth in Citicorp continued to outpace the wind-down of Citi Holdings and deposits grew 7% to $931 billion. We saw an expected decline in deposits during the fourth quarter, reflecting the runoff of episodic deposits which came in at the end of the third quarter, as well as the expiration of the transaction account guarantee, or TAG program. This decline was partially offset by continued growth in core operating account balances. On slide six, we show full year results, including the split between Citicorp and Citi Holdings. Throughout today’s earnings presentation, I will be discussing Citicorp results including our operating businesses

[Operator:]

[Operator instructions]  Your first question comes from the line of Glenn Schorr with Nomura.

[Glenn Schorr:]

I guess, John, you gave some good detail on some of the improving credit trends in Holdings and the mortgage portfolio. I guess the blunt question – I know we’ve asked it in the past – is what more do you need to see to start freeing up the reserves?  It’s $8.4 billion, you have 33 months now. It’s a big difference because it goes hand in hand with the question of how do we get that P&L impact of Holdings lower. So just curious on your thoughts there.

[John Gerspach:]

Glenn, your observations are absolutely right as far as – and we’ve pointed this out before - as far as being able to begin charging those [NCLs] [ph] against the reserve is one way of driving Holdings towards breakeven. But as we’ve said last quarter, we want to make sure that those trends – and we do see some strong positive trends in the housing market. We want to make sure that they are sustainable. And at the end of last quarter, we pointed out to we wanted to see the US get past the whole fiscal cliff issue. Well, unfortunately at the end of the year, the resolution of the fiscal cliff was basically kicking the can down the road. So I think that what we would like to see now is how the US deals with the ongoing debt ceiling debate and the upcoming sequester on expense reductions. We get through that, and we see how the economy performs, we see whether or not the trends that we see now are sustainable and then we’ve got decisions to make.

[Glenn Schorr:]

Crystal ball, that’s a 2013 event though?

[John Gerspach:]

You tell me how we’re going to come through the debt ceiling…

[Glenn Schorr:]

They’re going to put another band aid on it.

[John Gerspach:]

We’ll take a look.

[Glenn Schorr:]

The $10 billion in paydowns this quarter that you mentioned, is that – are there specifics to the portfolio that would make fourth quarter more or less or is $10 billion a quarter fair enough to think about?

[John Gerspach:]

Glenn, I just want to make sure that we’re focused on the same items. When we were talking about that net pay downs, that’s not the overall in the mortgage portfolio. I don’t know if you…

[Glenn Schorr:]

I’m with you, correct, but it’s inside Holdings’ assets, correct?

[John Gerspach:]

Yes, that’s fine, that’s fine. Look, we’ve guided you for some time now that the pace of reduction in Holdings is going to slow and it won’t necessarily be smooth quarter-after-quarter. So I wouldn’t look at that $10 billion of net paydowns necessarily as being indicative. But we don’t anticipate that it should drop off dramatically in the next quarter or two.

[Glenn Schorr:]

In the back end – in Slide 26 in the appendix, you gave us the Basel I to Basel III walkthrough and I guess there’s a 24% increase when you go from one to the other. And that’s been consistent. What we’ve seen at some of the competitors is as portfolios have reduced and as credit has continued to get better, some changes to the models and therefore Basel III assets go down, therefore your Basel III cap ratio goes up. Curious on what would be different on Citi’s portfolio that we wouldn’t see something similar.

[John Gerspach:]

Assuming that we continue to reduce the risk in the portfolio, and if there’s an improving environment that is the way the model should work.

[Glenn Schorr:]

So, bottom line, is at year end you didn’t make big changes to the models for what you’ve seen on credit, and so therefore no big reduction of Basel III.

[John Gerspach:]

No, no. The reductions that you see in Basel III primarily reflect, again, movement in the actual books themselves.

[Glenn Schorr:]

I appreciate that. One last quickie is you mentioned on the $1.3 billion of legal costs this quarter related to some consumer matters. I wouldn’t mind just a little bit more color there. This way we can make our own decisions on whether or not we think that’s the appropriate run rate or if fourth quarter was unusually high.

[John Gerspach:]

We don’t go into detail on specific reserving actions unless it’s in connection with a settlement that we’re announcing. But look, many different aspects of U.S. consumer-related products and offerings are the focus of reviews across the industry, including by several of our regulators. I don’t think it’s any secret that the CFPB has been reviewing various consumer products, and in fact they’re currently reviewing us. But I’m really not going to say anything more about individual regulator discussions.

[Operator:]

And your next question comes from the line of John McDonald with Sanford Bernstein.

[John McDonald:]

Hi, John, a couple of clarifying questions about your outlook comments. You indicated that you hope to keep the net interest margin stable. Would that imply that you expect to have some expansion of net interest income dollars given that the balance sheet is growing?

[John Gerspach:]

The answer to that is it somewhat depends. I’m going to have fudge this a little bit, only because of the impact of the trading book, and how that impacts net interest. So when you look at our core banking operation, we should have some improvement in net interest revenue. The difficult thing to project, always though, is the exact movements of net interest revenue, and therefore NIM, on the trading book. In this quarter, for instance, I mentioned roughly half, 4 basis points, of the 7 basis point improvement came about as a result of the trading portfolio.

[John McDonald:]

Okay, that’s fair enough. And then on the expense outlook, you said core operating expenses should be trending at the $11.5 billion per quarter? Right?

[John Gerspach:]

I said that that’s a good base on which to start to think about it.

[John McDonald:]

Okay. And for the year, you expect that core operating expense to be lower in 2013 versus ’12. What’s the amount in ’12 you are looking at when you say it will be below that?

[John Gerspach:]

Take a look at the full year reported operating expenses for Citigroup.

[John McDonald:]

Do you have the number that you’re looking at?

[John Gerspach:]

I think there’s a slide in the appendix. How about 29? So it’s 46.3.

[John McDonald:]

So you expect the core operating expense to come in below that in ’13. That’s what you’re shooting foreign. And that’s before the $900 million in repositioning saves?

[John Gerspach:]

I rolled it all together. I’m trying to stay away from giving you a specific number. But think in terms of the 11.5, as I said, as being an indicative base for moving forward. Off that 11.5 base, we’re going to deliver the $900 million of expense saves coming off of the repositioning. We’re going to drive down expenses in Citi Holdings. We’re going to have to spend some amount of money off of those two reductions in order to fuel volume growth that we’ll see in the business, but we’re also anticipating continuing our reengineering program and therefore driving up more expenses on top of the $900 million.

[John McDonald:]

And then finally, we heard you say legal and related costs a lot today as you went through your remarks. And just a little bit of color on what’s included in that type of category, because there was a lot of expense increase in this quarter attributed to legal and related. And what are your thoughts as we go through? It’s obviously tough to predict this stuff, but do you expect to make some improvement on that front in ’13?

[Mike Corbat:]

Well, as I said, we don’t – legal and related – let’s see, what does this include?  Let me get to one of your specific questions. It certainly includes the results of announced settlements. We can call that out for you just as we did with the $305 million settlement that we reached in connection with the foreclosure review, so, right. It would include other reserves that we take in relation to ongoing legal and regulatory matters for which we don’t comment because there just – we’re not going to comment on publicly until they become a fact. So given that, those are the types of items that you look at and given the environment that we’re in, that’s why we would expect legal and related expenses to remain somewhat elevated as we move forward. Legal and related for this year ran about $2 billion plus and closer to $3 billion, $2.9 billion. It’s a $600 million or $700 million increase off of where we were last year. I think you’re going to be looking at those types of levels going – at least in the near term.

[John McDonald:]

And one final specific question, can you tell us how much you had in expenses related to mortgage look backs and that might be ending with the independent foreclosure review settlement?

[Mike Corbat:]

Yes, one of the good things coming out of that settlement is that we can stop incurring those expenses. Those expenses were running us just south of $200 million a year.

[John McDonald:]

And were they disproportionately in Holdings?

[Mike Corbat:]

They were all in Holdings.

[Operator:]

Your next question comes from the line of Jim Mitchell – Buckingham Research.

[Jim Mitchell:]

Can I ask about the LCR?  You guys have disclosed in the past that you, even under the more stringent criteria, you had I think in the third quarter, 116% LCR. With the new changes, have you had a chance to look at that and the way you might be in it?  Does that give you an opportunity to free up some cash?

[John Gerspach:]

That’s a very timely question. Actually, during the quarter, we actually did reduce the amount of excess cash that we were carrying towards the end of the quarter.

[Jim Mitchell:]

Yes, that was my next question, thanks.

[John Gerspach:]

So whereas we were running levels of a little bit north of $400 million, we’re currently at about a $350 billion level on the excess cash. But even at that reduced level, under the new rules, we’re running an LCR ratio of something to the tune of – it’s either 116% or 118%. So we still think that we are certainly in compliance with the new rules as fully rolled out as we understand them.

[Jim Mitchell:]

And so when we look at your balance sheet down – on a period-end basis, down $70 billion, is that a function of the fact that you used a lot of that cash to pay down debt?  Obviously you did have some decline in City Holdings as well but was a good chunk of that used to pay down debt?

[John Gerspach:]

Yes, a fair chunk of that went to pay down debt. We also had, as we said, some deposit runoff, largely the runoff of those episodic deposits that we talked about coming in to us at the end of the third quarter. And then we also made some additional investments available for sales securities. So I’d say roughly on the $60 billion it’s probably 50% going towards long-term debt, 25% is the deposit rundown and 25% or thereabouts on the growth in AFS securities.

[Jim Mitchell:]

Then maybe the last one I guess I’ll take a shot at capital return. Obviously there’s been a lot of chatter. You can’t really say exactly but can you maybe discuss maybe a just broader view of how you think about the (C-card)?

[Mike Corbat:]

The way we approached (C-card) was probably not surprising to most. It’s really job one or mission one really to put a submission in there where we could get approval. And so we’re obviously focused on doing that. I think second thing we were focused on is in 2013 giving ourselves the goals of getting to and breaking a 9.5% Basel III tier common ratio. And so I think those two things were the guiding principles of our submission and I’ll leave it at that.

[Operator:]

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

[Matt O'Connor:]

It sounds like you’re not ready to comment on future cost saves, although there was a comment earlier that some additional efficiencies should be coming. So I do want to just prod a little bit there. As we think about the $1 billion or so of savings that you disclosed last month, is that kind of a downpayment on something that’s going to be pretty big? Or is this a pretty big chunk of what the overall pie might be?

[Mike Corbat:]

Matt, I think that what you described as the downpayment was as I described the results of our budget process, and I think as we went through the budget, we came to some conclusions that we had expenses, people, businesses in places that we didn’t think we were going to be able to earn the requisite returns on those businesses over the intermediate period, and chose and made decisions to exit, downsize, rescale those activities. I think as an institution, and you heard me mention it, that from an operating efficiency perspective our businesses and geographies need to be focused, really BAU, on the way they think about and run their businesses. And so we’re trying to drive, as we come out of this budget process, a mentality that rather than having one-off events or annual events around repositioning charges, people need to have specific metrics by which they’re going to be held accountable for delivering against their businesses and that they need to make real-time decisions in terms of how they choose to make that happen.

[Matt O'Connor:]

And in terms of the timing of some of the metrics that you’ll provide us and I guess just kind of the overall strategy review -- I can appreciate you’re a couple of, or a few, months into this -- what’s the timing of that in terms of when you’ll communicate to investors and the Street?

[Mike Corbat:]

You know, we’re working through it, and I think over the next coming months we’re going to come out with that.

[Matt O'Connor:]

And I realize it’s still being formed, but as we think about which metrics are important to you, I’m not going to pin you to the level, but in terms of whether it’s the ROA, the ROE, the efficiency, or all of them, are there a couple of key ratios that you think about?

[Mike Corbat:]

Yeah, in my opening remarks I mentioned a few that I think are critical and my guess is as we refine this we’ll speak to… In no particular order, I’ve mentioned operating efficiency. I think ROA is one of those things I think that return on tangible common equity is a ratio that we should probably be out speaking and measuring ourselves to.

[Matt O'Connor:]

And then just lastly, maybe a question for John. If we look at some of the capital markets revenues and I guess specifically [thick], I think last quarter you had a very good quarter and maybe the first three quarters you gained a lot of share. And it seems like at least so far, as we have seen report this quarter, you might have given back a little bit this quarter. Is there something different in your mix, because it’s more global, or just a product set, that maybe explains some of the relative weakness in 4Q?

[John Gerspach:]

I wouldn’t call it a weakness in the fourth quarter at all. I actually think we had a very good fourth quarter in our [thick] business. And I think that for the full year, you’ve got [thick] revenues up 28%. That’s good performance. And I think that that ongoing performance, you know, reflects a lot of the repositioning that we did in the business in 2011. So, relatively speaking, we probably had more of an outperformer in the third quarter and therefore it makes the fourth quarter -- you know, when you’re doing quarterly sequential comparisons -- look a little small therefore. But I think that if you judge the year in its entirety, that’s really the way to look at the business. And I think the business had an excellent 2012.

[Operator:]

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

[Brennan Hawken:]

Just wanted to follow up first on something Glenn hit on, the reserves and holdings. And I just want to make really clear, there’s nothing that you’re seeing there in the data -- given your comments, John, I wouldn’t assume so, but just want to make sure here -- that would be preventing you from releasing any reserves there?

[John Gerspach:]

I think we’ve been pretty clear that we feel pretty good about the underlying credit data in that mortgage book. Delinquencies continue to improve, the NCLs, as you can see, continue to go down. We put up some data for you at the financial services conference I spoke about in December, that point to some of the improvements that we see in the portfolio related to the dollars and the percentage of the portfolio, FICO scores over 660 and the amount of loans that had either FICO scores less than 580 or an LTV over 100%. And all of those trends are showing favorable movement. So the book looks pretty good.

[Brennan Hawken:]

Yes, agreed. It just seems – and then you combine that with the home price improvements that we’ve seen now over the last three quarters. It just seems really odd that we would get some reserve release. Dysfunction in Washington is something that we’re probably going to be able to count on until we normally would have been able to like Social Security. God knows whether that will happen. So it’s just – I guess I’m just trying to figure out what’s really preventing the releases there, especially giving the ETA.

[Mike Corbat:]

If we end up with a sustainable stalemate that then produces a sustainable trend, maybe that’ll give us the basis then to make some other decisions.

[Brennan Hawken:]

And then could you quantify the impact that the loan sale had on the Holding reserve bill this quarter?  It sounds like there was a little bit of noise there.

[Mike Corbat:]

Yes, it was a little over $100 million worth of losses that we took, net losses that we took on loan sales in the quarter and that flows into that LLR line.

[Brennan Hawken:]

Then also on reserve, in Asia, we switched to a build there. Are we seeing a cyclical – any reason to believe that that’s now a cyclical shift where there will be some build for a while or is that more one-time in nature.

[Mike Corbat:]

I don’t think it’s one-time but I think if you look at Asia over the last three or four quarters, we’re bouncing around a level of reserves. I think we had a reserve build in Asia. I can’t remember if it was the first quarter or the second quarter. Then we had some small releases. Now we’ve got a small build. So I would just look at it as fine tuning the reserve levels.

[Brennan Hawken:]

Then just a couple quick ones on cap markets. You guys don’t provide comp ratios in securities and banking but when you look at the expense ratio delta, it didn’t show the improvement there that some of the peers, particularly those reporting yesterday, showed. Could you give some color on what’s going on?  Is there any reason why those would diverge or is there any noise that might imply the actual trends didn’t diverge as much as the reported numbers would imply?

[John Gerspach:]

I think what you have – when you take a look at the business, you have to take a look at the full-year results in order to really get a true measure of performance and I’m not – I don’t have the full-year securities and banking numbers in front of me, ex-CVA and everything else. But I believe that we did show improvement in the efficiency ratio in securities and banking during the course of the year and I think even now, if you just take a look at securities and banking, our efficiency ratio compares pretty well with the efficiency ratios of some of our peers. Having said that, and as Mike indicated in his opening remarks, we’re still not satisfied with where we are and we intend to drive for improvements in efficiency ratios in all of our businesses.

[Brennan Hawken:]

Then last one, the DCM pipeline, can you maybe give some color on where that stands for you guys?  We had a pretty terrific end of the year. Are we going to be looking at a typical sequential uptick here as we head into the typically seasonally strong 1Q?

[John Gerspach:]

I really can’t comment on the pipeline at this point in time. I’m sorry.

[Operator:]

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

[Betsy Graseck:]

A couple of questions – one, at a recent conference I think you mentioned a mid-term goal on ROTCE of about 10% and I was wondering if you could give us some color, clarity behind timing on that and how much the announced changes that you’ve made get you to that goal?

[John Gerspach:]

I think that we would wrap up the timing on – more specific timing on that - in Mike’s opening comments were, over the next coming months, we’ll get you more specifics on that goal as well as improvements in ROA and operating efficiencies.

[Betsy Graseck:]

Okay, and then on the comments around investing to get the revenue share that you’re looking for, how do you think through the timing? Just as you go throughout the year in 2013, you generate the expense saves and the $900 million that you discussed, and then you’re investing that along the way or are you needing to see some revenue improvement first to have business units self-invest?

[Mike Corbat:]

I think when we talk about operating efficiency, Betsy, it’s the want to have the balance between a strong focus on expenses but understanding that you can’t cut yourself to where you need to be, and that we have businesses we need to make investments in, but understanding that expenses are the things that you can control. So we’re going to be looking across the company in terms of where and how we make those investments, and we’re going to have a set of parameters and an understanding around those investments as they come for people to make them. But we need to be in a position to be able to make those on a regular basis and drive that in a BAU way.

[Operator:]

Your next question comes from the line of Erika Penala with Bank of America.

[Erika Penala:]

My first question is actually a follow up to Matt and Betsy’s questions. Mike, specifically regarding GCB in Asia and Lat-Am, we appreciated John’s comments with regards to revenue growth potentially starting to converge into earnings growth in Asia. And now we have a public comparable in terms of looking at credit growth trends in Mexico now that Santander is public. I guess I’m wondering, have you gotten a chance to evaluate whether or not the infrastructure in those two regions are right-sized to potentially reap the revenue acceleration? Or is it still sort of unwieldy relative to the secular changes of retail banking generally? And tell me if you need clarity on the last part of the question.

[Mike Corbat:]

I think if I understand your question right, I think Erika it’s important to understand the way we think about, and the way we’ve asked Manuel to drive our consumer business, and that is that we operate a consumer business in roughly 40 countries around the world, and that we recognize that aside from a few individual countries, our scale is not going to come from any one particular country, that our scale has got to be driven on a global basis. So as we think about our lending platforms, our card platforms, the mundane things of account openings, we’ve got to make sure that the systems and the way we approach things allows us to recognize that scale on a global basis. So I don’t think of our consumer business as being constrained in the intermediate term in terms of any individual geographies but it’s making sure that we have this drive to come in on our platform so that that can occur. I’m not sure if that answers your question.

[Erika Penala:]

I guess, just to be clear, there are not any additional investments that you would have to make in specific countries in those regions. I know you’re focusing on China, but in Mexico, for example, to reap sort of the credit growth and the revenue growth, if the Mexican economy is picking up as much as folks down there are saying. There’s no additional reinvestment coming?

[Mike Corbat:]

We’ve been making investments. You know, we started making reasonable investments into Asia last year, and around the world -- Asia, Mexico, and other places. We’ve continued to invest and I expect we’ll continue to invest in some of those higher-growth areas into the future.

[Erika Penala:]

Okay. And just a quick one that’s not on Holdings reserves. If I look at the provision levels in GCB North America, it was up quarter over quarter, but flattish year over year. Is the bump up just simply seasonal as the volume spend is higher in the fourth quarter, and could potentially come down on a dollar level in the first quarter?

[John Gerspach:]

You’re talking about the overall provision, or just the NCL rate, I just want to make sure…?

[Erika Penala:]

The overall provision in GCB North America.

[John Gerspach:]

Yeah, see when you get into the overall provision, then you get a little bit into loan loss reserve releases. So let’s talk a little bit about the credit losses, separate from loan loss reserve releases. Because I think we’ve given you the guidance on the loan loss reserve releases that specifically in cards going forward, we would expect the loan loss reserve releases to be roughly at the level where we are in the fourth quarter, at least into 2013. When you take a look at the NCL rates, though, the net credit losses have been improving, the net credit loss rate has been improving in both our branded and our retail services portfolios throughout the year. We’ve now got – I don’t have the numbers right in front of me – but we’ve got a 3.92, or something like that, NCL rate in branded cards. That’s pretty low. I would anticipate that you’ll see some increase in that rate during 2013 just because it’s at a historically low level. I think even in 2013 you’re looking at a level that’s going to be in the low fours. So we’re not looking for some change in the underlying credit dynamics of either of our card portfolios.

[Operator:]

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

[Mike Mayo:]

John, if you could just clarify, what was the return on tangible equity for Citigroup, however you look at it, excluding all the noise?  What was ROTE for last year or the fourth quarter or both?

[John Gerspach:]

Well, I think it’s – I don’t have that number, Mike. I’m sorry. It’s somewhere in the 5% range, I believe, for the full firm, for the full year. I just don’t have the specifics.

[Mike Mayo:]

And assume it’s 5% for the whole firm, what would it be just for Citicorp?

[John Gerspach:]

We don’t break out TC. We don’t apportion the TCE as you know to the various operating segments.

[Mike Mayo:]

And John, just in very simple terms, maybe as a summary comment, your reserve release declined from around $900 million down to $100 million or $0.19 down to $0.02. Why was reserve release so much less?

[John Gerspach:]

Unfortunately, Mike, it’s not going to be a very simple comment. But I guess if I was going to break it down, it would be that there were some episodic releases in the third quarter which did not repeat. Don’t forget in the third quarter we called out that we had a $600 million reserve release in that third quarter specifically related to increased net credit losses that we were – that the rest of the industry was forced to incur by some new guidance issued by the OCC. The loan loss reserve release associated with cards has been tracking down, as we talked about. I think if you take a look at the cards book, we released about $800 million of reserves in the second quarter, about $550 million in the third quarter and now we’re down in that $200 million to $300 million range in the fourth quarter and that’s where we think we’re going to be going forward. So we reached where we’re going to be in cards. The rest of it is just a lot of individual noise around the portfolio. Take a look at international consumer. Our international consumer, we had a $100 million net reserve build in that business in the quarter. That’s due to the growth in those portfolios. So unfortunately, there isn’t a one sentence answer that I can give you on that. It’s just a collection of how we take a look at – it’s a collective view and an individual view of each portfolio.

[Mike Mayo:]

And then for Mike, I asked this question when you first got the CEO job. If in five years from now you were to look back at your performance, what would you want to see to show that you were successful?

[Mike Corbat:]

I think probably going back to your first line of questioning, we’ve got to get to a point where we stop destroying our shareholders’ capital. I would say that would certainly be at the top of the list, that we run a smart and efficient business that’s good at its allocation of its resources around its customer and client segments, that it’s continued to have the ability to lead in a company those clients around the world, that it served the social purpose. There’s several things in there.

[Mike Mayo:]

And then for us, the investors, I guess that, in turn, would lead to a higher stock price. Is that I guess a secondary focus to do everything else right?

[Mike Corbat:]

I wouldn’t call it a secondary focus. We understand why we come to work, and it’s a primary focus.

[Mike Mayo:]

The reason I ask, I mean as a new CEO, you have so many options of what you could do with the stock price. You could have all the directors take a lot of stock, and you’ve had some CEOs take their personal net worth and buy extra stock, and as investors I think that’s a huge focus. I guess whenever you’ve done your review, perhaps we’d hear more about what you might do along those lines. Is that a safe assumption?

[Mike Corbat:]

Yes.

[Mike Mayo:]

Okay. And would you ever consider having a target of where you’d want the stock price to be? In other words, if you’re looking for higher returns on equity, and you get the business mix that you ultimately want, and the efficiency and the capital allocation, would you have a target in mind? Or is that just left up to the stock market to kind of let the valuation fall wherever it will?

[Mike Corbat:]

I think we need to look at all the metrics that are out there. You talked to one of the challenges of that particular metric in terms of how the market is approaching certain things, but it’s obviously something we need to keep in mind.

[Operator:]

Your next question comes from the line of Gerard Cassidy with RBC Capital Markets

[Gerard Cassidy:]

Can you share with us on the sale of the assets out of Citi Holdings the pricing trends that you’re seeing compared to the sales of the delinquent mortgage sales, for example, that you’ve sold in the past? I think through the third quarter it was over $14 billion. Are you seeing better pricing now that the markets have improved a bit?

[Mike Corbat:]

Pricing did improve slightly in the fourth quarter. I’ll tell you that. I wouldn’t say that it went up by leaps and bounds, but it definitely improved over the levels, certainly, that we saw at the beginning of the third quarter. I’d say the pricing on some of those asset sales improved toward the end of the third, and then held up in the fourth, is the way that I would characterize it.

[Gerard Cassidy:]

Okay, and did you finance any of the sales of the assets in the quarter?

[Mike Corbat:]

No.

[Gerard Cassidy:]

Would that be a consideration of yours on a go-forward basis, to help accelerate the disposition of some of those assets?

[Mike Corbat:]

Actually we’ve done that in the past, if you look at some of the deals that we’ve announced. We’ve actually taken on those financings, in certain amounts, in order to make sure that the deals would go. So that is not something that we would shy away from. Again, it’s a matter of being the right deal, the right price. Think in terms of what we always say, economically rational.

[Gerard Cassidy:]

Sure. Shifting away for a moment to the net interest margin, your interest-bearing liability cost in the quarter, when we look at it with and without the FDIC insurance, is higher than some of your competitors. Is there an opportunity to bring those costs down, or is it just because of your global footprint, you just need to pay higher costs in markets outside the U.S.?

[Mike Corbat:]

I think that we, especially on the international deposits, I still think that we’ve got some opportunity. We’ve probably got some more opportunity on the international deposits to bring some pricing down than we do on the domestic deposits. As long as we stay in low interest rate environments in those countries, I do think that we’ve still got some opportunities. We continue to reposition those books away from time deposits. So if you take a look at what goes on in Asia in particular, or specifically, even what we would consider to be normal checking accounts here in the States, which don’t bear interest, a lot of the checking accounts in foreign countries do bear interest. So as you start to grow those checking balances, you’re going to, even though they’re operating accounts, see an increase in your interest bearing. The trick is to make sure that you’re growing the real operating accounts and shifting the mix away from time deposits, which have much higher rates than just the base checking account. So even within something that gets reported as interest bearing deposits, there’s a mix shift that you can still work on, and we’re certainly in the process of doing that.

[Gerard Cassidy:]

And one last question on the balance sheet. What’s the duration now of the securities portfolio, in years?

[Mike Corbat:]

I’ll focus on the AFS portfolio that we sort of use for the excess liquidity. I think we used to say it was slightly under two years. Now I would characterize it as being slightly over two years but it’s still roughly in that two-year tenor.

[Gerard Cassidy:]

Then one final question for Mike, in looking at over the next two to three, maybe even five years, when you look to increase shareholders’ wealth, is there – would you consider every spinning off or selling parts of some of your assets such as your bank in Mexico, for example. We all know how well Mexico’s doing and it doesn’t seem like Citigroup is getting enough credit for its position down there. How do you try to capture those assets that might not be recognized today by the market?

[Mike Corbat:]

I think when you look at the way we come to work, we think our strength comes from our global network and the interconnectivity of our network and our ability, as we’ve described it, to lead in a company our clients and customers around the world and that’s products, that’s businesses. And we think that the value lies in that, point one. Point two, I’d say that in many ways, our model is becoming more unique and has the ability to even become more valued over time. So if you look at where I just came from in Europe to deleveragings, regulation in many cases are – in some cases are forcing some firms to abandon global strategies, in some cases to abandon regional strategies. And I think that the importance of a bank that can do the things that we do for its global clients is only becoming more valuable and we think that the future lies in that. So we’re committed to that and that’s what we’re going to continue to invest in.

[Operator:]

Your next question comes from the line of Marty Mosby – Guggenheim.

[Marty Mosby:]

I wanted to ask you a couple specific questions and then ask Mike a very broad, strategic question. If you look at the $1.3 billion of expenses related to the litigation and foreclosure settlement, can you break that out between Citi Holdings and what was in Citicorp?

[John Gerspach:]

I think that’s already broken out for you on one of the first slides that we got in the presentation package. I think if you look at Slide 4 …

[Marty Mosby:]

I’m sorry. I got that. If you look at the loss improvement that you saw in Citi Holdings, we talked a lot about release of allowance but when you’re starting to look at the actual charges and the losses coming down, can you give us a little bit more color about what’s driving that and how sustainable this new low level of losses would be?

[John Gerspach:]

When you’re talking about the low level of losses, Marty, I assume you’re referring to the net credit losses that we …

[Marty Mosby:]

That’s correct, yes, and about a 46% drop that we saw there this quarter.

[John Gerspach:]

Yes, and as we said, we try to give you a little bit more color on that on the following slide, Slide 20, where we break out the net credit losses on mortgages which constitute the – certainly the vast majority of the NCLs in that business. Mortgages basically constitute three-quarters of the NCLs that we have in Holdings and I think you see a fairly clear trend on that page. Now, we certainly – again, given the current environment and where we see things today, we would anticipate some continued improvement in those trends.

[Marty Mosby:]

And then lastly, the strategic question is as we’ve structured the management team, it’s kind of a traditional consumer versus business type of structure. How do you foresee driving the businesses such that you can make sure the focus in those two units and the cost sale and the relationship building continues to move forward and maybe evolve as a culture that is a little bit more traditional banking in nature as you continue to build out the new direction?

[Mike Corbat:]

So if you look, Marty, what we announced is we announced co-presidents of the company, Jamie and Manuel each running in essence global products and coverage organizations, Manuel on the consumer side, Jamie on the institutional side. And in those roles, they’ve got all of the products reporting into them. So you can then go to the next level and, look, we did what we did as part of the reconstructive operations in technology. Obviously operations in technology are critical parts of the operating businesses that we’re in. So in 2008 and 2009, we actually pulled operations back from being embedded in the businesses, I think to reset the functions around the controls we saw necessary going into the more challenged environment, as well as to be mindful around costs and bloat that we thought had existed. I think we’re at a point today, after making what I would characterize as good progress against those, whereas we look at business decisions that need to be made and where we want to make investment, and how we’re going to spend those dollars, I think those become not just operations technology, safety, and soundness decisions, but they become more broadly business decisions, and I want Jamie and Manuel thinking about that. So in my earlier comment that Manuel has got to take our consumer business to scale around a drive toward common in our consumer franchise, and that Jamie’s got to continue to wring the synergies of what I call adjacencies amongst our businesses, our client sets, out, and to make sure that we can provide the things we need, we can develop the things we need, but we can do them in an efficient way. And so I think the part of the organization attempts to dictate and drive that. From a geographical perspective, I had the four large region heads reporting to me as well, and when you think about the balance in an organization, you want the balance between your products and your geographies, and obviously the third piece around your clients. And you’re just going to make better decisions. When I can look at what’s going on in the products, and I can measure what’s going on in the geographies, and I can see what our clients, and in particular our global clients, are doing around the world, we can just make better decisions about where we want to be, how we want to be there, and where we want to use our resources.

[Marty Mosby:]

And would you say profitability, as we manage or monitor that, being focused on those two big pieces primarily, meaning consumer and commercial? Or still kind of a matrix approach across all of the different geographies, products, and all that? Or are those two business units really, with what you’re breaking out, going to drive the profitability overall?

[Mike Corbat:]

No, I think as a company that comes to work in a hundred companies around the world every day, we’ve got to have a balance between geography and product. Our products are global, many of them are world-class. We’ve got to make sure that that gets celebrated and used in the right way. And I’ll go back to the example I’ve used before, that when we think of EMEA, where I came from, we operate in 55 countries, and we come to work very differently in most of those countries. And so if you’re going to make sure you get the most out of your franchise, you’ve got to be mindful of that, and make sure that you’re driving the metrics and holding people accountable for the things that you need to do. If not, what you tend to see is you tend to see style drift, or you tend to see the business start to veer into activities that really aren’t core to its overall mission and principles. And having spent three or four years trying to clean that up, I’m not anxious or willing to go back there.

[Marty Mosby:]

And then lastly, and thanks for your time here, when you look at just the business lines and segments that are reported, do you see any changes related to that in relation to the changes that you made here in management?

[Mike Corbat:]

I think right now we’re focused on the metrics that really drive these businesses. I think over time, as always, we need to make sure that our reporting structure matches our management structure, and I think today it does. So I’m comfortable with it, but over time we’ll continue to reassess that.

[Operator:]

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

[Vivek Juneja:]

Just on the lines of some of those questions that you’ve been getting, are there significant businesses that you think you would consider exiting? And as you think about savings, do you see them more U.S. or non-U.S. following this down payment that you talk about?

[Mike Corbat:]

You characterize it as a down payment. I didn’t. I think that we went through an extensive, exhaustive amount of work around the work for the 2013 budget. And again, I think we made a number of decisions in terms of what it was we felt we needed to do, and what were the right choices around those things. Again, I think as we go forward, I don’t want to be in a position, or the company to be in a position, where we do these in one-offs. It’s got to be BAU, we’ve got to continually be assessing how, and where, and with whom, and in what ways we’re using our resources. And that’s got to be driven and compared at the business level, and I think that’s got to be something that’s ongoing rather than either being done on an occasional basis or in a step function basis.

[Vivek Juneja:]

When you talk about individual country – when you talk about having all these metrics that you’re going to put out, are you going to vary them by country because obviously individual country dynamics vary a lot, your market position varies a lot. So some countries, even on that – based on that, you’re not going to be able to have the same efficiency ratio as the most efficient bank. So are you going to be customizing it that way or are you going to drive more top of the house and, if so, what level do you intend to share with us when you do?

[Mike Corbat:]

Well, I think that we need to – and we’ve already started the work around the country strategies and, again, we come to work as you described, in many places in very different ways and, therefore, the things that we want to hold people accountable for and the things we want to measure need to vary and that’s the direction that we’re taking the firm. I think in terms of sharing those metrics at a granular basis I don’t – being in a 100 countries, I don’t think that’s something that we would care to do or probably in some ways you would find worthwhile. But certainly at the top of the house, which will be a roll up rather than drive down. We’ll be choosing those metrics that we want to share with you.

[Vivek Juneja:]

Maybe at a continent level like you do right now, like Asia, Latin America, that kind of?

[Mike Corbat:]

Again, we’re working on metrics and over the next couple of months we’ll be out with some things.

[Vivek Juneja:]

John, a couple of questions for you. When you look at your Basel III capital ratio, your assets seem to have come down more than RWA. Did something change to cause the fact that the RWA didn’t come down as much, especially given that you reduced assets in Citi Holdings which should actually have a higher risk rate associated with them?

[John Gerspach:]

Except, Vivek, it’s not every asset in Citi Holdings is weighted the exact same. So I would say that for this quarter, when you take a look at the total amount, the $15 billion that came down, some of it was in lower risk weighted assets or more favorably risk weighted assets than at the higher end. And it’s just simply that. It’s just a matter of mix.

[Vivek Juneja:]

But on top of that, you came down 50 plus (inaudible) in Citicorp, so I would have thought that at the very least you would have come down by – I guess what you’re saying is what you’re coming down is much lower risk weighted even in Citicorp, that’s why your RWA is not coming down that much.

[John Gerspach:]

Think about the reductions that we made in cash. It took $60 billion, so.

[Vivek Juneja:]

DTA, the disallowed amount, John, went up by $2 billion. What did the total amount of DTA do?

[John Gerspach:]

Total amount of DTA in the quarter increased by about $2 billion.

[Vivek Juneja:]

And now what?  $56 million?

[John Gerspach:]

I’m sorry, sir.

[Vivek Juneja:]

Is that about $56 million?

[John Gerspach:]

About $55.3 million I think will be the number that will be in the K.

[Vivek Juneja:]

And lastly, just a clarification on a comment you made earlier, so you expect legal related charges to continue at a $600 million to $700 million rate going forward?  Did I hear that correctly?

[John Gerspach:]

No, I don’t think that’s what you heard at all, Vivek. What I said was that the legal and related expenses are going to stay elevated and somewhat volatile but that we certainly didn’t expect the $1.3 billion of expense that we had in the fourth quarter to represent a new norm.

[Operator:]

Your next question comes from the line of Eric Wasserstrom – SunTrust.

[Eric Wasserstrom:]

John, just – this is just more of a structural question but if I did my numbers correctly in each of the major business lines within Citicorp, generated between let’s call it 1% and 9% in positive operating leverage year-over-year. Do those figures sound about correct to you?

[John Gerspach:]

Yes, yes, roughly. I don’t have it in my head, so each one was positive.

[Eric Wasserstrom:]

So I guess my real question is this. And those numbers, the only adjustment I made was to exclude CVA and DBA but nothing else about what you might consider non-recurring or otherwise diminishing environmental expenses.

[John Gerspach:]

So the only difference between the way that I would have explained it and probably the way I would think of it is I would also adjust for the fourth quarter repositioning which ran $1 billion or so in the fourth quarter of this year compared to $400 million. But if that the only adjustment that we’re differing on? We’re not going to get that wide of a gap.

[Eric Wasserstrom:]

So the heart of my question is this, since we generally agree on that point

[John Gerspach:]

The answer to that is, I’m not going to say in business by business, because spread compression is going to hit you differently in different businesses, and I think we’ve seen that. Certainly in Transaction Services, if you’re not able to offset spread compression, but the volume, you can have the impact of spread compression, you know, it will take away revenues without impacting your level of volume. And so therefore, you’re really running the same stuff through your shop. So your ability to take expense out is then just limited to your ability to generate reengineering savings, which may or may not be enough to offset the impact of the spread compression. So in general, you know, you’re thinking about it the right way, but it is somewhat dependent business by business, and it’s also dependent upon the magnitude of the spread compression that is impacting each business.

[Eric Wasserstrom:]

And then just to follow up on that, outside of spread compression, which is obviously something that you [unintelligible], what then would be, in your mind, the other big risk factors that would disrupt the realization of positive operating leverage across the various businesses?

[John Gerspach:]

Well, general economics. If our customers aren’t growing their businesses, if our customers have a change in sentiment as far as how they view the general economy and cut back on either savings or borrowing or any of that, that certainly is a risk factor.

[Eric Wasserstrom:]

So it sounds like outside of deterioration in the broader macro-environment, what you’re suggesting is the spread issue remains a serious one to look at, but other than that, we should probably be thinking about continued low single digit operating leverage expansion.

[John Gerspach:]

Although I probably will be directing you to make sure that you do a thorough reading of every risk factor that we publish in the 400-page 10-K that we’ll be delivering to you at some point in time in the next 45 days or so.

[Eric Wasserstrom:]

Well, I look forward to that.

[Operator:]

Your next question comes from the line of Andrew Marquardt with Evercore Partners.

[Andrew Marquardt:]

Just following on that line of questioning, on expenses, can you talk about the areas that you’re most focused on investing? You talked about, obviously, cost saves and there’s more to come, it sounds like, after this first cut, but the investment spend that you need to focus on to drive the volume and the revenue, can you talk a little bit about where you’re most focused?

[Mike Corbat:]

Sure, so we’re focused in a few areas. One is in the operations and technology area in terms of continuing to combine, streamline, develop, and roll out common systems around our global network. I think that would be one significant area where we’ve made investment. We’re going to need the continue to make investment. We’re always investing in our people, in terms of wanting to continue to retain and attract talent, and in particular in our institutional parts of our business, we’ll be continuing to invest in the build-out of our commodities businesses around the world. We’ll continue to be investing in digital and digitization around our consumer banking. I’d say those are probably a few of the more significant investments.

[Andrew Marquardt:]

And then regionally, if we were just to focus on the global consumer bank, it sounds like you’re turning the corner in terms of revenue in Asia and Lat-Am remains very strong. How should we think about revenue in North America?

[Mike Corbat:]

I think from a North American – in particular, I would say US consumer perspective, I think the environment, while John spoke to some of the positive attributes, I think that needs to be balanced with some of the realities of the low interest rate environment. I think that as others have forecasted and I think that we see is a slowing in terms of the mortgage refinance boom and the economics that have been associated with that. I think those are two reasonable headwinds that we’re going to have to overcome in 2013 in North America consumer.

[Andrew Marquardt:]

Outside of mortgage, can the cards business – should we think about that actually growing this year or still needed?

[Mike Corbat:]

I think we’ve done a lot of work. We’ve made fresh and we’ve stabilized the portfolio. We’ve got to get growth back into it and that’s going to be a focus.

[Andrew Marquardt:]

And then just lastly, as you’re going through your ongoing business reviews and work on operational efficiencies, have you had a chance to get a sense of longer term, the all-in earnings power of the franchise? Will you also be updating us on your views on that longer term? I guess historically you guys have talked about it an ROA 125, 150. Is that still applicable or should we wait for an update?

[Mike Corbat:]

I think – addressing those questions in reverse order – I think that the ROA 125 to 150 in this environment is not a practical goal to set out there in the short term. So we’ll be resetting that. I think we’ll be coming out over the next coming months, as I said, with some things that we’re going to be measured against and we’ll try and lay that out and show you best we can the path for the company going forward.

[Operator:]

And you have no further questions. Do you have any closing remarks?

[Susan Kendall:]

Hi, yes, thanks, operator. Thank you, everyone, for joining us today. If you have any follow-up questions, please call the investor relations team here. Thanks.