Citigroup Inc.
Q4 2014 Earnings Call Transcript

Published:

  • Operator:
    Hello and welcome to Citi’s Fixed Income Investor Review with Chief Financial Officer, John Gerspach and Treasurer, Eric Aboaf. Today’s call will be hosted by Peter Kapp, Head of Fixed Income 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. Mr. Kapp, you may begin.
  • Peter Kapp:
    Thank you, Brent. Good morning and thank you all for joining us. On our call today, our CFO, John Gerspach, will speak first; then Eric Aboaf, our Treasurer, will take you through the Fixed Income Investor Review materials, which are available for download on our website, citigroup.com. Afterwards, we will 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 and capital and other financial conditions 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 2013 Form 10-K. With that said, let me turn it over to John.
  • John Gerspach:
    Hey, thank you, Peter and good morning, everyone. We are pleased to be hosting our Fixed Income Investor Review this quarter. Eric Aboaf, our Treasurer will review our balance sheet, liquidity profile and capital position and we will provide guidance on our current funding plans for 2015. Before I turn it over to Eric, however, I would like to highlight some key points from our fourth quarter and full year results on Slide 2. Last week, we reported earnings of roughly $350 million for the fourth quarter of 2014, including the impact of $3.5 billion in legal and repositioning costs, which we had previously disclosed. On a full year basis, revenues grew slightly, while core operating expenses and credit costs declined. However, higher legal and repositioning costs drove a decline in net earnings to $11.5 billion. While these legal and repositioning charges had a significant impact on our results for the year, we believe we took important steps to resize our operations and address our legal issues. As we said in December, we believe we put a significant portion of our outstanding legal matters behind us. Although of course nothing is certain until the matters are resolved. At the same time during 2014, we continued to make progress on our key execution priorities. In consumer banking our U.S. franchise performed well and we showed modest growth in international consumer even as global economic growth remained uneven. Our institutional businesses performed well throughout the year as we focused on serving core clients. We generated solid revenue growth in banking driven by investment banking, treasury and trade solutions and the private bank. Our markets businesses were impacted by volatility towards the end of the year and we will continue to take steps to make sure that they are sized correctly for the environment we see going forward. For the first time since its establishment Citi Holdings was profitable for the full year and we reduced its assets by 16% to below $100 billion. And we utilized $3.1 billion of deferred tax assets. During the year we managed our balance sheet carefully. Grew our loan book in Citicorp and improved both our net interest revenue and margin from 2013 levels. We continued to reduce funding costs by increasing the quality of our deposits and optimizing our debt outstanding. And our capital leverage and liquidity ratios each increased over the course of the year. On Slide 3, we show total Citigroup results adjusted for the items noted on the slide. We earned $346 million in the fourth quarter as our results were impacted by significant legal charges and repositioning costs. Revenues declined by 1% year-over-year as shown on the slide, but increased 2% on a constant dollar basis, while credit costs continued to fall. For full year 2014, we earned $11.5 billion. Looking ahead to 2015, we remain committed to delivering on our financial targets including a mid-50s efficiency ratio in Citicorp and a return on assets of at least 90 basis points for Citigroup. We believe these targets can be delivered through a combination of modest revenue growth in our core business, maintaining expense discipline to offset higher regulatory and compliance costs and realizing the cost savings from the actions we took in 2014. And with that I will turn it over to Eric.
  • Eric Aboaf:
    Thank you, John. Let me start on Slide 4 with a review of how we are managing our balance sheet to drive profitability and returns and adapt to both current and expected regulations. On a reported basis, our total assets declined by $40 billion in the quarter mainly as a result of the dollar’s continued appreciation against foreign currencies especially the euro, yen and peso. Therefore to provide more meaningful insights into the trends of our underlying business, we presented this slide in several others in today’s presentation on a constant dollar basis. On this basis we have held our balance sheet roughly flat below $1.9 trillion over the past five quarters, while continuing to optimize both our assets and liabilities and supporting our client activity. On the assets side of our balance sheet cash and investments were 27% of our assets, consistent with recent quarters as we have maintained liquid balance sheet. Net loans were unchanged year-over-year as 3% growth in Citicorp was offset by continued runoff in Citi Holdings’ loans. Trading assets and liabilities increased during the second half of 2014 as increased market volatility particularly in rates and currencies increased the carrying value of our existing derivative positions. We expect these values to decline in the coming months as the shorter tenor positions runoff. On the liabilities side, we maintain a diversified stable and low-cost funding profile. Including the Japan retail bank deposits which were reclassified to held for sale during the quarter due to our announced sale agreement, deposits declined 2% as we carefully managed the quality of our deposit base under the LCR including actively reducing zero value deposits. Repo decreased 10% from last year as we strengthen our liquidity position and trading liabilities increased consistent with trading assets. At the bottom of the page average assets grew $35 billion sequentially and were greater than ending assets, mostly due to the elevated trading assets that I just mentioned. We expect average assets to decline going into 2015 though foreign exchange rates may influence the balance. Overall, we continue to actively manage the return profile of our balance sheet allocating from lower return assets to higher return opportunities while serving our clients. Now, turning to Slide 5, let me discuss our loan portfolio. In constant dollars, total Citigroup loans increased 1% year-over-year as 3% growth in Citicorp was offset by continued reductions in Citi Holdings loans. Consumer loans grew 2% year-over-year driven by 4% growth internationally. Corporate loans grew 4% year-over-year. Traditional corporate lending balances grew 4% with strong growth in North America as we supported transaction activity among our core clients. Trade loans decreased 8% as we maintain trade loan origination volumes, while reducing lower spread assets and increasing asset sales to optimize returns. And private banking and markets loans increased 16% led by growth in the North America private bank contributing to revenue growth in that business. Citi Holdings loans decreased 20% year-over-year mainly due to continued runoff in asset sales in North America mortgages as well as the sale of our consumer banking operations in Greece and Spain. As John mentioned in our earnings call last week, on Page 28 of the appendix, we have provided information on our corporate credit portfolio, including additional detail on our $60 billion of energy exposures covering both funded loans and unfunded commitments. Approximately 70% of our exposures are in the U.S., UK and Canada. Funded loans to the energy industry amount to approximately $22 billion or roughly 3% of Citigroup’s total loans. And roughly 80% of our energy exposures are rated investment grade consistent with our target market strategy and our overall corporate credit exposures. We actively manage this risk in several ways. Loan underwriting decisions are calibrated to a through the cycle perspective on commodity prices. Industry limits control our aggregate exposure to the energy industry and we actively monitor performance and manage net exposures in the event of any credit quality changes. On Slide 6, I’d like to review the credit trends in Citicorp’s consumer and corporate loan portfolios. On the top half of the page illustrates net credit losses in Citicorp’s consumer credit portfolio across four regions. In the fourth quarter, global consumer credit trends remained favorable, with net credit losses of 2.33% in North America, the NCL rate continued to improve to 255 basis points. Asia remains stable with net credit losses of 80 basis points. And in Latin America, we have recorded roughly $70 million charge-off related to our homebuilder exposure in Mexico, which was entirely offset by related loan loss reserve release. Excluding this charge-off, the NCL rate in Latin America would have improved to 467 basis points. Although not shown on this page, credit quality in Citi Holdings also continues to improve with NCLs in the North America mortgage book declining to 130 basis points this quarter. All the losses in that portfolio were offset by reserve releases. The bottom half of the page highlights the high quality of our corporate portfolio. Non-accrual loans as a percentage of corporate loans improved slightly to 41 basis points as a charge-off of an exposure in Latin America in the quarter drove a reduction in the non-accrual loans in that region. Now, turning to Slide 7, let me discuss changes in our deposit base, which continues to serve as the primary source of funding for the lending activities in our banks, including the Japan retail bank deposits. On a constant dollar basis, total deposits declined 2% year-over-year. Consumer deposits increased 2%. North America consumer deposits increased 1% with a continued focus in growing checking account balances and despite selling or closing over 130 branches in the past year. And international consumer deposits, including the Japan deposits, grew 3%. Corporate deposits increased 1% year-over-year as we saw continued strong deposit growth in North America while we actively reduced lower quality deposits. Citi Holdings and other deposits have declined year-over-year due to the transfer of MSSB deposits. On Slide 8, we highlight the quality of our deposit franchise by carefully managing our deposit base to prioritize higher quality deposits and reduced lower value deposits. We have improved the liquidity value under the LCR and compressed the size of the balance sheet. Our deposit base is geographically diversified with approximately 55% of our deposits outside the U.S. as you can see in the left column. The right side of the page demonstrates the improvement in the liquidity value of our deposit base under the final U.S. LCR rules. Under the LCR deposits are assigned liquidity values based on their stability and the type of clients served, generally 90% to 97% for retail deposits, 60% to 75% for corporate deposits and zero to 75% for financial institutions deposits. Our consumer deposits including retail and commercial banking deposits provided approximately 87% liquidity value consistently over the past year. Our institutional deposits have a 66% liquidity value and have improved steadily as we have reduced the 100% runoff deposits by nearly $30 billion over the past year. At the bottom of the page you can see that our total deposits had LCR liquidity value of 73% trending upwards driven by the reductions in the low LCR value deposits. We will continue to actively manage the quality of our deposit base. On Slide 9, we show the evolution of our net interest revenue and margin. Net interest revenue in constant dollars has continued to increase steadily. Our net interest margin improved to 292 basis points in the fourth quarter reflecting two primary factors. First, we have issued long-term debt at tighter spreads in maturing our repurchase debt. This contributed to a 70 basis point improvement in our cost of long-term debt over the past year. And second, we have driven the cost of deposits down by reducing customer rates paid on deposits mindful of both the regulatory value of the deposits and local market conditions. Looking to the first half of 2015, we expect our net interest margin to remain more or less flat to full year 2014 levels. As you can see in our appendix Slide 36, we continue to expect the NIM benefit from a rising rate environment. We estimate that 100 basis point parallel rate shock would increase our net interest revenue by $1.8 billion over the first year for a NIM benefit of 11 basis points similar to recent quarters. Our exposures remains concentrated in the shorter end of the curve so that we would not expect material impact from the continued decline in long-term rates that we have recently seen. On Slide 10, let me cover our long-term debt which is the primary source of funding for our parent company and our broker-dealers and is a valuable liquidity management and supplementary funding tool for our banking subsidiaries. During 2014, our total long-term debt was broadly stable. As we worked to optimize our liquidity position, manage funding cost and position for current regulatory requirements, we increased our bank level debt to strengthen our liquidity position and comply with the U.S. LCR rules. We continued to securitize credit card receivables and we increased our long-term FHLB advances to extend the term structure of the bank level funding at attractive funding costs. Parent company debt decreased slightly during the year. And we continued to refinance high-cost debt with new issuances at lower coupon. In 2015, we expect parent company debt to increase slightly and bank level debt to decline as we position for likely TLAC requirements. Moving to Slide 11, we cover the bank’s recent securitizations activity and our issuance plans for 2015. Our securitization activity has helped us diversify the bank’s funding sources and optimize the firm’s liquidity position at cost-effective pricing levels. In 2014, we issued $14 billion of securitizations primarily backed by Citi branded credit cards. In 2015 we expect to issue $5 billion to $10 billion in the securitization markets continuing to support this important funding program while also considering the impact of TLAC requirements on our funding strategy which I will come to in a moment. Slide 12 details our debt issuance and liability management activity at our parent company. During 2014 we issued $21 billion of benchmark debt and $11 billion of structured notes. Maturities for the year were $29 billion and we redeemed $10 billion of debt through tenders and other early redemptions resulting in net redemptions of $3 billion. Our issuance during 2014 was diversified as we maintain an active benchmark curve in dollars and we expanded our non-dollar debt to nearly a third of total issuance across a range of tenders. Our $10 billion of liability management activity in 2014 helped us to maintain liquid and efficiently priced benchmark curves while managing our overall funding costs. For 2015, we expect maturities of $17 billion. We also expect to continue to opportunistically repurchase outstanding debt consistent with past practice of approximately $11 billion for the year. And we expect to issue $20 billion to $25 billion of benchmark debt in 2015 and approximately $10 billion of customer related debt, resulting in net issuance in the range of zero to $5 billion for the year. Shown on the bottom of this page, in 2014 we issued approximate $4 billion of preferred stock consistent with 2013 issuance levels, bringing our additional Tier 1 capital to approximately 90 basis points of risk-weighted assets. We expect to issue approximately $4 billion of preferred stock again in 2015 as we continue to prepare for full implementation of capital requirements in 2019. In November, the FSB released a consultative document for total loss-absorbing capacity or TLAC. While the document helps to resolve some questions, many uncertainties remain and we are awaiting formal U.S. guidance. On Slide 13, we updated our estimate of total loss-absorbing capacity, which totals $264 billion. The discussion around total loss-absorbing capacity continues to focus on a few questions, what qualifies as loss-absorbing; how much loss absorbing capacity will be required; against what denominator; risk-weighted assets; total leverage assets or something else, is it measured and which entities are subject to bail-in requirement. Consistent with our prior estimate under the FSB’s proposal, the primary components of TLAC include Common Equity Tier 1 capital, preferred stock, unsecured parent issued senior, and subordinated debt with at least a year remaining until maturity and a small portion of our customer related debt. By contrast, debt issued by operating subsidiaries and secured debt will likely not qualify as TLAC. Additionally, certain structural features of structured notes are viewed unfavorably. We are working with industry groups to evaluate ways of improving the eligibility of these instruments. As of quarter end, we estimate Citigroup’s loss-absorbing capacity to be $264 billion or bit more than 20% of our risk-weighted assets, and 10.6% of our total leverage exposure. All of our estimates and expectations at this point are just that given that we do not yet have a formal proposal from the U.S. regulators. On Slide 14, we provided some context for a loss-absorbing capacity relative to the potential FSB requirements. Our estimated TLAC of $264 billion represents just over 20% of risk-weighted assets as compared to the FSB’s potential requirement of 20.5% to 24.5%. This range is based on the FSB’s requirement of 16% to 20%, to which we add the capital conservation buffer of 2.5% and our international GSIB surcharge of 2%. As TLAC rules become clearer, we expect to meet our requirements through an optimization of our regulatory capital position and our funding strategy. First, between now and 2019, we will continue to issue preferred stock and subordinated debt to satisfy our regulatory capital needs, providing roughly $15 billion to $20 billion of additional TLAC over the next four years, as we have previously communicated. Second, as certain aspects of the rules are clarified, we may also be able to adjust the terms of our structured note issuance, allowing us to continue to serve our customers needs without increasing our net issuance or funding cost with as much as $20 billion of benefit over the next four years. And third, if we need additional loss-absorbing capacity, we can increase our issuance of TLAC eligible senior debt and reduce our outstanding securitizations FHLB advances and repo. The incremental cost of this issuance is marginal, driven by the spread differential between our parent company senior debt and the funding we replace, not the full cost of the debt issued. As a result, we believe that we have a number of avenues to manage the cost of meeting potential TLAC requirements. The Fed released an NPR for the U.S. version of the GSIB surcharge in December. On Slide 15, we highlighted the key features of the proposal and the drivers of the surcharge calculation. The U.S. NPR builds upon the international GSIB framework, but includes several features that make it more stringent than those standards. Most notably, the Fed’s method to proposal retains four of the five systemic indicator scores under the international approach, but doubles them to determine the surcharge. It then adds a short-term wholesale funding indicator, which is unique to the U.S. proposal. This last indicator was expected to increase capital requirements for firms heavily reliant on repo financing to reduce systemic risk from fire sales. Instead however it heavily penalizes non-operating deposits and is relatively lenient towards repo funding. Under the LCR rules, these non-operating deposits are effectively placed as cash at the Fed today, therefore presenting no fire sale risk to either the institution or the financial system. The obvious question is how much can banks manage their GSIB surcharge, which relates to some 64 individual line items across the five broad indicators? Some elements of the NPR are well-coordinated with other regulations. So, our ongoing efforts to actually manage our LCR and SLR drivers, for example, should complement our responses to the GSIB rules. For example, non-operating deposits are discouraged under the LCR and the SLR already encourages a smaller balance sheet, incentives consistent with lower scores under the size and interconnectedness indicators. However, other elements of the proposal are incompatible with current regulations and therefore harder to manage. The interconnectedness indicator as an example includes the long-term debt we use to safely fund the firm. While we believe the GSIB surcharge was intended to provide incentives to reduce size and complexity, it is difficult for a bank to impact directly the surcharge calculation, because there are additional factors outside management’s control. The proportionality of the calculation means that the impact of any one institution’s actions on its surcharge also depends on the collective actions of the other 74 GSIBs. Furthermore, since the aggregate market indicators are denominated in euros, U.S. institutions are disadvantaged when the dollar strengthens as their dollar denominated balance sheet translates into a larger relative proportion of the other 74 GSIBs. In light of the recent strength of the dollar, we would currently expect a 4% GSIB surcharge under these proposed U.S. rules. Turning to Slide 16, let me summarize our capital position, which remains among the strongest in the industry. During the quarter, our common equity Tier 1 capital ratio declined approximately 20 basis points to 10.5% driven by a pension-related reduction in OCI and an increase in operational risk, RWA. Foreign exchange movement had virtually no impact on our common equity Tier 1 ratio during the quarter. Under the standardized approach, our common equity Tier 1 ratio remained stable at 11.1%. And our supplementary leverage ratio and total leverage exposure were both flat to the prior quarter. Citigroup’s SLR was 6% and Citibank’s estimated SLR remained in excess of 6% as well. Turning to Slide 17, I’d like to update you on our liquidity profile. We currently estimate that our LCR under the U.S. rules was 112% in excess of the 100% minimum requirement and up 1 percentage point from last quarter primarily driven by deposit flows and improvements in the quality of our deposit base. Factored into the 112% LCR, we have $413 billion of HQLA predominantly consisting of cash and sovereign debt with only 14% of HQLA categorized as Level 2 assets. In addition to the LCR, we continue to assess the impact of the Basel committee standards regarding the net stable funding ratio, the NSFR, which measures our liquidity under a 12-month stress scenario. The Basel committee released its final rules in the fourth quarter, which better aligned the NSFR and the LCR rules in several important ways. Based on what we know today, we believe we are in compliance with the international NSFR. We expect a proposed rule from the U.S. regulators in 2015. Moving to our last slide let me summarize four major points. First, we saw momentum across our businesses in 2014 notwithstanding a challenging macroeconomic and market environment. We saw continued progress on a number of our execution priorities including continued utilization of our DTA and a profitable year for Citi Holdings as well as further repositioning and strategic actions to streamline our franchise. Second, we actively managed our balance sheet maintaining total assets below $1.9 trillion and optimizing our assets and liabilities to support client needs and improve returns. Credit trends remained favorable across both our consumer and corporate credit portfolios. Third, our deposit base remains a key strength as we continue to prioritize our high quality deposits. Our 2015 issuance plans are designed to support our operations and position us to adapt the regulatory changes. And lastly, we have continued to actually manage our balance sheet, our capital and liquidity remained strong. This concludes our fixed income review. John and I will be happy to take your questions.
  • Operator:
    [Operator Instructions] Your first question comes from the line of James Ellman with Ascend Capital. Please go ahead with your question.
  • James Ellman-Ascend Capital:
    I guess – I was hoping you could give us a little information regarding the impact of oils fall on the balance sheet. First of all in terms of the CCAR stress test, will the Fed be asking you to stress oil prices down from $46 to something lower and its impact on your balance sheet?
  • John Gerspach:
    Hi, it’s John. We have had no indication from the Fed at this point that they are looking to change the parameters that were already issued for CCAR.
  • James Ellman-Ascend Capital:
    Okay. But in general, tell me if I am wrong please, but as I understand it the Fed will take wherever prices are at the beginning of the CCAR process and ask you stress those prices and see what happens to your balance sheet and P&L, correct?
  • Eric Aboaf:
    Jim, it’s Eric. I think the Fed routinely evolves their stress test as part of CCAR. They do it at annual CCAR. They do it in the mid-cycle. They obviously look at current prices of commodities, of equities, of rates. And you have seen that they have over the last couple of years adjusted their stress tests in various ways. And so it’s hard to predict what they will do, it’s not at all a question that they will touch on the current economic environment and evolve their stress tests accordingly.
  • John Gerspach:
    I think more importantly is the fact that we continuously stress our own balance sheet to take a look at a variety of different changes including the impact of lower oil, so that’s something that we just embed in our normal risk management processes.
  • James Ellman-Ascend Capital:
    Okay, very good. And in addition to just the detail you gave us on energy exposure on the balance sheet today mostly North American related and investment grade, could you just help us understand looking at the loans on the balance sheet, how has fall in oil or how will fall in oil and other commodity prices affect your loans in exporting oriented emerging market countries. And then on the other hand I would imagine there is some benefit to you from falling oil under consumer book both credit card and other if you could help us think about how we should frame that thought process? Thank you.
  • Eric Aboaf:
    Yes, it’s Eric. I think clearly we have a set of changes in the global economy with the fall of oil prices. And I think you yourself have actually framed it reasonably well where you have energy and oil exporters, right, it will be who will have lower exports as prices fall. They may have to adjust some of their economic policies and obviously GDP growth and thus borrowing demand for lending in those markets is likely to slow, in particular on the corporate side but even potentially on the consumer side and that’s no real surprise. We have obviously seen swings in the oil exporting economies. I think the other part of that that I think you hinted at yourself is that whether it’s Europe as an importer of oil or the U.S. where oil prices actually factor into discretionary consumer spending, lower oil prices tend to encourage and allow consumers to spend in other areas and that can have positive benefits for the economy. The question will be whether as that runs through the economy, whether consumers choose to borrow a little more or not, but we see it on the margin as positive for the developed economies and thus if that’s the case, we will likely see perhaps a tiny bit, a little bit more borrowing, but it’s very hard to predict one way or the other and obviously consumers with the ability to service their existing loan book. And so it should not change credit quality much.
  • James Ellman-Ascend Capital:
    Right. One last quick question and thank you for the time, I just wanted to get an idea that as the U.S. dollar has been strengthening and potentially continues to strengthen against many of the other currencies and countries where you do business. Shouldn’t we expect to see your capital ratios improve as your balance sheet in dollar shrinks? And then also is there an impact on the P&L? Thank you.
  • Eric Aboaf:
    It’s Eric again. The answer is there is no impact on the P&L, because in effect, earnings are translated and we are reasonably and naturally hedged. On the capital side think about it this way, we operate with capital in foreign jurisdictions and risk-weighted assets in foreign jurisdictions. And so we have a natural offset as the dollar either strengthens or weakens in our – that effectively stabilize our capital ratios. To the extent that we have either a little more or a little less capital in a particular jurisdiction that we offset with vanilla foreign exchange hedges, so that we can insulate those capital movements. And as such, you can see that our capital ratios driven by currency swings have stayed almost flat relative to any real measure. We actually have on Page 35 you see a good summary of that. You see the foreign exchange currency translation, which is the net effect of currency movements on our capital ratios and you see we run our capital ratios within a couple basis points, right, even with these quite substantial swings in the dollar that we have seen over the last few quarters.
  • James Ellman-Ascend Capital:
    Very good. Thanks again so much.
  • Eric Aboaf:
    Our pleasure.
  • Operator:
    Your next question comes from the line of David Knutson with Legal and General. Please go ahead with your question.
  • David Knutson-Legal and General:
    Hi, good morning. I wanted to I guess follow-up on the one of the earlier questions and that’s in regards to your emerging market risk exposures. In your slide deck, you break it down between consumer and corporate. And I guess when you think about the different regions, it looks like maybe Latin America, Brazil and Mexico specifically are probably a little bit weaker. How will your franchises specifically the consumer franchise and then the corporate franchise? What are your expectations? Will we see weakness first in the consumer or maybe in the corporate depending on how you are exposed or what are your thoughts going forward given that those two economies do have a fairly high reliance on oil revenues for their budgets?
  • Eric Aboaf:
    David, it’s Eric. I think the recent context, the last 2 years is actually helpful, right. We have not been living in a particularly high growth timeline or particularly the growing environment. And so as a result, what I think is – let me keep going. I think what you see is that the economies have been fairly stable. We have got an echo. We are trying to sort that out. I am going to keep going. We have seen economies that are fairly stable. And so I don’t think that this particular change is out of the ordinary of what we have seen over the last 2 years, right. We have seen quite modest growth and this kind of throws another twist in that equation. If you kind of want to play it out, I think it’s easier to describe the global economy not from an emerging market versus developed economy standpoint, but from oil exporters versus non-oil exporters because I think that is where there may be a little more change in growth rates. And as I mentioned that will likely put a bit more stress on corporate exposures to the energy industry and tend to either be neutral or positive for consumer lending book.
  • Operator:
    Your next question comes from line of Ryan O'Connell with Morgan Stanley. Please go ahead with your question.
  • Ryan O'Connell-Morgan Stanley:
    Thanks very much. First, just to follow-up on the remarks on TLAC, which are very, very helpful, I think what you said Eric is that there is so much is going over the dollar, etcetera. You are now expecting that that GSIB surcharge would more likely be 4% rather than 2%. So, if I heard that right, then we should really be thinking of a range about 22.5% to 26.5% right?
  • Eric Aboaf:
    Ryan, it’s Eric. That is correct, right. In the GSIB area, right the international rules were set at a certain level. The U.S. rules effectively doubled that, and that puts us in the 4% range and GSIB. I think the question on TLAC is that for now, all we have is an FSB, the Financial Stability Board document. It’s quite an outline, and it’s a bit unclear how that outline will evolve, how the U.S. versus international GSIB may factor in. And so I think you have mentioned one potential scenario, but I think there is a number of scenarios that are possible for TLAC as we go forward. And part of what we are trying to do here on the page and in the discussion is just lay out that we have a set of natural tailwinds to help us confirm to certain levels of TLAC within this range, but also have tools that are disposal that are particularly expensive to adapt if necessary.
  • Ryan O'Connell-Morgan Stanley:
    Understood and it’s a very helpful layout. If I could just, in your footnote one, which you say is that – let’s say there is a 100 basis point increase, so that would be debt. Okay, that is pretty clear. Then further increases beyond the first 100, would be expected with common equity Tier 1, so I guess maybe you could expand on that a little bit?
  • Eric Aboaf:
    Yes. It’s Eric again. I think as you know under the current GSIB rules, we have run that – we have a 9% requirement with a buffer we run at 9.5% or we would need to run at 9.5%. Because we already run at 10.5% as of this last quarter, right, we have a 100 basis point there that is satisfying TLAC rules. To the extent that the GSIB just moves from 2% to 3%, and we have the equity necessary, but the natural add or requirement to TLAC would effectively be 100 basis points of debt and so that kind of flows through naturally. Any GSIB requirement over and above what might be 3% now to potentially say 4%, right, would then naturally require us to add capital to the balance sheet to retain more capital to the balance sheet of about 100 basis points and that would directly support TLAC and so that in a way it would be the way it would factor through.
  • Ryan O'Connell-Morgan Stanley:
    Sure. And then one last one, and again apologies in advance, but just as you look at the various TLAC needs, I think what you are saying here is let’s take the senior debt for example, incremental senior debt $10 billion, $25 billion that’s over the span over the next four years right that’s not per year, that’s over the span of next four years in the aggregate?
  • Eric Aboaf:
    Ryan, that’s exactly right. The range here we laid out just to give you all a way to model this. $10 billion to $25 billion over the course of four years is what $3 billion to $6 billion per year, right. You know that we issued typically $20 billion to $25 billion of benchmark debt per year. You know, that in the past we and other large banks have issued $30 billion, $40 billion, $50 billion of debt per year. So, we know there is enormous demand in the marketplace for our debt. And adding something like $3 billion to $6 billion per year on a base of $20 billion to $25 billion, while it is more, right, we don’t think is a big – would be a particularly big change. I think the other context is that as you know as we issue debt we have order books that tend to be oversubscribed by a factor 3x, 4x, 5x, alright which gives you a sense for the depth of the market that we have access to. So like you said it’s kind of $3 billion to $6 billion as we have modeled out per year and something that we think that while it’s not zero could be easily absorbed in the marketplace.
  • Ryan O'Connell-Morgan Stanley:
    Okay. Great. Thanks very much Eric.
  • Operator:
    Your next question comes from the line of Robert Smalley with UBS. Please go ahead with your question.
  • Robert Smalley-UBS:
    Hi. Thanks very much and thanks for putting together this deck, it’s very informative. Thanks John and Eric and Peter. Couple of questions on Slide 28 and then one or two to follow-up on TLAC if that’s alright?
  • John Gerspach:
    Sure.
  • Robert Smalley-UBS:
    Do you have any breakdown, I am looking down in the lower left hand box, do you have any breakdown of midstream and downstream exposures. I see that you have E&P here, do you break it down that way as well?
  • John Gerspach:
    This is John. E&P is about as far as we are breaking it down right now, but maybe I can help you with some other questions that you have got.
  • Robert Smalley-UBS:
    Okay. Well, then let me just stick with this box here. The second line item the 14.7, that’s the – I am assuming that’s independent drillers, technology, services, etcetera?
  • John Gerspach:
    Yes.
  • Robert Smalley-UBS:
    Okay. So that’s probably where the industry is going to see problems first as we have a lot of new and highly levered companies there, can you give us an idea of how much of this 14.7 has been classified or in any way categorized as non-performing or troubled at this point?
  • John Gerspach:
    Actually most people are focused more on the E&P type of companies, the phrase that you also [indiscernible] closer to the drill bit.
  • Robert Smalley-UBS:
    Right.
  • John Gerspach:
    And that would be – that would actually be in the top line that you are looking at which is the 6.5 and the 18.2. So I want to make sure that I am being responsive to your concern but I want to make sure that I understand where your concern is directed.
  • Robert Smalley-UBS:
    Sure. Well, my concern is more with some of the smaller and mid-sized companies that may not necessarily be first order but those that could fall away pretty quickly due to lower demand?
  • John Gerspach:
    That would actually be more in the top line then.
  • Robert Smalley-UBS:
    Okay.
  • John Gerspach:
    We are looking at the 6.5 and 18.2. So there when we take a look at our exposures to E&P companies as a group they are also predominantly investment grade at over 80%. And with the funded exposures to the E&P companies at about 75% investment grade, so again very heavily weighted toward investment grade. And when we do lend to non-investment grade E&P companies, we tend to do so under radio a reserve based lending structure which allows us then to adjust the borrowing base on a periodic basis.
  • Robert Smalley-UBS:
    Right. And my understanding is that borrowing base gets for a lot of this will be recalculated in the spring around April or so?
  • John Gerspach:
    I don’t have any exact data in mind. It’s usually every six months or so it gets recalibrated.
  • Robert Smalley-UBS:
    But from your comments earlier you are kind of – you look through that and you don’t wait for that recalculation you are doing your own work and seeing where that comes out long before they – long before you – the companies themselves recalculate the borrowing base?
  • John Gerspach:
    Absolutely.
  • Robert Smalley-UBS:
    Okay. One other question commodity related, do you break out your mining exposure at all coal, copper, etcetera?
  • John Gerspach:
    No.
  • Robert Smalley-UBS:
    Okay. And then I just want to follow-up on Ryan’s question on not TLAC understanding that your amount of debt that incremental debt that you have to issue isn’t really that much given market access and what you have outstanding, but you won’t be issuing this debt in a vacuum. You will have competitors who will be doing the same thing and in a few cases, they will be required to do much more than you. What’s your strategy in terms of issuance? Are you going to try and frontload some of this in order not to pushup funding cost as a result of industry wide supply? And do you factor the rest of the industry in when you look at your funding costs for the incremental debt in the out years?
  • Eric Aboaf:
    Rob, it’s Eric. Fair questions. I think we are going to be deliberate here on TLAC right in the sense that this is international proposal. There isn’t any U.S. guidance on that. Hopefully, we will get some in the first half of this year. And I think we need to know more about what the rules going to look like before we jump in and adapt. Obviously, we have a history of adapting, but we need to see more the rules. I think secondly, you are going to see us adapt in a paste manner, because adding a lot of debt upfront and then just keeping it stable before we need it is expensive, not because of the marginal cost of debt, but because you have got more debt outstanding. You have seen in one of the earlier slides on preferreds, we know what we need to do on preferreds, but we have been deliberate, we have been paced, we have been issuing $1 billion a quarter and have obviously been able to do that at nice rates and without flooding the market. I think we’d expect to do that, because partly we want to keep our cost of funding as low as possible. We also don’t want to disrupt holders of our debt who are – who have got positions who wanted to trade well in the secondary market. I think the third part of it is while there maybe some uptick in industry issuance, we know that there are some GSIBs out there in large banks who are because of their nature balance sheet structure have enough TLAC debt. And so there is a group that won’t be issuing anymore. I think that’s something to factor in. There will certainly be some that will be issuing, but when we talk to our investors, they tend to have not only aggregate limits for FI debt, but also single name limits. And we think that, that diversification that they are looking for will suit us and will actually play to our advantage in the sense that they really will compare us against what their capacity might be in our particular name. And we think as a result it will be more of a comparison as we describe the kind of potentially $3 billion to $6 billion per year, but off of a base that we are ready to issue of $20 million to $25 million.
  • Robert Smalley-UBS:
    That’s great. And again, thanks for all the information here.
  • Eric Aboaf:
    Good. Our pleasure.
  • Operator:
    Your next question comes from the line of David Jiang with Prudential. Please go ahead with your question.
  • David Jiang-Prudential:
    Hi, my questions on TLAC, Eric on Page 14 where you break out the three different types of TLAC needs, the customer related debt re-issuance, how do you plan to achieve that? Is it basically issuing vanilla benchmark debt to replace the customer-related structure notes or is there something you can do to transform the customer-related notes into eligible TLAC?
  • Eric Aboaf:
    David, it’s Eric. It’s more likely to be the latter because that’s the area we want to explore. The very initial TLAC proposal again from the FSB, right, it’s not a detailed rule it’s really more of an outline, right, than a detailed rule. Effectively, this allows any debt with any structural feature. So, any debt that might have a – that may parallel or have some reference to an equity index or rates index or an FX index is automatically disallowed. We find that surprising to be honest in the sense that, that is good debt, it has a term structure oftentimes at 3, 4, 5 years. And in our discussions with industry groups and with various supervisors, what we have learned from them is they have some openness to explore this and to consider certain types of customer debt or structured notes. And part of the reason we think they have an incentive to do that is they like us to diversify our funding, the diversifying between benchmark notes to typically institutional investors and then structured notes that typically go to high net worth is a way for them and then for us to ensure the diversification in our funding. As a result what we are doing is we are working through with them and through the industry groups what is it about structured notes is it about, is it potentially, for example, about the difficulty in valuing the structured component of the note at the time of bail-in. If that’s the case as an example, can we structure around that? For example, can we just have a knockout feature, where the note reverts to par at any bail-in situation? Right, that’s the kind of adjustment we could make in our structured notes, we and others in the industry could make and the kind of adapting that we would look to accomplish.
  • David Jiang-Prudential:
    Do you think these changes would diminish the capacity of that channel, the ability to issue the size?
  • Eric Aboaf:
    It may on the margin, but it’s – on the other hand, this is a pretty robust channel through a series of institutions, high net worth. It’s broad-based between the U.S. and internationally. It’s a sophisticated set of investors who would naturally understand what a knockout feature is or a back to par feature, right. It’s kind of the simplest of turning this to be a little more vanilla and we can imagine that, that is actually something that we could transition to fairly easily, but let me just remind you, we are speculating here. We don’t know how the rules will be written. For all we know, the rules will say structured notes, because they provide diversification to the large and medium-sized firms would be included under the U.S. rules, where we are just trying to work through it and so you have got some of our early thoughts here.
  • David Jiang-Prudential:
    And then lastly given that the other lever to pull is the Basel III RWA denominator in figuring out TLAC. On Page 29, I think there is about 14% of the total RWAs in Citi Holdings and that’s been shrinking consistently over the last few years. Is that – what can we expect that number to go down to in the 2018 timeframe when you calculate the TLAC number?
  • Eric Aboaf:
    Good, David. Clearly, RWA will be important and how it evolves whether it’s TLAC or capital ratios or leverage ratios, it’s going to be an important factor. I think what you have seen us try to do is run with relatively flat RWA over the past, whether we have had some upticks for a bit of operational risk. We think we have got a good bit of that behind us or all of that behind us to be fair. We have some tailwinds and that holdings will reduce our RWAs over time as we sell and it matures out. So, that’s a benefit. And then we will have some natural growth in our client activity. And I think what we would like to see at least for now, I am not going to forecast out 4, 5 years, but we like to run RWA as flattish and clearly time will tell. Right, it will depend on how the economy picks up, how borrowing demand picks up, how inventories change, but I don’t think we are expecting we can really predict that far out. I think for the immediate future seeing RWA as flattish is probably a good construct.
  • David Jiang-Prudential:
    Got it. And then sorry, one last thing, have you thought about how you plan to issue vanilla benchmark debt in terms of kind of your average duration, because given that if you can extend your durations, you can have less debt coming due each year, which obviously doesn’t count as TLAC, especially when you are looking out to 2018? Is that something you would consider?
  • Eric Aboaf:
    David, it’s Eric. It’s something we are obviously exploring. You know, we run at good durations here, 7 years is our average WAM. We have been issuing with a WAM of that level, which if you think about in its simplest terms if we issue 5s and 10s that averages out to 7.5. If we issue 5 and 10s which are the core of our issuance right, that actually gets us into 2019 right and into the TLAC sort of value window even with issuances this year. So, there is a natural way we can fill up TLAC with the current issuances. Would we try to lengthen out the WAM? We are always doing a little bit of analysis on is the cost as a credit curve worth some other benefit. And I think you can imagine we will continue to do that. I think for now we feel pretty comfortable with our WAM that we have of about 7 years. We think it gives us a good balance between cost, liquidity, which is obviously critical and these new rules and are likely to stay in that range.
  • David Jiang-Prudential:
    Great, thank you.
  • Operator:
    Next question comes from the line of John McDonald with Bernstein. Please go ahead with your question.
  • John McDonald-Bernstein:
    Hi, good morning guys. Thanks. This is very helpful for the equity guys as well. John, just kind of a separate comment on different topic number of banks have commented about the impact of the shock to the FX markets after the Swiss national bank currency decision and there are some press reports indicating that Citi may have lost some money. Just wondering do you have any upside to comment on that, all those stories, just either specifically on those numbers or just generally in terms of the impact of that event on your FX business?
  • John Gerspach:
    Yes, John. Yes, obviously last week’s move by the Swiss Central Bank was unanticipated. And as a result, we did see an unusually large move in the value of the franc in a very short period of time. It’s not unusual that our role as market maker to support our clients, we did have some positions and I would say that we did experience a modest loss.
  • John McDonald-Bernstein:
    Okay, but manageable in the context of….
  • John Gerspach:
    Overall, overall though, since that event, we have seen good activity – good activity levels from our customers in the FX markets and we are going to continue to work closely with our clients to help them manage their currency needs.
  • John McDonald-Bernstein:
    Okay. Eric, thanks for that helpful teaching on TLAC and the GSIB proposal from the U.S. Quick follow-up on that? On the GSIB and your estimate of 4% surcharge that seems higher than what was implied by the Fed’s summary comments that all but one bank are currently above their minimums? I guess there is lots of reasons where your numbers could be different than what the Fed and the Fed, of course, didn’t tell us our numbers, but could some of that difference be attributable to the FX issue that you described or to asset growth since they ran their numbers and you run yours, just any idea why your number might be a little higher than what was at least implied by their comments?
  • John Gerspach:
    Well, John, it’s John. When you take a look at the significant move of the euro versus the dollar, the dollar strengthening against the euro, that is driving a lot of things.
  • John McDonald-Bernstein:
    Yes.
  • John Gerspach:
    It’s a key determinant of the whole GSIB methodology and one that is very, very difficult to control. It’s when you look at what the Fed did that the relative nature of the proportional approach that was embedded in the original FSB calculation already caused many to consider it to be a somewhat flawed methodology. As such, it was curious that the Fed in proposing a new surcharge for U.S. banks that they would choose to, in effect double down on an arguably flawed methodology, especially one that would cause a U.S. bank’s surcharge to increase merely because of the dollar strengthening. In some ways, the ECB’s quantitative easing program probably added 50 basis points to every U.S. banks’ GSIB surcharge.
  • John McDonald-Bernstein:
    Yes, okay, got it. That’s helpful perspective. And one last follow-up John, this one is for you as well, understanding that your goal of efficiency improvement for Citicorp in 2015 kind of implies positive operating leverage for 2015? And also understanding that how your expenses actually come out will depend on revenues, what are some of the expense levers or tailwinds that you have to lean on in Citicorp for 2015 in terms of reducing the core expenses relative to the core operating expense that we saw in fourth quarter? If we looked at that as the exit rate on the core operating expense, what kind of levers or tailwinds you have to lean on this year depending on where revenues shake out?
  • John Gerspach:
    Well, John, a lot of it is already embedded in the – in just making sure that we get the full results of all the actions that we took throughout 2014. We took a sizable amount of repositioning charges last year, including a sizable charge in the fourth quarter itself. Those expense reductions will manifest themselves during the four quarters of 2015. And we think that, that in and of itself gives us a good deal of tailwind. Beyond that, we have obviously got the ability then to if revenues are lagging we have investments that are baked into our 2015 budgets that we will cut back on. There are additional recapacitization actions that we can take. So, we think that we have got several levers that we can pull on, but a lot of those levers have already been pulled, because we are going to deliver on making sure that the repositioning savings come through in 2015.
  • John McDonald-Bernstein:
    Okay. So, just understanding if we are looking at the fourth quarter exit rate relative to that, there is still some savings to come that’s not in the fourth quarter run-rate, correct?
  • John Gerspach:
    Absolutely. As a matter of fact, I think I don’t have the – exactly what the comments were during the call, but as we indicated we have delivered about $2.7 billion I think of savings of the full amount of savings for the repositioning actions that we have taken. We expect those repositioning actions to actually deliver about $3.4 billion. So, we have got an additional $700 million of annual savings that are not reflected in that fourth quarter run-rate. Now, I am not going to be able to deliver all $700 million in the first quarter, but that $700 million will be delivered during the course of the year. And so that again should give us some good movement going forward.
  • John McDonald-Bernstein:
    Got it. So, that’s incremental to the fourth quarter. And then just one final, there also were some kind of one-timers in that fourth quarter number as well, right, so that should help relative to the kind of printed fourth quarter number?
  • John Gerspach:
    Correct. I mean, what we have said was we – with the additional – we had about a $200 million core operating expense increase over the third quarter and we said about three quarters of that that was either one-time in nature or already contemplated in our 2015 expense base.
  • John McDonald-Bernstein:
    Got it. Okay. Thanks very much.
  • John Gerspach:
    Okay, John.
  • Operator:
    Your next question comes from the line of Scott Cavanagh with APG. Please go ahead with your question.
  • Scott Cavanagh-APG:
    Good afternoon, guys and I appreciate the fixed income presentation. It’s very important and I want to recognize that you guys are the leaders for the disclosure and hopefully will be mirrored by the rest of your peers in the money centers. So, first question, looking at TLAC issuance another dive into this. When I think about the refinancing of the client, the structure notes, should we be looking at more of a run-rate of around just under $12 billion versus $6 billion if we just assume it’s all issued in unsecured issuance, plain vanilla?
  • Eric Aboaf:
    Scott, it’s Eric. No, I think for now we should keep those categories as separate, because it’s hard for us to imagine at least to start with that structure notes. We are going to be effectively outlawed by a TLAC requirement. As I mentioned before, they provide real diversification to funding for banks. They provide offerings for investors. They help – some investors actually invest or hedge their positions. So, I think for the time being, I think we probably should expect that, that some component of the customer-related or structure notes will count. I think we have given you a range, right. We have outstanding about $28 billion. How much of that could count? Right now, on a simplistic basis, it’s 4, but could it be 14 or 24, it could be and that’s kind of we want to see a little more as that comes out.
  • Scott Cavanagh-APG:
    Okay. Then when we think about the timing of the NPR and the impact from the potential rating agency methodology changes, how should we be thinking about that in terms of a timing, is there a duration component so not overweighting the shorter duration securities. Then how the rating agency methodology changes will actually impact?
  • Eric Aboaf:
    Let me take that from the end of the question that you asked Scott. The rating agencies have actually to their credit been in front of this question of bail-in debt at the parent versus operating company debt this – they have evolved their rating systems. I think everyone of the three agencies have cut over to a process where they think about debt as open to bail-in. They have tiered their ratings accordingly. They have been quite public in that. And so I think there isn’t much more to come from there that is going to impact investors from the rating agencies. I think the rating agencies have actually been leaders in this area and they have properly sensed the evolution of the government and regulatory practices here. So I think there isn’t that much on that front that will change the equation. And as such the real question will be how the U.S. begins to develop a set of rules for TLAC. They are clearly going to put a set of rules out there. We expect in the first half of the year. So there will be proposed rules open for comments. So clearly we are giving them some through the industry association the industry is providing some initial feedback on the FSB rules to the Fed and our other supervisors in the U.S. And again post the proposed rule we will do that again, so more to come on this one probably.
  • Scott Cavanagh-APG:
    Okay. If I could sneak in one more question switching to the energy, when I look at the E&P bucket and look at the funded versus the total exposure. Is this include – when I think about the bucket of companies that you provide services to, is this – how do I think about on a size basis is this like an Exxon type of size of is this a very small bucket type of company when I think about the exposures there I mean there is some you very helpfully put out that vast majority is investment grade but that probably won’t be for long that so many are investment grade how we do think about it from that perspective?
  • John Gerspach:
    Yes. It’s John, the companies that will be included in that first line are a – of a variety of sizes. And so I can’t give you a specific. But there are some that are medium and some that are large and some that you might consider small. But again the – 80% of the exposure is investment grade. We do look at it on a constant basis. And it’s something that we are very, very closely monitoring.
  • Scott Cavanagh-APG:
    Thank you very much for your time and for doing this call. Greatly appreciate it.
  • John Gerspach:
    Thank you, Scott.
  • Operator:
    Your next question comes from the Mark Kehoe with Goldman Sachs Asset Management. Please go ahead with your question.
  • Mark Kehoe-Goldman Sachs Asset Management:
    Good morning. Just one more last question on TLAC is this in terms of the $3 billion to $6 billion of additional annual debt issuance, do think you would more likely do a larger chunkier deals or be a larger kind of frequent – more frequent issuer. And then coming to the regulator question is do you think the regulators will mandate [indiscernible] language to be included within the prospectuses of this bail-in [indiscernible] noting the fact that bondholders may be written down in the event of an adverse outcome?
  • Eric Aboaf:
    Mark it’s Eric, I want to see what regulators specify I think for now. I think they have been clear in their public statements that debt is subject to bail-in, that’s how the Dodd-Frank rules are written in the law and it’s not clear at all that indentures need to change other than the obvious risk factors that we have been indentures that already capture a variety of different outcomes. So I think rating agencies as was just mentioned have been quite clear on this. So we don’t see potentially need to change or specify specific indentures and debt. And I think you all as investors obviously know that in the worst case that that can be bailed in and that’s part of the new financial system and that’s there for a reason and that will protect the taxpayer and the system as a result. In terms of how we might adjust our issuances and we have been talking about potentially and this is all potentially subject to change $2 billion, $3 billion to $6 billion per year over and above $20 billion to $25 billion program that we have today. I think you would see us continue to do it in the way that we have done in a paste manner, I think was first observation I would make in a disciplined manner. You have seen us do a number of deals that are in the $1 billion, $1.5 billion range. We like that, because we can connect directly with investors. We can satisfy their needs of either currency or tenor and we think it actually doing deals of that size gives us a good discipline on pricing, which obviously is important to us as we manage the balance sheet and to our equity owners. So, I think you will see us continue to be disciplined. We have got a good reputation of doing that. I think we have an expectation of that and that you can see continue.
  • Mark Kehoe-Goldman Sachs Asset Management:
    Right, thank you.
  • Operator:
    Your next question comes from the line of Hima Inguva with Bank of America Merrill Lynch. Please go ahead with your question.
  • Hima Inguva-Bank of America Merrill Lynch:
    Thanks a lot. I am still new to the sector, so I apologize if I ask something basic. I do have to say that this is one of the best fixed income investor conferences or meetings I have attended. Just a quick question I guess follow-up on Slide 12, the benchmark $20 billion to $25 billion, I am looking for a split between sub and senior historically I see that 2013/14 has been 15% to 20% between sub and senior, so any guidance there would be greatly appreciated?
  • Eric Aboaf:
    Hima, it’s Eric here. We typically don’t really give much more guidance here, why, because we want to retain a little bit of flexibility in terms of the mix of issuances. What I would tell you is we tend to be relatively consistent in how we issue. We do that for obvious reasons, because then our investors know more or less what to expect. Then I’d point you to the past few years, I think that’s – that gives you a good range of the kind of activity you might see in senior or sub or thereabouts. I think it’s a good indication.
  • Hima Inguva-Bank of America Merrill Lynch:
    Thanks a lot. Again, thank you very much. Appreciate it. Very excited to be part of the community.
  • Eric Aboaf:
    Thank you.
  • Operator:
    Your next question comes from the line of Jacob Habibi with Invesco. Please go ahead with your question.
  • Jacob Habibi-Invesco:
    Thank you. Most of my questions around TLAC have been asked and answered. The only note that I would want to add is that according to some of my calculations here just looking at the senior stack only, I come up with potential issuance of anywhere between $10 billion and $62 billion based on a range of 16% to 20% TLAC and that’s taking out all of the different CET1 buffers that have been ruled ineligible. So, I am just trying to square on the high-end there that $62 billion versus the numbers that you have on your Slide 14, where it really only adds to about $45 billion on the high-end of potential issuance needs between the restructuring of the structured notes and incremental senior debt that would replace other forms of funding?
  • Eric Aboaf:
    Jacob, it’s Eric. I think Page 14 might give you a roadmap and obviously we could follow-up with our Investor Relations team, but we labeled the dollar amount of total TLAC that we need right, that’s the various debt and equity components altogether, the $264 billion. We compare that on an RWA basis. And then we give a range of the potential requirements in dollar terms, $66 billion to $318 billion. And I think if you do the math there, we are guessing that total TLAC needs will be somewhere between $2 billion and $64 billion, which is in line with what I think you have estimated, but what’s very important is that there is a natural tailwind from some of our existing activities in preferred and sub debt which I think some haven’t factored in previously and then maybe a little bit of what you are working through.
  • John Gerspach:
    And Jacob, it’s John. So, even then if you took, if the U.S. additional surcharge comes through and it is an additional 2% as we indicated it could be that would of course add another say $26 billion on to a TLAC requirement at the upper end of the range, it went all the way to say $26.5 billion, but that would get you then from what we are looking at as $54 billion to may be $80 billion. And it’s just hard to see that we need to $62 billion of the senior in order to fill up the $80 billion. But as Eric said if you want to work with our – with Peter in Investor Relations he will be more than happy to walk you through the numbers.
  • Jacob Habibi-Invesco:
    Okay, sure. I was just trying to isolate the senior stack alone and so sort of backing it out that implies senior of anywhere between 8% to 12% risk-weighted assets, so I am – so we are looking at very simplistically on that terms and just assuming that any buffers that you want to build to CET1 or AT1 whatever those may be. I guess I am not assuming that you are going to use those buffers and apply them to maintain I guess a smaller senior stack, but would that be an incorrect assumption, are you going to be using some of those?
  • John Gerspach:
    Why don’t you give Peter a call in Investor Relations and he can help walk you through all the detailed numbers.
  • Jacob Habibi-Invesco:
    Okay.
  • John Gerspach:
    Rather than have us try to work through a model right here on the phone.
  • Jacob Habibi-Invesco:
    Okay, alright. Thanks.
  • Operator:
    Your next question comes from the line of Louise Pitt with Goldman Sachs. Please go ahead with your question.
  • Louise Pitt-Goldman Sachs:
    Hi, good morning guys. Thanks very much for call and for the additional it is very helpful. I know I am going to beat a dead horse on the question on TRAC, but there is nothing in your deductions for other GSIBs TLAC debt holdings, is that just because you don’t have enough information right now because you don’t have any?
  • Eric Aboaf:
    Louise, it’s Eric, fair question. We have been working through the deductions and obviously the FSB paper is quite broad-based. I think as you have mentioned there is a deduction that they referenced for the cross holdings of debt and equity of other GSIBs. For us that would be worth potentially 0.5 point it’s doing that calculation, is it a daily calculation, is it in the period calculation where it could be done in different ways. I think the reason we haven’t explicitly reduced these amounts by that is really for two reasons. First, if there is an active deduction for that it’s one of the easiest things on the balance sheet to manage down and actually to reduce our holdings. And you can imagine like for other activities we will intervene to a reasonable amount because that might be a costly deduction. The other is that in discussions that the industry groups have begun to have with some of our regulators, they seem to have an openness to potentially thinking about a quarter or a certain amount that is allowable for these holdings of in inventory of debt or equity of other firms. And the reason is that obviously when we market make in the debt or equity of another firm, we are helping create liquidity and transparency in the marketplace that has some benefits for many investors and for the Fed as they oversee the financial system. And so we could see a way where it is possible, but again it’s highly uncertain, at this point we don’t have any real rules. We can see where it’s possible that there is a certain reasonable amount that as along as it’s diversified potentially across counterparties that we hold that might be allowable.
  • Louise Pitt-Goldman Sachs:
    That’s really helpful. Thank you. In terms of the securities that will be TLAC eligible obviously you have excluded anything with less than one year to maturity, but in thinking that they will still be at hold co and while they may not be TLAC eligible they would be bail-in of all under the tons of the regulators’ view of those securities, they will still be outstanding in parity pursue at the time of any resolution. So is there any move to actually require all securities with maturities of less then one year to not actually be at the hold cos so that there is no cross default and therefore fund everything in less than one year at an operating company?
  • John Gerspach:
    I think we have seen some – a bit of chatter on that question, but it seems pretty straightforward for us that if you have debt that was issued at 10 years and 9 years later is rolling down to under a year that’s debt that you have outstanding. And whether regulators think of it as TLAC eligible, it’s up to their discretion. As it goes below the 1-year basis, will it still get bailed in? I am guessing probably, but they obviously don’t want to count on it. So, potentially that’s why it’s excluded, but we don’t see any particular reason why having debt that either rolls down or other small amounts of short-term liabilities that may exist in the parent would create an issue, although maybe there is – we don’t see a particular reason there. So, that would be an issue.
  • Louise Pitt-Goldman Sachs:
    So, you don’t see a move to issue sort of 10 non-call 9 securities or 11 non-call 10 to give you the option and forecast?
  • Eric Aboaf:
    Louise, that would be a little premature at this point given we have an FSB kind of whitepaper, that’s what it feels like. And we don’t even have a proposed U.S. rule, so not at this point.
  • Louise Pitt-Goldman Sachs:
    Okay. Just a couple of other questions. On your opportunistic redemptions that you have listed there in the past, it potentially hasn’t just been a coupon or clearly visible to the investor base rationale as to why certain securities have been in any LME transactions? Is there anymore additional color you can give us in terms of what might drive those opportunistic redemptions?
  • Eric Aboaf:
    Yes, Louise, it’s Eric again. I think you are referring to the redemptions and the liability management that you see on Page 12. There are really two drivers for the bonds that we tend to choose. The first is that we tend to find that we have bonds over time that trade outside of the natural credit curve. Sometimes that’s rolled down. Sometimes that’s debt that may have – may have smaller outstandings or where you don’t see much secondary market activity, but what we routinely do and for those who are interested in understanding or even guessing at what we might buyback, what we routinely do is ask the question across all the outstanding debt that exists across the credit curve what might be trading north of the – of what would be that average or perhaps the top quartile credit curve that you could draw through that mix. So, that’s the first one and you will see that we have been – we routinely tend to retire that debt. The second factor is the basis. And this one I think tends to be a little more volatile and a little harder to predict. But as we look at the currency basis between dollars and euros or dollars and yen or where we may have issued that also gives us an ability to retire debt and then reissue right out on a less expensive level. And so to the extent that I described the first bit of analysis we do is a credit curve, we do a merit set of that analysis on a basis adjusted credit curve and we find that there is debt that we could buyback and then reissue at more normalized levels. So, those are the two drivers and we are happy to show you how some of our practices are pretty, pretty straightforward. I think that might give you some guidance.
  • Louise Pitt-Goldman Sachs:
    Okay, that’s really helpful. Thanks again guys.
  • John Gerspach:
    You are welcome.
  • Eric Aboaf:
    Thank you.
  • Operator:
    Your next question comes from the line of Pri de Silva with CreditSights. Please go ahead with your question.
  • Pri de Silva-CreditSights:
    Good afternoon and thank you again for providing all this information. It’s very helpful. I don’t mean to beat a dead horse, I am going to stay clear of TLAC, but I want to get a sense of how should we look at Citi’s internal incremental capital buffer given all the movements? Also based on our internal estimates, it looks like [indiscernible] bump up in their FSB GSIB capital buckets. So given that, the movement that we see due to exchange rates, how should we look at the capital buffers? And all of this is assuming that the Fed will not implement the capital conservation and the GSIB buffers into the CCAR process?
  • John Gerspach:
    Until we get some more clarity on what the final U.S. GSIB surcharge will be, we are still planning to operate with a 50 basis point buffer above our stated requirements which would be the 9%, the 4.5% plus the 2.5%, plus the 2% which gets you to the 9%. And then we are planning to run at 9.5% with the 50 basis point buffer. And that’s all I can tell you right now.
  • Pri de Silva-CreditSights:
    And Eric how should we look at in the event the Fed incorporates a capital conservation buffer and the GSIB buffer into the CCAR process I know it will be a long drawn out process, but how should we look at capital requirements for banks as a whole not just Citi but the eight GSIBs in that case?
  • Eric Aboaf:
    We will have to cross that bridge when we…
  • Pri de Silva-CreditSights:
    Great. Thank you very much guys.
  • Operator:
    Your next question comes from the line of Irving Franco with Barclays. Please go ahead with your question.
  • Brian Monteleone-Barclays:
    Hey, good afternoon. It’s actually Brian Monteleone. I won’t ask you guys another TLAC question, but I did have a question on the preferred stock. The preferred stock items $8 billion to $10 billion. When I look at the $10 billion in preferred it’s outstanding and $2 billion the Citi ends relative to RWAs which Eric you said earlier you expect it to kind of remain flat, to me that implied about $7 billion of incremental supply, so I just want to make sure are you still planning to operate at the 150 basis points or what’s driving that small diversions from kind of 7 versus 8 to 10?
  • Eric Aboaf:
    Brian I think it’s just a little bit of rounding, right. We are at 90 basis points of prefs today. We need to get to 150 basis points. We would plan on operating at 150 basis points. We obviously because of the non-call 5, non-call 10 features of some of the prefs there is always going to be some that we consider buying back and so we obviously would need to factor that in a little bit. But I don’t think that’s particularly significant as we have started more recently they should perhaps. But I think you are in the right range 7, 8, 9, 10 it is somewhere in that area I think is fair to model.
  • Brian Monteleone-Barclays:
    Okay. We should assume that 150 basis points is the target and that the Citi ends will remain part of that?
  • Eric Aboaf:
    That’s correct.
  • Brian Monteleone-Barclays:
    Okay. And the second question just around energy, so you guys have kind of noted your confidence, the quality of the energy portfolio that you have, but I guess if the prices will stay this low for say a couple of years, can you talk about what you are see in your stress tests maybe that the pockets where you do have some concerns, then also some of structural protections you have, your ability to take collateral things like that that gave you comfort and kind of how you expect things to play out?
  • Eric Aboaf:
    Brian, it’s Eric. I think there is obviously intense focus you are at Citi. But I think every bank as we consider oil and you can imagine we are stressing oil from we stressed it first on the 50s and to 40 I am sure we are working on stressing it to 30, 20 and 10 right for operating purposes. And then we are going to stress it when it goes back up, right because that’s going to create dislocations not just happiness on the energy industry or in the stock market. So I think first you should imagine we do a lot of stress testing a lot of different ways across various parts of the energy supply chain as we talked about earlier and around the world because it can have different impacts on different economies, I don’t want to get into great detail because it’s a long, long conversation. I think at the same time we actively risk manage these books. And I think we would try to give you a little bit of that taste in the sense that our underwriting considers not just spot rates of pricing in oil but a range. John mentioned some of the collateral that we revalue so that we have the right amounts of protection and can either call loans or have them adjusted. We clearly have limit structures not just for aggregate energy but multiple levels down across different sectors of energy or different quality types of energy companies. And then obviously we have an ability as we see any concerns or changes we can certainly have an ability to sell certain portions of loans. We have done that before. You have seen us talk about that as we have adjusted our books, we could buy protection in the CDS markets. We could enter into a series of different actions to adjust our position. So there is I think on one hand significant amount of stress testing that you can imagine goes all the way up to the Board and even our supervisors are interested, but we ourselves as bankers are first and foremost interested in how our books will perform. So, you could imagine there is a significant amount of work in that front in multiple different ways of the imaginable and the unimaginable on one hand. And on the other, there is a very active risk management process that we have lot of experience in and we will continue to be active in.
  • Brian Monteleone-Barclays:
    Thanks. Thanks.
  • Eric Aboaf:
    Thank you, Brian.
  • Operator:
    Your next question comes from the line of Rob Nuccio with Income Research. Please go ahead with your question.
  • Rob Nuccio-Income Research:
    Hi, thanks for taking my call. And I will just come out and say I will beat the dead horse one more time, but just when you consider your needs of debt issuance and trying to do $1 billion to $1.5 billion to keep things manageable for investors. Has that changed your shift and how much you would ultimately want to issue in U.S. dollars versus other currencies?
  • Eric Aboaf:
    Rob, it’s Eric. No, the discussion of dollar versus non-dollar is really driven by investor appetite on one hand around the world that we find it quite broad-based. We have always been a global issuer. It’s driven by the credit demands, the credit spreads you see in those individual markets, which tends to be a little different. And so we take advantage of that. And then the foreign exchange basis, because we naturally will swap most of the dead back to dollars and insulated for many currency swings. And as the basis moves in favor of one currency or another, we will issue that currency. What we do like to do is to have the diversified set of issuance across multiple currencies, multiple investor groups, multiple geographies, multiple tenors and you will see us continue to do that, because that’s an optimization on one hand for the economics and it gives us a diversification of funding opportunities from a liquidity standpoint on the other.
  • Rob Nuccio-Income Research:
    Okay, great. Thanks. That’s all I had.
  • Operator:
    Thank you. We have no further questions in the queue at this time.
  • Peter Kapp:
    Right. Thank you all for joining us today. If you have further questions, please reach out to us in IR.
  • Operator:
    Thank you. This concludes today’s conference call. You may now disconnect.

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