Citigroup Inc.
Q1 2015 Earnings Call Transcript

Published: 24 Apr 2015

[Operator:]

Hello, and welcome to Citi's Fixed Income Investor Review with Chief Financial Officer, John Gerspach. 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. Thank you Mr. Kapp, you may begin your conference.

[Peter Kapp:]

Thank you, Tiya. Good morning and thank you all for joining us. On our call today, our CFO, John Gerspach will take you through the Fixed Income Investor presentation, which is available for download on our Web site, citigroup.com. Afterwards, I will be happy to take questions joined by Deputy Treasurer Joe Bonocore. Unfortunately our other Deputy Treasurer Loretta Moseman was unable to join us this morning. 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 own discussion today, and those included in our SEC filings, including, without limitation, the Risk Factors section of our 2014 Form 10-K. With that said, let me turn it over to John.

[John Gerspach:]

Thank you, Peter and good morning everyone. We are pleased to be hosting our Fixed Income Investor Review this quarter. I would like to begin by highlighting some key points from our first quarter 2015 results on Slide 2. Last week we reported a strong quarter earning 4.8 billion while making continued progress on our execution priorities. U.S. consumer banking performed well with growth in the retail bank. International consumer revenues were flat but loans, deposits and purchase sales all continued to grow and we expect some of the headwinds in that business to abate as we go through the year. Our institutional businesses performed solidly with revenue growth in investment banking, corporate lending, security services and the private bank. And while parts of our fixed income business saw a slow start to the year, our rates and currencies franchise continue to see strong client activity. Citi Holdings remained profitable again this quarter and we reduced its assets by 19% from a year earlier to $122 billion. Over the past few months we have made great progress towards divesting businesses in Citi Holdings, including the announced sales of our consumer businesses in Japan, Peru and Nicaragua, as well as OneMain financial. We expect these sales to close this year totaling roughly $32 billion of assets and we have several other active sales processes underway. Also we utilized 1.2 billion of deferred tax assets. We continue to manage our balance sheet carefully, growing loans and deposits in Citicorp, while improving our net interest margin from last year. We continue to reduce funding costs and strengthen liquidity by increasing the quality of our deposits and optimizing our debt outstanding and our capital, leverage and liquidity ratios remained strong. On Slide 3 we show total Citigroup results adjusted for the items noted on the slide. As I noted earlier, during the quarter we earned $4.8 billion generating a return on assets of 105 basis points and a return on tangible common equity of 11%. Net income grew by over $660 million year-over-year with about one-third coming from core improvement in Citicorp and two-thirds attributable to lower legal and related expenses in Citi Holdings. Revenues declined on a reported basis to 19.8 billion but increased slightly year-over-year in constant dollars driven by 2% growth in Citicorp. Expenses declined 10 year-over-year mostly reflecting the lower legal and repositioning charges, as well as a benefit from FX translation. Our first quarter results provide a solid start to 2015. Better demonstrating our underlying earnings power and the impact of the actions we've taken to simplify and streamline our operations. On Slide 4 we show trends in our balance sheet. We manage our balance sheet to optimize returns, while also adapting to current and expected regulations. On a reported basis our total assets declined by $10 billion in the quarter and over $60 billion in the past year. As a result of the dollars’ continued appreciation against foreign currencies especially the euro, Mexican peso and yen. To provide more meaningful insights into our underlying business trends, we have presented this slide and several others in today’s presentation on a constant dollar basis. On this basis, we have held our total assets around 1.8 trillion over the past five quarters. Net loans and deposits in Citicorp each grew 3% year-on-year across our businesses. Offset by the continued wind down of Citi Holdings. Trading assets and liabilities also increased during the year, driven impart by increased volatility in OpEx and rates markets which led to increases in both our derivative assets and derivatives liabilities. We reduced short-term borrowings by nearly $20 billion in the core. In response to continued growth in high quality deposits and our long-term debt declined driven mainly by reductions of non-TLAC eligible securities. Slide 5 shows the trends in our loan portfolio. In constant dollars total Citigroup loans decreased 3% year-over-year as 2% growth in Citicorp was offset by significant reductions in Citi Holdings. Consumer loans grew 1% year-over-year with broad based growth driving a 3% increase in international consumer loans. Corporate loans grew 4% year-over-year. Traditional corporate loans in private bank volumes increased while TTS loans declined 10%, spread compression in trade especially in Asia, led us to reduce our on balance sheet loans while we continue to support new origination for our clients. Citi Holdings loans decreased 35% year-over-year driven by a $17 billion reduction in North America mortgages as well as the reclassification of $10 billion of loans to held-for-sale related to our announced agreements to sell OneMain and the Japan credit card business. On Pages 23 and 24 of the appendix, we have updated information on our corporate credit portfolio including our energy exposures. Our total energy exposures are now $58 billion down modestly from year-end and funded loans to the energy industry was stable at nearly 22 billion, or roughly 3% of Citigroup's total loans. While we did see some ratings downgrades during the quarter 82% of our energy portfolio remains investment grade in line with our overall corporate credit exposures, reflecting our strategy of focusing on large cap multinationals. As a result of market developments and these downgrades, we build reserves against our energy exposures by approximately $100 million in the quarter. But we realized no material NCLs against the energy sector. While we are building reserves we continue to believe that our risk is well contained and we continue to expect any losses we may incur to be manageable. On Slide 6 we show continued stability in our consumer and corporate credit trends. In the first quarter consumer credit remains favorable with a net credit loss rate of 222 basis points. In North America and Asia trends remain stable to improving and in Latin America the NCL rate increased somewhat from last quarter on a normalized basis. However, the delinquency rate in that region continued to improve which we expect to result in lower NCL rates later in the year. Our corporate portfolio also continues to see favorable credit performance. Non-accrual loans improved slightly to 40 basis points of corporate loans. Turning to Slide 7 we show our deposit composition. Citicorp deposits grew 3%, with high quality deposit flows across our franchise. Consumer deposits increased 2% driven by 5% growth in international markets. North America deposits were flat year-over-year even as we closed or sold roughly 175 branches over that period representing nearly 20% of our branch footprint. Corporate deposits increased 6% year-over-year as we saw continued high quality deposit growth, particularly in North America while at the same time we constrained flows of deposits with higher expected runoff rates under the LCR. Citi Holdings and other deposits declined significantly year-over-year mainly due to the agreement to sell our Japan retail bank which resulted in the reclassification of $21 billion of deposits to held-for-sale last year as well as the continuing transfer of MSSB deposits. Slide 8 demonstrates the diversity and stability of our deposit franchise. A deposit base is geographically diverse and provides attractive local funding as we seek to match assets and liabilities by currency in each of our markets. Over 55% of our deposits are outside the U.S. We continue to work to improve deposit quality under the LCR. Our bankers understand the importance of growing higher quality deposits and working with clients to reduce lower quality deposits. In our Consumer business our deposits which the LCR tends to value more highly have consistently had an 87% LCR liquidity value over the past year and in the Corporate business we have increased the liquidity value of deposits to approximately 66% over the past year by reducing 100% runoff balances such as non-operating deposits from financial institutions and by favoring higher LCR value deposits such as corporate operating deposits. Overall, Citigroup’s deposits have a 73% liquidity value under the LCR up modestly over the past year. On Slide 9, we show Citigroup’s net interest revenue and margin. Net interest revenue in constant dollars increased 2% year-over-year and net interest revenue per day seen below the bars has continued to increase steadily. Our net interest margin remained flat sequentially at 292 basis points in the first quarter and was up slightly from a year ago on improved funding cost. In the second quarter we expect our net interest margin to decline perhaps by 2 to 3 basis points, similar to the trend we’ve seen in prior years. Looking to the second half of the year, our results will depend impart on the timing of divestitures including the OneMain and our Japan Retail business. We estimate that without these businesses on a combined basis, our net interest margin would be lower by roughly 7 to 8 basis points, before using any part of the associated gains to redeem high cost debt. As you can see on Slide 31 in the appendix, we continue to expect a NIM benefit from a rising rate environment. We estimate that 100 basis point parallel rate shock would increase our net interest revenue by 1.9 billion over the first year for a potential NIM benefit of 12 basis points similar to recent quarters. On Slide 10, we show the composition of our long-term debt outstanding. During the quarter, our long-term debt declined by 12 billion to 211 billion. Bank issued debt accounted for 6 billion of the reduction, as deposits increased we reduced our FHLB advances and securitizations outstandings at the bank. We now expect to issue less than $5 billion of securitizations for the year. We expect to continue to support this valuable program through a periodic issuance, but as we do not expect securitizations to count towards TLAC, we will likely reduce this balance overtime. Parent company debt declined by 6 billion during the quarter, mainly reflecting the reclassification of OneMain as held-for-sale, senior and subordinated unsecured parent debt were broadly stable in the quarter. We currently expect to end the year with total parent company long-term debt of roughly $160 billion. In addition to long-term debt we increased our total preferred stock outstanding to $14 billion including our offering earlier this week. As a result, preferred stock now provides nearly 110 basis points of additional Tier 1 capital. On Slide 11, we update our issuance and redemption expectations for long-term debt in 2015. In 2015, we continue to expect to issue 20 billion to 25 billion of benchmark debt of which we issued $7 billion during the first quarter including offerings in dollars and euros. We offered an additional $5 billion yesterday toward our issuance expectations for the year. Year-to-date in addition to $5 billion of maturities, we have reduced long-term debt by 8 billion reflecting $3 billion of buybacks of benchmark debt as well as the impact of our agreement to sell OneMain. For the balance of the year we expect additional redemptions of $4 billion to $5 billion of benchmark debt. We expect the combination of new issuance, maturities and redemptions to result in an increase on our long-term debt of approximately $5 billion for the year. So far in 2015, we have issued $3.5 billion of preferred stock including the $2 billion earlier this week. We will remain opportunistic around market conditions and currently expect to issue an additional $2 billion or so of preferred in the second half of 2015. As we continue to build towards 150 basis points of additional Tier 1 capital. On Slide 12, we update our estimates of our total loss absorbing capacity based on the FSB’s November consultative document and our ongoing discussions with regulators and other industry participants. Comment letters recently submitted to the FSB focused on the proper calibration and implementation of TLAC requirements. Specifically discussions continue to focus on the appropriate level of required TLAC to achieve targeted policy objectives and the kinds of instruments that will qualify as loss absorbing capital. Comment letters also saw clarification with respect to internal TLAC requirements and their structure and made suggestions to improve the workability of the pending proposal. However, since November we have had no formal proposals or feedback as to our regulators stance on these issues. Accordingly, consistent with our prior estimates, we include CET1 capital, preferred stock and unsecured parent issued senior and subordinated debt with at least one-year remaining until maturity as well as a small portion of our customer related debt in our estimates of TLAC. We estimate Citigroup's total loss absorbing capacity increased to $270 billion, including the recent preferred issuance or 21% of our risk weighted assets and over 11% of our total leverage exposure. We calibrate this 21% against potential requirements of 20.5% to 26.5% depending on the base TLAC requirement of 16% to 20% combined with our potential GSIB surcharge. We continue to await formal regulatory guidance or rules. On Slide 13, we address potential strategies for meeting TLAC requirements once rules are established. Our plans to meet potential TLAC requirements include actions to optimize our capital structure around other regulatory requirements, as well as those specifically targeting TLAC needs. First, we will meet our CET1 Tier 1 capital and total risk based capital requirements through an efficient capital structure, which implies issuance of $4 billion to $6 billion of additional preferred stock and $8 billion to $10 billion of subordinated debt by the end of 2018. Second, while the FSB proposal excluded structured notes, we are working with regulators and industry groups to address concerns cited as reasons for their exclusion. With some revisions to the proposed requirements we may be able to increase the TLAC eligible component of this program, potentially providing as much as $20 billion of benefit. We would then generate additional loss absorbing capacity, if necessary by increasing issuance of TLAC eligible senior debt, while reducing our use of other funding sources, such as securitizations or repo to maintain our balance sheet efficiency. The right side of the slide illustrates one potential approach to addressing a hypothetical TLAC need. Assuming a TLAC requirement of at the midpoint of the FSB range or 18% of risk weighted assets and a 4% GSIB surcharge we would face a total requirement of 24.5% of risk weighted assets or roughly $315 billion. As indicated on the prior page, we currently estimate our available TLAC at $270 billion, leaving a remaining need of $45 billion. For the current CET1 ratio of 11%, we would expect to retain $6 billion of additional CET1 as a buffer against ratio of volatility. We could issue 4 billion of preferred stock and $8 billion of subordinated debt and in this example we assume we could modify $10 billion of structured notes to qualify as TLAC. That leaves $17 billion of incremental senior debt issuance through 2018 or approximately $5 billion incremental per year. By issuing in multiple currencies, we can diversify our funding base and better align the currency profile of our debt with our risk weighted assets. In summation, we believe that we have a number of alternatives for addressing TLAC, but we need to see proposed rules. Turning to Slide 14, let me summarize our capital position, which remains among the strongest in the industry. During the quarter, our fully phased in CET1 capital ratio increased approximately 40 basis points to 11%, driven by our retained earnings and approximately $1.2 billion of DTA utilization. Despite the dollars’ significant appreciation FX had no impact on the CET1 ratio during the quarter. Under transition arrangements our CET1 capital ratio increased by only 20 basis points to 13.3%, as our capital generation was partially offset by the phase in of increased capital divestitures. Our supplementary leverage ratio grew to 6.4% driven by strong capital generation and preferred stock issuance, as well as the decline in our leverage exposure. Citi Bank’s SLR also increased in the quarter to 6.6%. On Slide 15 we update our liquidity position. Our LCR under the U.S. rules is 111% in excess of the 100% minimum requirement. HQLA declined modestly to remain just over a 400 billion, while our improved deposit quality contributed to a modest reduction of our estimated outflows. We continue to expect the U.S. regulators to propose a U.S. version of the net stable funding ratio in 2015. We believe as we remain in compliance with the International NSFR. Moving to our last slide let me summarize four major points. First, we reported solid results in the first quarter with modest revenue growth and positive operating leverage in Citicorp. We made continued progress towards winding down Citi Holdings and we utilized an additional $1.2 billion of DTAs. Secondly, we have actively managed our balance sheet maintaining total assets around 1.8 trillion and optimizing our assets and liabilities to support client needs and improved returns. Credit trends remained favorable across both our consumer and corporate portfolios and we have managed our funding cost to maintain a stable net interest margin. Third, our deposit base remains a key strength as we continue to prioritize high quality deposits. Our 2015 issuance plans are on-track to support our operations and position us to adapt to regulatory changes including preparations for formal guidance related to TLAC and lastly we have continued to prepare our business and balance sheet for the ongoing evolution of the regulatory environment. Our capital and liquidity remains strong. This concludes our fixed income review and Joe and will be happy to take your questions.

[Operator:]

[Operator Instructions] And the first question will come from Robert Smalley with UBS.

[Robert Smalley:]

A couple of questions, one on housekeeping notes. Back on Page 12, when you have the potential TLAC requirements, you've got 20.5 to 26.5. In the presentation you did, at the end of last quarter that range was 20.5 to 24.5. Is there any reason for that change?

[John Gerspach:]

Well, at that point in time we were still in the process of estimating where we would be on GSIB. And I think that we’ve now come down squarely that our estimates would put us in a 4% bucket for GSIB. So that’s the additional 2% that you’ve seen.

[Robert Smalley:]

Okay, great. Moving to slide on Page 31, the net interest revenue positioning slide I guess this and the question I’m going to ask about reserve releases is around the idea that we’re all waiting for an interest rate rise or some change in the curve, which should extensively help the NIM. And in the meantime, we are going to have to continue to drain reserve we are going to have to continue to release reserves although that’s a diminishing pool. So I guess my first question around this is, you have a number of different scenarios here, do you see one as more likely? And that’s the first question. The second question is, when we look at an increase in Fed funds, generally that means a steepening in the front-end of the curve, the Fed funds to twos for the rest of the curve historically has remained flat. Is that what you’re positioning yourself for?

[John Gerspach:]

Well, as you said several questions in there. So let me just go back to the very-very beginning and I just want to make sure that it’s clear that reserve releases have got nothing to do with interest rates. So they may both be contributing to earnings but the diminishing level of reserve releases that you’ve seen certainly in our books is consistent with what our expectations were going into the year and I think consistent with the expectations that we shared with you back in January. So we are in the environment that we expected to be in. Having said that, yes, we would definitely benefit from a rise in interest rates and we’ve given you which I think is fairly traditional for most people they shock it by 100 basis points. I would not want to opine at this point in time on what I would think is the most likely scenario for interest rates I think that there is enough written about that. I can tell you that we as we’ve said in the call that we had last week “we’re not expecting to be bailed out”, by a rise in interest rates at this point in time. If we get a rise in rates it will benefit us but that clearly is not the way that we’ve been planning for this year. No, keep going Robert.

[Robert Smalley:]

I was just going to say. It speaks to the geographic and product diversity of the business. But go ahead.

[John Gerspach:]

No, I was going to say, so our positioning is not -- we haven’t set aside a positioning thing, we’re betting on a rate environment. This is somewhat the natural positioning of the business, we definitely do benefit again from a rise in rates we know that and most of the benefit that we would expect to get would be on a rate rise concentrated in the short end of the curve.

[Robert Smalley:]

And if we can circle back on reserve releases, most of them in the quarter came from holdings and North American consumer business. How do you look at judging where you have excess reserves, reserves that can be released? Can you talk a little bit about the dynamism of that process? And how much more do we have left if everything remains stable, how much more do we have left between now and the end of the year?

[John Gerspach:]

Well if everything remains stable we don’t have any more reserve releases to the end of the year in our certainly in our North America consumer business because I should have released them already. So I think from a Holdings point of view the reserve releases that you’ve seen is consistent with the declining portfolio, but there is some credit improvement in there but as we noted during the presentation, we greatly reduced the amount of loans that we’re currently holding in Holdings. You’ve seen the reduction that we’ve had in U.S. mortgage levels that are in holding we’re down to $54 billion worth of mortgages and so most of the Holdings releases are really coming out of the mortgage book. And again it is resulting both from credit improvement, but I think just as importantly from asset reductions. And as we noted in the call last week, we don’t -- even though we’re hopeful that credit quality will continue to improve somewhat during the year, we don’t see where even with improvements in credit quality you're going to continue to benefit or we’re going to continue to benefit from significant amount of loan loss reserve releases in our various businesses because we’re also into a period now where we’re looking to have growth in the underlying loan portfolios. So the two factors of growing the loan portfolio and the somewhat stabilization of credit should keep our reserve levels either steady as they are now or perhaps even require some builds later in the year.

[Operator:]

The next question will come from Ryan O'Connell with Morgan Stanley.

[Ryan O'Connell:]

Actually I'd like to focus on what you were talking about the reduction in U.S. mortgages and holdings, which is impressive. And then there is another area. But just to focus on this for a sec, so one, I assume that the pending sale of OneMain doesn't have anything to do with those numbers, right? That's totally separate?

[John Gerspach:]

That is correct Ryan, that is correct.

[Ryan O'Connell:]

Could you give us a sense of two things? One, the breakdown between just people paying down the debt if you're selling off mortgages, I guess what I'm trying to get to is what would you see as the glide path for this portfolio for the rest of the year?

[John Gerspach:]

The glide path is somewhat difficult to predict, I think that if you were looking at the mortgage book, you do have to break it down to least two broad components; one would be the amount of home equity loans that we have and that is I believe roughly about $24 billion right now and that was laid out certainly in one of the slides we had last week. You see that that element of our book is really driven by pay downs because there really is no market to do asset sales in home equity loans and so I think that if you just look at the pace of asset reduction in home equity loans that gives you a pretty good view as to how we would anticipate that book coming down overtime and it's slow, it's slow. The remaining part of the book, the $30 billion then of first mortgages that we have there we get the combined benefit of both pay downs as well as asset sales. I don’t have the breakdown in front of me of how much the pay downs were during the quarter. But there at a pace right now where we’re going to get a 1 billion, 1.2 billion -- 1 billion to 2 billion of pay downs during a quarter from that. And the rest of it will come from asset sales and the pacing of asset sales is really going to depend upon the markets, the economics that are associated with the various classifications of mortgages. So it's going to be somewhat episodic.

[Ryan O'Connell:]

And then just the other thing I wanted to ask you about, John is really just to clarify something. In your slides, I think it's 11 or so, you've reclassified 5 billion of the OneMain debt. Is that just stuff you pay off at closing or does it go with the deal? I'm just trying to get the mechanics of that.

[John Gerspach:]

Yes, in the quarter since we did sign a definitive agreement to sale OneMain and since it is a significant business we therefore re-classed all the assets and all the liabilities of OneMain into held for sale so you don't net the two but the assets come out of loans and where ever else they were and they go into other assets held for sale and the same thing on the liability side and our estimation is that those liabilities especially the liabilities that you are talking about the securitization of the debt liabilities of OneMain will go with the business at the point of sale.

[Operator:]

[Operator Instructions] The next question will come from Arnold Fukuda with Bloomberg.

[Arnold Fukuda:]

I think you mentioned that in terms of benchmark redemptions left, it's about 4 billion to 5 billion. Could that potentially include, let's say you have some high coupon TRUPS that might be redeemable at the end of this year, could that potentially include TRUPS in that number?

[John Gerspach:]

While is it possible that were we to redeem TRUPS that they would be included in that number yes they would be, but I'm not going to tell you that we've got current plans to redeem those TRUPS.

[Arnold Fukuda:]

And then in terms of, you guys were very helpful on the last call in terms of calling out the sensitivity of your GSIB buffer that changes in the FX rates and is there some sort of sensitivity that you guys can give us in terms of, if the euro moved again, let's say, to euro parity or, say, down to 0.95, would that kind of be enough for you to shift into potentially from 4% bucket to a 4.5%?

[John Gerspach:]

I don't think that the sensitivity I haven't run that particular scenario the additional complexity off course is that you are not just dealing with one pair. It would be nice even if it was so simple that all I had to worry about was dollar and euro. But the 79 other institutions gushed on it aren't as simple as either dollar or a euro banks I've got banks that use a multitude currencies that are included in there and gee-whiz that makes the sensitivity calculation really-really-really difficult to do. So, I can tell you that we don't believe that the euro moving to parity would be in and of itself enough to move it to the 4.5% bucket, but it would in order to be something definitive I have to run several models including not just dollar, euro but dollar, euro, pound, won all sorts of different currencies so I apologize.

[Arnold Fukuda:]

And then one more, a European competitor announced a big legal settlement today. You probably can't talk about that but could you just remind us -- you had some legal settlements last year. And then along with that, you had some increases in operating risk RWAs. So can you just remind us again in terms of how legal settlements could potentially lead to potential increases in RWAs? Could you just walk us through that, what happened again last year with you guys?

[John Gerspach:]

I think everyone is still going through model reviews on opp risk so I can't give you the definitive path by which a particular legal settlement then would lead to increases in opp risk but obviously we are impacted both by our own legal settlements, as well as operating losses call that legal settlements that are incurred by others. And so each can have an impact but I can't tell you that it's you take this multiply it by four divide it by 10 and that's the number. So, it has an impact but I can't reduce it to a formula for you?

[Operator:]

The next question will come from Glenn Schorr with Evercore ISI.

[Glenn Schorr:]

So, I heard your overall comments on energy. And I do note that energy prices are up like 15%-20% so far in April. With that said, I just want to -- I like Slide 24 back in the appendix where you give some more detail. The question I have is, if 82% is investment grade for the overall portfolio, how that breaks down for the oil and gas sleeve of the close to 18 billion?

[John Gerspach:]

When you say the oil and gas you are talking about okay the oil and gas E&P right?

[Glenn Schorr:]

Correct, sorry.

[John Gerspach:]

So, that has been consistent that is slightly below the overall 82% that's roughly 75% investment grade and that's been fairly constant since year-end.

[Operator:]

The next question will come from Gerard Cassidy with RBC.

[Gerard Cassidy:]

Can you share with us you touched on the home equity portfolio in Citi Holdings going down slowly due to pay downs? Are there any ways that you see or what would need to happen for that to accelerate? Will housing prices need to rise 15% or 20% from here and allow people to refi out? What kind of scenario would you have to paint to see that accelerate that pay down?

[John Gerspach:]

The truth is, is that the consumer behavior on home equity loans is less linked to changes in property values and if you recall back in, even back in 2009, 2010 many people were surprised by the relatively good performance of home equity loans compared to first mortgages and that’s because most consumers treat these as just revolving credit and for a while everybody was referring to them as second mortgages and from a capital structure point of view that’s true but again to a consumer it’s not necessarily a second mortgage. They don’t view as it being part of a capital structure. They view it as the instrument that they use to go on vacation to buy a car to finance their child education. So there is a whole different dynamic in consumer behavior when it comes to home equity loans. And again I think we’ve all seen that over the last six to seven years and that continues to this day.

[Gerard Cassidy:]

Can you refresh my memory the reason for them to be in Citi Holdings is more of a loan-to-value issue than anything else?

[John Gerspach:]

No, it has to do with -- don’t forget when we first looked at the mortgage business back when we set up Holdings, the mortgages including both the first and the seconds, the home equity loans that we put into Holdings were those that just didn’t fit the strategy that we had outlined. We had acquired a lot of these mortgages not through origination through our branches or under the new credit schemes, credit regimes that we would have put in place. But a lot of these were purchased. And therefore they are the type of business that we would necessarily do again.

[Gerard Cassidy:]

Shifting over to deposits, you made a good point about the value of your consumer and corporate deposits from a liquidity standpoint. And I think you said the corporate deposits have a 66% liquidity value now, which is up from last year. Do you see much more improvement there or are you at a level where you think that's where it's going to stay?

[John Gerspach:]

Well I do believe that we can continue to improve the overall liquidity value of the deposits but it’s not going to go from 73% to 83%, can we get that 73% to 74% maybe at some point in time to a 75%, yes, but it’s not going to come in leaps and bounds at this point in time.

[Operator:]

The next question will come from David Chang with Prudential.

[David Chang:]

I had a question on Slide 13 on the illustrative TLAC. This 6 billion that’s management buffer, what does that represent? Is that like the operating buffer on top of all the SIFI buffers?

[John Gerspach:]

It’s basically a 50 basis point buffer on top of what we would look at as being our estimated GSIB requirement based on our understanding of the current proposed U.S. GSIB rules.

[David Chang:]

Right. Which could change right, the surcharge, which as you calculated now, does any part of that count towards TLAC?

[John Gerspach:]

When you say the surcharge, I just want to make sure you…

[David Chang:]

The 4% GSIB surcharge.

[John Gerspach:]

Yes, it should because it will be in our capital base.

[David Chang:]

Right but if that goes down, do you lose that credit to say?

[John Gerspach:]

When if the GSIB surcharge went down please dear God if it reduced from 4% to 3% I’d say then that would also change the calculation of the TLAC requirement so I wouldn’t need to hold the capital but at the same point in time I wouldn’t have the same level of TLAC requirement.

[David Chang:]

Then when you think about the 16 to 20 FSB guidance, are you under the assumption that each of the SIFIs will get a different number within the 16 to 20 or depending on the jurisdiction, the U.S. or another jurisdiction would just choose a number and then calibrate with the buffers?

[John Gerspach:]

It is very possible that each country will come up with its own. I’d almost say it’s likely but again we don’t know as yet.

[Operator:]

The next question will come from Kevin Maloney with BlackRock.

[Kevin Maloney:]

First off, the LCR is 111. Is there a target you want to be at? And can you bring that LCR down to 105? I mean it's fairly inefficient to be above 100?

[John Gerspach:]

Well again you're looking at the absolute -- the way the rules are said. We’d also run of course our own internal LCR equivalent and that is really what we manage to and I can tell you that our own internal LCR requirement or LCR like requirement is a little bit tougher than even what the U.S. rules have in place. So can the 111 come down? Yes, I think that we can optimize a bit of the 111, but I certainly don’t imagine us getting down to anything below 105-107.

[Kevin Maloney:]

And you were nice enough to give RWAs for Holdco. Can you give us RWAs for OneMain and the other assets that are being disposed of, meaning…?

[John Gerspach:]

No, we haven’t broke -- go ahead keep going, before I tell you no let me hear the whole question.

[Kevin Maloney:]

No, no that's fine. I asked the question. Please answer.

[John Gerspach:]

Now, okay we haven’t broken out the RWA specifically associated with OneMain at this point in time.

[Kevin Maloney:]

And one last question, your total assets plus other off balance-sheet liabilities, you gave us some numbers and it was down Q-over-Q. I mean can we expect more improvement in that ratio for the SLR?

[John Gerspach:]

Well we continuously try to optimize again our total leveraged assets and so we do have active management programs in place to try to bring that measurement down. So it's hopeful that we should be able to reduce it now again, we were also hopeful that we’ll be able to expand the overall business so there will be some -- hopefully some growth pressure on there. But yes, we continue to optimize both the RWA calculations and when I say that it doesn’t mean that what we’re trying to do is just change the way we do calculations, we try to optimize by running the business differently and so we continue to manage that on both an RWA and a total leverage exposure basis as well.

[Kevin Maloney:]

I guess one last small question on Page 13 you show the customer related debt restructuring, which is I guess structured notes. And you're suggesting 10 billion could be changed, but you have much more than that. I was wondering why you picked 10 billion?

[John Gerspach:]

Well again this is a hypothetical, it's just meant to be illustrative and there we would look as being hopeful that we could get 20 billion, but I have to tell you I think that that is -- that’s probably being optimistic at this point in time. Again we don’t know anything, we haven’t seen the rules. But what I would say is probably a bit more realistic as that we could get half of it back say 10 billion. So it's just an estimate.

[Operator:]

The next question will come from John McDonald with Sanford Bernstein.

[John McDonald:]

I wanted to ask about rates in the rest of the world. With QE starting up in other parts of the world, and half of your deposits outside the U.S., is low for longer rates in the rest of the world a potential concern for your net interest income margin. As we look out into ’15 and ’16 when we think just about what low rates did for U.S. banks as it was going through QE, is that something we have to kind of worry about in the rest of the world given where your deposit base is?

[John Gerspach:]

Again we tend to take all of that into consideration, but in general we prefer rates to be higher, low rates do give us some issues. But again it's consistent with the environment that we’ve been planning for and so we’re not seeing an environment that is greatly different from that which we anticipated doing into this year and as reflective of the comments that Mike and I would have made back in January about the type of environment we’re looking at and our expectations that even in this type of environment, we still believe that our Citicorp businesses should be capable of low to mid single-digit revenue growth and you saw the 2% that we generated in the first quarter. So is it a concern? I wouldn’t say it's a concern, it's a consideration and one that again we try to bake into everything that we’re doing.

[John McDonald:]

And just a separate question, in terms of the fixed income results that you talked about kind of a dichotomy between rates and currencies on the one hand and the credit business on the other, have you seen that same kind of market conditions kind of persist, as we've gotten into April, that with the one business doing better than the other?

[John Gerspach:]

Well I don't think I'm going to talk this early in the quarter as far as where we think the markets are going will give you updates on that later in the quarter but I'd say that as of now April of 2015 is sort of looking like April of 2014.

[John McDonald:]

And any color on that kind of split within the FIG business or do you not want to go there?

[John Gerspach:]

No, I really don’t want to get into business-by-business after the first 15 days, 14 days of the year of the months or the quarter.

[John McDonald:]

And then can you help us think about what was the drag on the credit business, it was just lower issuance year-over-year what you experienced in the first quarter and why that was challenged year-over-year?

[John Gerspach:]

Well I think we've pointed out at least I tried to point out it was really lower activity levels and across all categories of distress credit specially non-investment grade CLOs and as well as munis and these things they started at the beginning of the quarter and it kind of stayed there for the entirety of the quarter so it just was an off quarter for spread products.

[Operator:]

The next question will come from Brian Monteleone with Barclays.

[Brian Monteleone:]

A couple questions on Slide 13. The CET1, the management buffer, the 6 billion, to the extent that the 50 basis points is the right buffer across your CET1 ratio, wouldn't you need that buffer above whatever your TLAC requirement is to the extent TLAC ends up being like Pillar 1 requirement where if you fall below, in this example, 24.5%, that has the same implications as if you had fallen below the 11% CET1 ratio?

[John Gerspach:]

That is certainly a possibility and it’s -- but again in the absence of rules I didn't necessarily want to build hypotheticals and type of hypotheticals but you can certainly treat that 6 in your own individual models anyway you would like to.

[Brian Monteleone:]

And then on the sub debt 8 billion to 10 billion on the left-hand side of the slide, the 8 billion on the right, I guess I look at the left-hand side is a gross number, but then the right-hand side I would assume that's a net number. Can you help me think about what the right way to think about the sub debt issuance guidance is?

[John Gerspach:]

See the left side would be what we might need to do in order to get all the way up to the 26.5 and if we were just trying to get to 24.5 we're just trying to give you a menu that we might pick from then in order to get to that 24.5. It's nothing more than again as I think it says on the top it's just illustrative.

[Brian Monteleone:]

Okay.

[John Gerspach:]

And the illustration is 8 billion of potential sub debt issuance, that's gross? So, not net of what you have maturing over the next four years? It would have to be additional it would have to be additive to our TLAC. So, you are quite right.

[Operator:]

The next question will come from Mark Kehoe with Goldman Sachs.

[Mark Kehoe:]

Just wondering, on your understanding of the advance versus standardized approaches, whether there is a blanket methodology applied to the ratios overall or whether one ratio could be an advanced ratio and another would be a standardized ratio, so much so that you face the more punitive ratio for each methodology?

[John Gerspach:]

You went pretty quickly there. So I'm not quite sure I caught the gist of your question. Q - Mark Kehoe When looking at the standardized versus the advanced approach, whether those approaches would be across your capital structure or whether it would depend on each ratio. If so for example, if one ratio is a standardized ratio and other could be advanced ratio, depending on which is the lower ratio of the two?

[John Gerspach:]

Well let me try and then you tell me if I'm helping when even under the current rules right now you are constraining ratio is the lower of your CET1 ratio under either advanced or standardized that's per Basel rules. However what we have seen is that individual countries can pick and choose what they want to use you've seen the U.S. in CCAR for a while it was focused on standardized now they may move to advanced in this next CCAR so we have to calculate how are ratios under each methodology and certainly be aware of it but it's going to potentially vary from year-to-year as to what the most constraining ratio is I don't know if I'm being helpful.

[Mark Kehoe:]

You are. It's really to see whether you could be penalize by having a lower ratio under the advanced approach, say, for CET1 ratio, and then the other one it would be your total cap ratio could be the constraining one, would be the advanced ratio, so in a sense you operate under the standardized approach for one ratio and then the advanced approach for another ratio?

[John Gerspach:]

That’s not my understanding of the existing rules. They start with the lower of advanced versus standardized for CET1 and then your total capital and your Tier 1 capital are build off of that. But again I can’t say that the rules wouldn’t change but based upon certainly my current understanding of the rules is that lower hub is only applied at the CET1 level and then the Tier 1 and total capital ratios are build off of whatever your most constraining base is.

[Operator:]

The next question will come from Justin Ziegler with Aberdeen Management.

[Justin Ziegler:]

You’ve reflected on a little bit on previous questions, but I guess just in terms of talking about operating risk weighted asset again and I am trying to think about in terms of 2020 when TLAC and everything comes into full effect. Can you give any sense in terms of how you’re looking at that and how you’re looking at modeling operating risk-weighted assets as Holdings kind of goes in the review mirror. And given you global footprint, how are you kind of thinking about that in any sort of strategic moves over the next few years that might give you any relief on the denominator side?

[John Gerspach:]

Right now, again based upon how our understanding of opp risk and where we think opp risk is headed. It’s unlikely that just disposing of the Holdings assets is going to get us immediate relief from the opp risk associated with Holdings. So when you take a look at the risk-weighted assets associated with Holdings there is about $179 billion of risk-weighted assets in Holdings. Of that $179 billion about 49 billion of that is opp risk. And our current view is that, that $49 billion of opp risk is going to be with us for some period of time. I can’t tell you that it’s going to be with us all the way through 2018-2019 that every dollar of it’s going to be with us but right now I would believe that most of that if not all of that will be with us through at least 2018.

[Justin Ziegler:]

And maybe I’m getting into the nitty-gritty here too much, but away from Holdings and Group, what kind of opp risk weighting assets do you have in the non-U.S. businesses? Do you have that broken out or?

[John Gerspach:]

We don’t go into the opp risk on the non-operating business and when we file the Q in a couple of weeks we will give you as we normally do the breakdown of what the total opp risk of risk-weighted assets are, but right now I would say of our total 1.288 trillion there is approximately about 325 opp risk RWA.

[Operator:]

The next question will come from Don Jones with Sterne, Agee.

[Don Jones:]

Two quick questions and it’s really more just a characterization. But Slide 31, you provide the adjustments or the expected estimated hits to accumulated other comprehensive income. If rates shifted out, say, 200 basis points, from 100 to 200, is it a hypersensitive relationship, or kind of one-to-one, or how much is the I guess evaporation of the carry trade on balance sheet has taken away the hypersensitivity for a like a jump in the rates?

[John Gerspach:]

Well, as I’ve disclosed in the past, most of the sensitivity in OCI to -- is that what you’re going after the sensitivity in OCI, are you going after the sensitivity on Page 31 that just talks about the overall 1.9 billion?

[Don Jones:]

Yes. For OCI the 2.6 billion but if there is, say, a 200 basis point spike in rates, just as a characterization I mean I’m sure you guys don't have it mapped out but like how, since we are at such a low rate environment, if there is a big spike in rates is there a big sensitivity, a hypersensitive relationship? Or just generally, not even giving a probability expectation, how hypersensitive is that relationship if rates go up from not even 100 but 200 bps?

[John Gerspach:]

It’s been a long time since I would have seen anything associated with the 200 basis point immediate shock in interest rates. I think that giving you the interest rate sensitivity on 100 basis point immediate shock that’s what this is, it is immediate shock I think that is about as hypothetical as I would like to get at this point in time

[Justin Ziegler:]

And then lastly this is really kind of a hypothetical scenario again, but do regulators have any discussions or if there been any in terms of the development of the living will talk about funding out of separate not just the bank OpCo, but other operating entities like the broker-dealer for instance?

[John Gerspach:]

Again I just want to make sure that I am responding to your question, as part of resolution planning one of the things that of course we need to do is to make sure that the significant entities would be self sufficient from a liquidity point of view.

[Justin Ziegler:]

And since the broker dealers, well and a captive broker dealers don't issue yours included, is that clearly you have talked about it internally but do regulators, I don’t know how much you can characterize this but do regulators bring it up is something that they want to test it or effect this because hypothetically saying you can issue out of the broker dealers is one thing, but actually doing it is another, right?

[John Gerspach:]

Yes, we don’t typically issue at a broker dealers. There the regulators haven't put any real benefit to issuing out of broker dealers. As a matter of fact if you think about it what we’re being, what really is important from a TLAC point of view would be to have the senior debt issued from the holding company level. So there is no current plans to test the issuance out of individual broker dealers.

[Operator:]

The next question will come from John Giordano with Credit Suisse.

[John Giordano:]

Just a couple of and a lot of really good questions asked you already. Just in terms of the structured notes or as you call them customer related debt, because you do highlight that a number of times. Is there anything -- can you give us a little more specificity in what you think you can change to actually make that eligible? And then sort of answers a little bit, but what your confidence is that you could actually make that count?

[John Gerspach:]

Well again we don’t have final rules, so I can’t tell you what my confidence level is in any specific modification since I don’t know how the rules will change overtime, if they will change overtime. What we’ve tried to lay out to you on Slide 12 is that when you take a look at the customer related debt based upon our understanding of the NPR that is out there only 4 billion would count. Now there has been as we mentioned, there have been a lot of the comment letters that have gone in and have been reflective on this and so I think that as an industry were hopeful that there will be some modifications to the final rule that will therefore allow us the ability to include some of this debt in the final calculation. But I can’t tell you specifically what we would change because I don’t know what we count, right now only four of it counts, hopeful of more.

[John Giordano:]

And so if the 10 that we used on Slide 13, the 10 billion was zero how do you think you might allocate that versus seniors other than preferreds?

[John Gerspach:]

Well again we’ve laid out one hypothetical, we would have to make it up elsewhere and beyond that I am not going to go into it in a great detail as this is the hypothetical that we have been looking at if the final rules indicate that this is not good then we’ll have to take a look at what the overall final rules are and then we will optimize off of those final rules.

[John Giordano:]

So I guess this is more of a forward-looking question as well, once the rules are finalized and are part of law, do you foresee making changes in the prospectus to either the risk factors or putting specific ballet language into a prospectus?

[John Gerspach:]

Again I’m going to have to see what the final requirements are and then we will adjust it off of that.

[John Giordano:]

I know it was hard one to answer, but I thought I was…

[John Gerspach:]

No, actually it was pretty easy.

[John Giordano:]

And then the last one is you talked a lot about the disposal of assets specifically at Citi Holdings, I am curious with a large seller in the market if you see yourself as a good buyer for any particular part of that or you're really just disposing of assets right now?

[John Gerspach:]

No, I think you’ve seen that where different portfolios of assets are in line with our strategy. We would be buyers two years ago we bought the Best Buy portfolio in our retail cards business, retail services business. This year we announced an agreement with Cosco and Visa and as part of that agreement we’re in discussions as far as the acquisition of the Cosco portfolio from the company that they previously had that relationship so we’re not averse to buying assets where it fits in with our strategy.

[Operator:]

The next question will come from Michael Rogers with Conning & Company.

[Michael Rogers:]

Wanted to ask you, the rating agencies seemingly are going in the opposite directions right now when it comes to your senior holding company debt ratings. And welcome any comment on your part on where you think that process may end. But have you as affirmed examined the potential impact on the breadth of the market as well as the potential incremental costs for your senior holding company paper, if indeed two or three rating agencies ultimately have BBB ratings on your senior holding company debt?

[John Gerspach:]

We've looked at a variety of different scenarios we don't think that that one is likely but we have looked at it and let's not again deal it necessarily in the hypotheticals right now so when you look at it certainly from the Moody's point of view it seems as though they have us on review and for a potential upgrade we're stable with Fitch we obviously have some work to do with S&P but I think so does the entire industry so it is kind of where that is?

[Michael Rogers:]

Are you hopeful that the recent better numbers could stable off a two notch downgrade at S&P?

[John Gerspach:]

I don't think that a two notch downgrade is necessarily going to be something that we're dealing with S&P but obviously they have to do their work and what they are facing as is Moody's is they are looking at wholesale changes to their methodology. So presumably any change that they are looking at will impact not just us but the industry in total and so just concentrating on one rating agency and one financial institution I think that's a bit myopic at this point in time.

[Operator:]

The next question will come from Eric Wasserstrom with Guggenheim Securities.

[Eric Wasserstrom:]

I'm just following up on some of the commentary on Slide 13. And you've done a lot to explain all of the components there and I recognize that it's illustrative.

[John Gerspach:]

Maybe be not enough?

[Eric Wasserstrom:]

So let me just belabor it. Just following up on that structured notes issue, if the final rule were to develop in a way that maybe there was some relief but not up to the $20 billion mark, what if we were to look at the example on the right side of the page, and you couldn't do 10 but a lesser number, where is it in the capital structure that would make up the difference? Would it be in the benchmark debt?

[John Gerspach:]

Well again just to on unfortunately I guess this of course isn’t, is debt as I thought it was, but I have to look to see where the final rule comes out. What we have laid out here is again surely an illustrative example I realize that there may be a bit of the committee to end redundancy committee but it's meant to be an example, it is mean to be purely illustrative and we will have to wait and see where the rules come out we do think that what the example should be showing is that we have several different levers to pull in which to make up whatever our current shortfall is against TLAC requirements if any we technically right now there is a scenario that says we're done and so what we're dealing with is how much more might we be required to do answer we don't know however if we were asked to hit a 24.5% TLAC requirement here is one way that we could possibly do it. It doesn't require herculean effort on our parts in order to get this thing done. We have areas of funding right now that we currently employee in our business that don’t count for TLAC and so what we would do is shift away from them and move towards levels of types of funding that are TLAC eligible. But notice me to tell you exactly what I would do I need banality as to what actually is TLAC eligible and what's really I just don't have that right now. But again if you look these are things that we clearly can do preferred stock issuance. We’ve told you that we’re going to be issuing $4 billion to $6 billion of additional preferred stock. So that’s what we’re going to do in order to make sure that we’ve got a capital stack that’s reflective of 150 basis points of our RWA in preferred stock. We have additional subordinated debt to issue. We know that in order to get our total capital up to a 200 basis point level. So, all of these things are already in our existing plan. The additional that we would need to do to get to TLAC requirement does not appear to us to be something that is just going to be I won’t say it’s not going to be difficult because everything is difficult. But if it’s not going to be something that forces us to dramatically alter our existing business plans or our existing way of managing our balance sheet.

[Eric Wasserstrom:]

I think that that point is very clear. I guess I just wanted to understand sort of where the positive point of evolution could be inside this example and where the potentially negative ones are. And it sounds like the most positive one would be where in fact the TLAC requirement falls out in terms of that range. It doesn’t sound like there is really much optimization left in risk-weighted assets. And then on the negative side, it would be the actual instruments and how they count towards the TLAC requirements. Is that generally correct?

[John Gerspach:]

That’s a generally good summation of exactly where we are.

[Operator:]

That concludes the question-and-answer session. Mr. Kapp, do you have any closing remarks.

[Peter Kapp:]

Thank you everyone for joining the call today. If you have follow-up questions please don’t hesitate to reach out to us Investor Relations. We’ll talk again next quarter.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. You may now disconnect.