During the Second Quarter 2024 Earnings Call for Citi, hosted by Head of Citi Investor Relations Jenn Landis, CEO Jane Fraser and CFO Mark Mason discussed the company's results and addressed recent regulatory actions by the Federal Reserve and Office of the Controller of the Currency. These actions pertain to consent orders entered into in 2020 and focus on risk management, data governance, controls, and compliance. The company's top priority is its transformation efforts to modernize infrastructure, unify tech platforms, and automate processes and controls, with a particular focus on data quality management.

Citigroup has acknowledged that they were behind in a certain area and have increased their investment as a result. The regulatory actions include two penalties and a new process to ensure sufficient resources are allocated for remediation. The OCC is the primary regulator for Citibank, N.A. and the amended consent order allows for dividends to be paid to Citigroup. However, dividends above a certain amount require OCC approval. These dividends are different from common dividends paid to shareholders and there are no restrictions on Citigroup's ability to pay them. Despite these setbacks, Citigroup has enough resources to invest in their business and return capital to shareholders through dividends and buybacks.

The speaker expresses confidence in their ability to improve specific areas of their transformation and acknowledges progress made so far. They mention investments in technology and changes to organization and culture that have led to tangible outcomes. The management team is committed to addressing any areas where they are behind. They then discuss their good quarterly results, showing their focus on executing their strategy and driving towards their return target. Revenues were up 4% overall and expenses were down 2% year-over-year.

The company is taking steps to simplify its organization, reduce costs, and increase investment in transformation. Services and Markets segments saw growth, with Services being described as the company's "crown jewel." Markets had a strong finish to the quarter, with fixed income slightly down but good performance in financing and securitization. Equities and banking saw significant growth, driven by strong performance in derivatives and investment banking fees. The company expects promising activity in advisory services for the rest of the year.

The wealth division of Citigroup is showing signs of improvement, with investment revenue increasing by 15% and expenses decreasing by 4%. The US Personal Banking sector also saw growth in revenue and loan balances, but lower-income customers are facing pressure in the credit segment. The company's operating margin has expanded, but returns were affected by seasonal credit factors and normalization of certain vintages. The recent stress tests have demonstrated the strength of Citigroup's balance sheet, with a high CET1 ratio and expected decrease in regulatory capital requirement. The company has also returned capital to shareholders and plans to increase dividends and buy back common shares. The US economy is still considered to be the strongest in the world, with inflation trending downward.

The article discusses the current state of the services industry, noting that while there are signs of a softening labor market and tightening consumer budget, the business model can still produce good results. The company has made progress in simplification and has completed most of its international consumer market exits. The focus is now on executing the transformation and strategy to meet medium-term targets and improve returns. The firm has reported net income of $3.2 billion, EPS of $1.52, and RoTCE of 7.2% on $20.1 billion of revenue for the second quarter.

In the most recent quarter, the company saw a 4% increase in total revenues, driven by growth in all businesses and a $400 million gain from the Visa B exchange offer. Expenses decreased by 2% and 6% sequentially, resulting in positive operating leverage. The cost of credit was $2.5 billion, primarily due to higher card net credit losses. The company continues to invest in transformation and technology, which may offset some sales and headcount reductions. However, they expect to be at the higher end of the expense guidance range due to the Fed and OCC penalties. They will continue to look for ways to absorb these penalties.

The speaker discusses the progress made in their company's transformation, highlighting improvements in wholesale credit, risk management, and data management. They also acknowledge shortcomings in data quality management and have allocated resources to address this, in response to feedback from regulators. The speaker then turns to discussing the quarterly results, specifically net interest income, deposits, and loans, and will speak about changes in these areas.

In the second quarter, net interest income was flat, with a 3% decrease excluding Markets. This was due to foreign exchange translation, lower revolving card balances, and interest rates in Argentina, partially offset by higher deposit spreads in Wealth. Average loans remained flat, with growth in cards and Mexico consumer offset by slight declines in other businesses. Deposits decreased by 1%, mainly due to seasonal outflows and non-operational outflows in TTS. The bank maintains a disciplined risk appetite and 86% of its card loans are to consumers with FICO scores of 660 or higher. The highest income quartile and over 740 FICO score customers are driving spend growth and maintaining high payment rates, while lower FICO bands customers are borrowing more and seeing sharper drops in payment rates. However, delinquency performance in the cards portfolio is stabilizing. The bank remains well reserved with a reserve to funded loan ratio of 8.1% for its total card portfolio. The corporate portfolio is mostly investment-grade and saw a decrease in non-accrual loans due to upgrades and repayments.

The company saw an improvement in their macro assumptions, leading to a comfortable reserve of $22 billion. The balance sheet, capital, and liquidity are strong, allowing the company to support clients during uncertain times. The deposit base is well-diversified across regions, industries, and customers, with the majority being corporate deposits. The loan portfolio is also well-diversified, and the company holds a significant amount of cash and high-quality investments, providing approximately $900 billion in available liquidity resources.

The company is confident in their strong balance sheet and assets, which position them to be a source of strength for the industry and clients. Their CET1 capital ratio is 13.6%, above the regulatory requirement of 12.3%. This requirement is expected to decrease to 12.1% in October, but does not fully reflect the company's simplification efforts and execution of their strategy. The company has increased their common dividend and plans to do $1 billion in buybacks this quarter. In the Services business, revenues were up 3% due to continued momentum in TTS and security services.

The article discusses the financial results of the second quarter for a company. Net interest income was down 1%, while non-interest revenue increased by 11%. Expenses increased by 9%, primarily due to transaction tax and legal settlement expenses. The cost of credit was a benefit of $27 million. Average loans were up 3%, driven by demand in certain regions. Average deposits were down 1%, but the company continues to see good operating deposit inflows. Net income was approximately $1.5 billion, with a high RoTCE for the quarter. In the Markets division, revenues were up 6%, with fixed income revenues decreasing by 3% due to lower volatility and tighter spreads. However, there was strength in other fixed income products and equity revenues were also strong. The company also saw growth in prime balances.

Expenses for the quarter decreased by 1%, mainly due to productivity savings and higher volume-related expenses. There was a net benefit of $11 million from cost of credit, with average loans and trading assets increasing. The Banking sector saw a 38% increase in revenues, driven by growth in investment banking and corporate lending. Investment banking revenues increased by 60%, with strength in capital markets and advisory. In ECM, there was a pickup in IPO activity and continued convertible issuance. Advisory revenues were also boosted by transactions closing. The sector gained market share in DCM, ECM, and advisory, particularly in technology. Corporate lending revenues increased by 7%, with positive operating leverage and a 10% decrease in expenses.

The paragraph discusses the financial results for the second quarter in the Wealth and US Personal Banking divisions. Wealth saw a 2% increase in revenues due to higher investment fee revenues and good momentum in non-interest revenue. Expenses were down 4% and cost of credit was a benefit of $9 million. US Personal Banking also saw a 6% increase in revenues, driven by NII growth and lower partner payments. The division generated positive operating leverage and delivered net income of $210 million.

In the second quarter, branded cards revenues increased by 8% due to growth in interest-earning balances and spend volumes from customers with higher FICO scores. Retail services revenues also increased by 6%, driven by lower payments from Citi and growth in interest-earning balances. Retail banking revenues increased by 3%, with positive operating leverage. However, cost of credit increased due to higher net credit losses and an ACL build. The three main factors driving NCLs are maturing loan vintages, seasonally higher NCLs, and certain customers impacted by inflation and high interest rates. Despite this, the company expects branded cards to be in the 3.5% to 4% NCL range for the full year, and retail services to be at the high end of the range of 5.75% to 6.25%. Average deposits decreased due to the transfer of relationships to the Wealth business.

The paragraph discusses the company's financial results for the quarter, including net income and RoTCE. The company mentions their efforts to manage through regulatory challenges and improve operating efficiency to achieve a high return. They also provide an update on their outlook and guidance for the future. The company mentions a recent amended consent order, which they find disappointing after four years. They mention the resources and efforts they have put into addressing the issue and express a desire to resolve it. The paragraph ends with the company opening the floor for questions.

Jane Fraser and Mark Mason address concerns about Citi's regulatory management and data issues. They explain that the transformation process is addressing decades of underinvestment in infrastructure and risk and control environment, and that it is a multi-year undertaking. They also mention that they have made meaningful progress on their transformation and simplification, as noted by one of their regulators.

Jane Fraser and Mark Mason discuss the progress made in transforming Citi in order to benefit shareholders, clients, and regulators. They have a clear strategy and have executed divestitures, resulting in a simpler organization. They have also retired platforms, reduced the number of data centers, and consolidated various platforms. However, there is still work to be done in terms of data and regulatory reporting, as Citi currently has 11,000 global total regulatory reports.

Mark Mason discusses the importance of ensuring the quality and efficiency of data in reports, using the example of the 2052a liquidity report. He also mentions that credit costs are currently low in the US Personal Banking sector, but there is potential for improvement in the medium-term targets. The company is still in a period of normalizing the cost of credit.

The speaker discusses the current state of the company's compounding losses and their impact on the P&L. They believe that delinquencies are starting to level off and losses will start to decrease in the medium-term. The company is also investing in the business and expects continued growth in volume and top-line performance. In regards to DCM, the speaker mentions that there has been a lot of refi activity driving performance in the first half, but they expect a different mix of activity in the second half due to a wall of maturing debt securities.

Mark Mason discusses the expected rate environment and financing markets, as well as the impact of M&A on the overall mix. He also mentions factors that will affect the wallet for the year, such as the return of a normalized IPO market, interest rates, global conflicts, and upcoming elections. NII was down almost 4% year-over-year, driven by FX translation, lower revolving card balances, and lower interest rates in Argentina.

In the second half of the year, there will be both positive and negative factors affecting the net interest income (NII) of the company. The higher yield on reinvestment and volume growth in the card loans portfolio will be tailwinds, while lower NII in Argentina, higher average betas, and the impact of CFPB late fees and lost NII from exits will be headwinds. The NII in the back half of the year is expected to be slightly higher than the first half, but still in line with the guidance of modestly down. As for expenses, they were better-than-expected in the second quarter, but the company expects them to increase in the back half of the year, likely due to restructuring and repositioning charges.

The company's expenses for the year will be around $53.5 billion to $53.8 billion, which includes repositioning charges but excludes the FDIC special assessment and civil money penalties. They plan to buy back $1 billion in shares this quarter.

The analyst asks about the company's buyback plans for the second quarter and if the $1 billion buyback in the fourth quarter is a catch-up pace due to not buying back any in the second quarter. The CEO and CFO explain that they will not be giving guidance on buybacks due to uncertainty around regulatory changes, and that the decision to not buy back in the second quarter was a prudent call in discussions with regulators. They will continue to make quarterly determinations on buybacks.

Gerard Cassidy asks Mark Mason about the higher credit losses and if there was any FICO score inflation during the pandemic. Mark responds by stating that they have been focused on underwriting new customers and ensuring the quality of acquisitions. He also mentions that while they have moved towards higher FICO scores, it hasn't had a significant impact on their customer mix. He also comments on the CFPB and late fees, stating that they have factored it into their forecast but do not have an update on timing. Ken Usdin then asks a question.

Mark Mason, in response to a question about the discrepancy between US and non-US rates and its impact on NII outlook, explains that they expect modest NII growth in the medium-term due to their management of the balance sheet and higher yields earned on reinvestments. However, if rates come off, there could be less NII pressure. The combination of volume growth, higher yields on assets, and pricing capabilities is expected to offset any potential beta increases and result in continued NII growth.

Jane Fraser discusses the impact of the IRE analysis on the current balance sheet, which assumes a simultaneous movement of the full curve across currencies. This would result in a negative $1.6 billion, with the majority coming from non-US dollar currencies. However, this analysis does not account for the rebalancing of the balance sheet and potential higher yields from reinvestment. Regarding the OCC amendment, Fraser states that the Resource Review Plan is simply a plan to ensure timely and sustainable compliance with the order. It will be confidential and the timeline for completion is not expected to be long. Betsy Graseck from Morgan Stanley asks a follow-up question about the plan.

Betsy Graseck asks about the path of expenses in the medium-term, specifically how far along the simplification process is and if regulatory requirements outweigh the remaining simplification efforts. Mark Mason responds by stating that the target for expenses in 2026 is $51-53 billion and that they have made progress in simplification and restructuring, which will result in $1.5 billion in savings. However, these savings will be offset by investments in transformation and business growth. Jane Fraser reiterates their confidence in meeting their RoTCE target of 11-12% over the medium-term.

The company is confident in its ability to manage the various elements of its transformation, including investing in the transformation, running its businesses, and returning capital to shareholders. They have spent $3 billion on transformation-related work in the past year and plan to spend more this year, but are actively managing their overall expense base to stay within budget. They have found productivity opportunities and are working to find efficiencies in areas where they are behind or tracking as expected.

The bank has been focusing on areas where there are duplicative roles and inefficient processes, resulting in a 10% decrease in expenses this quarter. They understand the importance of funding the transformation and are doing both. The $53.5 billion to $53.8 billion guidance does not include the resources needed to address the consent order, but they have already begun addressing areas that they are behind in and are absorbing the costs within their guidance.

The company is working on a Resource Review Plan with regulators to ensure proper allocation of resources. If any issues arise, they will apply the same process and spend whatever is necessary to get things back on track. Credit card revenues were down sequentially due to seasonality, but year-over-year trends are consistent.

The consumer spending has slowed down, but growth is being driven by affluent customers. The revenue line is affected by the combination of rewards and other factors. The OCC's recent action does not impact the company's ability to return capital to shareholders, and the purpose of the orders is to ensure proper funding and allocation.

The speakers clarify that the reference to dividending from CBNA to the parent company does not restrict their capital flexibility or ability to benefit from potential regulatory changes. They also address concerns about USPB's return on tangible common equity, noting that losses in cards are normalizing.

The speaker discusses the profitability of the company's cards business and the challenges facing the retail bank in terms of profitability. They mention the current credit cycle and industry headwinds as factors affecting returns, but express confidence that as these factors stabilize and mitigating actions take hold, returns will improve. The retail bank is focused on growing market share and improving operating efficiency through expense management and optimizing the branch and digital network.

Mark Mason and Jane Fraser discuss the utilization of DTAs and the focus on driving higher income in the US to utilize the disallowed DTA. They mention that this is a major driver for the utilization and that many business heads are focused on this opportunity. They also mention that winning in the US is an important part of their strategy and that they see opportunities in various areas of their business, such as commercial banking, wealth, and personal banking.

The executives of a retail services business are focused on generating returns rather than just increasing revenue, and are willing to say no to partnerships that do not offer appropriate returns. They are also considering the impact of CECL and establishing full lifetime reserves for partnerships. They are disciplined in their approach and are seeing the benefits of this strategy.

Jane Fraser, CEO of a financial institution, is asked about the timing of completing a consent order that the company is currently under. She explains that there are four areas to the consent order and they have been falling behind in certain areas related to data, but they are investing to address these issues. She does not expect the timeline to extend and they are making strategic fixes rather than temporary solutions. The final question is about the passing grades in risk, compliance, and controls, and Fraser confirms that the main issue is with data.

Jane Fraser, CEO of Citigroup, explains that the data issues at the company are not indicative of overall control and resiliency, but rather a specific problem with regulatory reporting. The company uses data for various purposes, such as customer statements, corporate client transactions, and trading. The transformation at Citigroup is focused on simplifying and improving the management and governance of data flows, with a strategic overhaul of infrastructure and the use of smart tools and automation. This includes capturing data accurately and housing it in two standardized repositories.

The company has invested in building a standardized reporting infrastructure and a single repository for all of their data, which will streamline data flows and improve accuracy of regulatory reports. They have added resources and are using AI and other tools to identify anomalies in data more quickly. They are also working on improving the culture of data management within the company.

The speaker discusses how their data strategy will give them a competitive advantage, improve revenue and client service, and address regulatory concerns. They acknowledge past setbacks but are confident in their ongoing efforts to improve.

The operator announces the end of Citi's second quarter 2024 earnings call and instructs participants to disconnect.

This summary was generated with AI and may contain some inaccuracies.