Citigroup's CEO Presents at Citi 2013 U.S. Financial Services Conference (Transcript)

| About: Citigroup Inc. (C)

Citigroup Inc. (NYSE:C)

Citi 2013 U.S. Financial Services Conference

March 5, 2013; 12:45 p.m. ET


Michael Corbat - Chief Executive Officer

John Gerspach - Chief Financial Officer


Unidentified Participant

Michael Corbat

Thank you very much. Its great to be here. I thank all of you for coming and joining us today.

In my first five months as CEO I spent a lot of time reviewing our businesses, from the pleasure process to our CCAR submission, the meetings with our clients, our investors, our regulators and then my travel, seeing first hand both the opportunity and the challenges in our company. But today what I’d like to do is share with you my perspectives on our business and importantly my priority as we move forward.

To begin with, as I said in the past, I believe Citi strategy is the right one and its well aligned against the global trends. We want to be a leading provider of financial services to the world’s largest multi-national corporation and investors and to provide best-in-class financial consumer banking to high quality customers in the world’s largest city. Out target client base is one which values our global network and the scale and scope of our franchise is designed to serve their needs.

As you know, may firms speak about themselves in terms of products, but for us it’s the markets in our network which allow us to service our clients in a differentiated way. And in fact, our global network is becoming more unique and more valuable every day.

If a financial institution doesn’t already have a significant global presence, its ability to recreate our footprint inorganically through significant M&A or organically through building, is extremely limited in today’s challenging regulatory and economic environment. But we recognize that our network only has real value if we can deliver on behalf of our clients and our shareholders and deliver a return on equity that exceeds our cost of capital.

In certain products and geographies, I believe we are well positioned with the right set of clients and appropriate allocation of resources to deliver strong return. Having said that, we still have many opportunities to improve on our execution.

First and foremost, we need to drive our resources to the best return. To us appropriate resource allocation only occurs when you consider it through three lenses; geography, clients and products.

I’m going to share with you today how we are using these lenses to prioritize our resources and importantly, how we are measuring and holding our managers accountable to drive efficiency in our everyday operations. So today what I’m going to do is share with your our financial targets for 2015, so that you can hold us accountable.

Let me take a minute and I’ll put our current priorities into concept. Citi is now in the fifth year of one of the most significant transformations every executed in our industry. Much of the major restructuring in behind us, having identified our core businesses in Citicorp and our wind down portfolio in Citi Holdings, nearly five years ago.

In 2008 we reorganized our structure, centralizing global functions such as risk management and finance in order to tighten control and simplify the organization, and in 2009 we recapitalized the company, which caused painful dilution to our shareholders, but also established the strong foundation for our future. Since that time we’ve reinvested in Citicorp and returned the core franchise to growth, by also reducing Citi Holdings, building capital and making the necessary changes in our business to prepare for the new regulatory and capital rule.

We reduced Citi Holdings by $600 million, lets not loose that $100 billion. We’ve reduced Citi Holdings by over $600 billion of assets and we’ve largely sold down the minority stake, which became punitive under Basel III. We’ve also reshaped certain businesses such as securitized products, that are most effected by the new capital rule. And as mentioned, we ended 2012 with a strong capital position at an estimated 8.7, tier one common ration under Basel III, and we continue to believe that we are going to end this year at 9.5% or higher.

As we enter the next phase of our transformation, our focus is on execution, with the goal of delivering consistent and high quality earnings. Execution is critical in today’s challenging environment, given the continued economic regulatory and other headwinds facing our industry, and its also important that Citi continues to manage through two significant legacy issues.

First is our differed tax asset of $55 billion and a significant amount of our DTA is deducted and calculating regulatory capital under Basel III and therefore, we hold a greater amount of tangible common equity than with other wise deeds to be there to support our operating businesses. The DTA doesn’t earn income and is in fact a drag in our equity returns.

Second is the capital supporting Citi Holdings. While we’ve reduced Citi Holdings to just under 8% of our GAAP balance sheet, it still represents nearly a quarter of our estimated risk weighted assets under Basel III, and so a significant amount of our capital supports businesses that still generate a lot. In fact, this means that over a third of our capital is not available to generate returns that we both expect and deserve.

With the remainder, therefore we have to be extremely disciplined of where and how and with whom it’s deployed and there is no margin for error. The good news is that the capital supporting DTA in Citi Holdings will free up over time, generating potential significant excess capital for return to our shareholders. But in the meantime, in many ways we are fighting with one hand tied behind our back, which is why superior execution is critical.

So what do we mean by execution? Broadly speaking we have three priorities. First is the efficient allocation of resources, including our equity capital, our expense dollars, our headcount, our risk, our risk capital. Second is the continued focus on the wind down of Citi Holding and third, is our priority around DTA utilization. We need to turn the DTA balance in the right direction and demonstrate its value to the market.

Let me take a minute now and talk about our strategy and what we think makes us unique. Many of our institutional relationships begin in the middle of this slide, with our transaction services business. This network facilities over $3 trillion of daily flows and serves as the backbone of our global infrastructure. We’re answerable to our clients daily operations and as their partner, we also capture significant trading flows in products like foreign exchange, as well as more episodic capital markets origination and M&A.

Likewise in the consume businesses, our strongest and most profitable relationships begin with a primary operating account, where we provide everything from automatic payroll, to global banking and payments and through these relationships we establish the foundation to extend credit for these consumers and ultimately earn the opportunity to provide longer term investment and wealth management advise as their needs evolve.

Together the institutional and consumer businesses provide a substantial base of deposit funding in local markets, which also gives us a unique ability to support these clients as they move around the world. And in fact, our clients are becoming more global everyday. Developed market companies are rapidly expanding outside their home markets and since 2002, acquisitions by developed market firms into the emerging markets have more than doubled.

Emerging market companies are also expanding globally, creating the next generation of large cap leaders. In 2005 less than 10% of the global Fortune 500 was headquarter in the emerging market, but last year that proportion had grown to over 25%. As business activity grows in the emerging markets, so does the base of aspirational consumers.

We see GDB concentrating in urban areas and we think that 60% of the growth in high income urban household through 2025 was expected to occur in emerging market Citi, where we already have a focus of our retail print.

As you can see from this slide, we are a global firm with a physical presence in over 100 companies that comprise our network. For Citi, global doesn’t mean packing up a suitcase and traveling to where a client needs to do a transaction. Global means we are established in the countries where our clients need us to do business, both in developed and emerging markets.

They can make payroll in Tanzania, they can purchase raw materials in Indonesia, they can hedge currency risk in Korea, and they can do so knowing that they are dealing with a strong, well regulated firm. So we provide them with the services they need and we also provide the reliability and market expertise of a truly global institution; its good for them, it promotes global economic growth and we all benefit from that.

Building from this slide, we provide broader where our clients need liquidity, access to capital markets and strategic advice to growth when some cases reshape their businesses. We also leveraged our network to provide consumer banking, focused largely on emerging market Citi’s, where GDP growth and urbanization are driving significant demand.

As a company, we often tend to talk about our reporting segments, consumer banking, transaction services or securities banking, but I don’t think this begins to describe the integration amongst these businesses. In securities and banking for as an example, nearly $5 billion of the $22 billion of revenue last year were generated in local markets rates and currencies, which drives much of its volume from the FX flows in DTA.

Likewise, securities banking include our corporate loan portion, which is closely tied to our operating relationships. And in consumer banking, in markets such as Mexico and Russia, a significant number of our customer relationships are generated through partnerships with our corporate clients.

So with our business model spanning multiple products in over 100 markets around the world, how do we make sure that we are driving our resources to the best opportunity? Without the appropriate discipline and targeting, our resources can be spread too thinly or too evenly across the portfolio, under investing in our best opportunities and opening ourselves of mission creep in less attractive areas.

And having just spent four years selling off assets that came on our balance sheet as a consequence of mission creep, I’m very familiar with this and what it means to not have a disciplined approach. I believe the right framework needs to be more granular today than in the past, with the balanced view across markets, clients and product.

We also need to make sure we measure our progress in real time, so we can make mid-course corrections as necessary and respond to the operating environment.

We reviewed each country in our network to determine the market’s attractiveness and the strengths of our franchise. The market attractiveness includes factors such as GDP growth, with competitive landscape and the regulatory environment in each country and against that backdrop, when you look at the strength of our business as defined by operating efficiency and return.

Based on these attributes, as you can see in the top right hand corner, we designated 20 markets in our system as invest to grow. These are markets where we also have a strong franchise. The vast majority of these are in the emerging markets and include significant operations in Mexico, Singapore, Hong Kong, India and China.

Below that, 48 markets are designated stay the course, where we have a strong franchise but with less opportunity. These include smaller countries, many of which support transition services in the emerging market.

As you can see in the top left hand corner, 18 markets are optimized and then grow. Here we see the biggest opportunity for improvement, as these tend to be large developed countries such as the U.S. and U.K., where we have the highest concentration of expenses end assets.

In the fourth bucket is optimizer restructuring. 21 markets fall into this category, including about a half with the consumer franchise. And the fifth bucket not on this page so the speak, is an exit from a particular geography or business line.

In December you saw us make a decision around our consumer businesses in Uruguay, Paraguay, Turkey, Romania and Pakistan. In these markets we continue to service sufficient clients, but didn’t believe that we in fact had a near term path, with separable returns in our consumer businesses.

As you can see, this framework creates a clear roadmap for resource allocation. Invest to growth markets are earnings their right through additional resources, while optimized markets are right for efficiency gain. Investor and grow represents 30% of Citicorp revenues and are amongst the most efficient in our network, with an aggregate efficiency ratio of less than 50% last year and these markets also generate strong returns on assets at nearly 2% in 2012.

Stay the course markets are much smaller proportion of revenues at around 5%. It also operates very efficiently and these markets generated a superior return on asset of 2.5% last year. This is where its important to make sure we have operating discipline and do not loose sight of why we are in these markets and who in fact we’re there to serve.

Optimize and then grow markets are over half our revenue, with the larger proportion of our expenses resulting in a high efficiency ratio and a below target ROA of roughly 70 basis points. This in our opinion represents a concentrated opportunity, where we can make real progress on both efficiency and return.

Finally, optimize and restructure markets are less than 10% of our revenues and amongst our least efficient with a very low ROA. These results are unsustainable and in these markets if there’s not a clear path to acceptable return, we intend to significantly scale back or exit certain business lines.

The second lens we consider is clients. As I noted earlier, I target clients that are those who most value our global network. On the institutional side, the number of countries in which we service a client is the best indicator of our revenue, as well as the number of products we provide to that client.

With our Warwickshire and our returns increase three fold as we go up the spectrum in serving the client in fewer than 20 countries to going over 50. So we are focused on those clients with the greatest potential to expand and migrate around the world.

Likewise we also serve our consumers best when we leverage several touch points. On the right hand side you can see the marginal contribution increases dramatically as we build the number of products per customer. The data on this slide is for North America, but the relationships hold true around the world.

This informs our investment decisions as it clearly, as it’s very clear that an additional loan provided to an existing customer has a much more powerful impact on our return than a stand alone prompt. This does not imply however that we don’t want to build our customer base, but we’re very mindful of establishing a new account is just the beginning of the opportunity.

The third lens I’d like to talk about is product. Across the firm we have opportunities to increase the efficiency of our spending and capture adjacencies, which we believe today are under penetrated. On the institutional side when we deliver more integrated solutions, we keep more of our transactions in our pipes for a longer period of time. This additional revenue is highly efficient as we’ve already done the work around credit analysis, A&L and the other work necessary to bring a client onto our platform.

As an example, one of our natural adjacencies is between markets and transaction services. We are integrating our client facing foreign exchange platforms in markets with our Treasury platforms and CPS, allowing corporate treasurers around the world to access our market and CPS franchises from a single point of contact. This facilitates cross product usage and streamlines our interaction with our client.

In consumer, one of the most important things we are doing is simplifying our product portfolio. As an example today, our global cards business supports multiple products in each country, each with its own features and processes. Our goal is to rationalize this portfolio, taking out nearly 60% of our products, in order to simplify our operations and improve the effectiveness of our spend.

The other resource allocation is only one part of achieving our Citi group level targets. We must also remain focused on Citi Holding. The wind down of Citi Holdings has two distinct components; winding down the assets and reducing the drag on earnings. We’ve made good progress in reducing Citi Holdings asset and our WA, but we still have work to do.

We’ve already disposed that most of the larger operating business, the majority of Citi Holdings assets are now U.S. mortgages and we continue to test the market for its appetite for those mortgage, and despite the recent improvements in housing prices, we still don’t believe that the scale of mortgages on a large scale is possible with prices that we or your investors would consider acceptable.

Potential investors are still facing relatively high funding costs, not to mention high-required equity return. Citi by contrast has accessed the low cost funding, and as we remain very comfortable with the reserves allocated to this portfolio, we have no desire to sell these assets at a sizable liquidity discount.

We’ll continue to sell smaller portfolios and in fact in this quarter we signed a deal so far to sell roughly $1.5 billion of mortgages, taking advantage of the recent improvements in market conditions. And of course, if the market environment changes, that’s if a larger sale is feasible, we’d absolutely take advantage of that opportunity.

Second, we have to reduce the drag on earnings coming from Citi Holding. There are three primary drivers to getting Citi Holdings close to the breakeven, from a roughly $7 billion pre tax loss in 2012, excluding the impact of loan loss reserve. The first two drivers, reps and warranty and legal costs, we characterize here as legacy issues and together they added over $2 billion to our pre tax loss last year. Legal costs in particular have been very difficult to predict, but we are working to try and put our legacy issues behind us.

Excluding these items, Citi Holdings lost slightly under $5 billion pre tax driven by credit loss. 70% of these credit losses were attributable to North America mortgages and assuming no deterioration in the U.S. economic environment, these losses should continue to decline as housing prices stabilize and the portfolio shrinks, and importantly, if conditions remain favorable, we can begin utilizing our $8.4 billion of reserves that we hold against this portfolio.

Our third execution priority is DTA utilization. As I’ve noted, the significant amount of our DTA is deducted in calculating regulatory capital and so we are required to hold a larger amount of tangible common equity than we will otherwise be needed to support our operating businesses. While we view the DTA as a source of significant excess capital, we understand that the market will discount or even exclude its value until we demonstrate our ability to utilize this asset.

The vast majority of our DTA relates to U.S. federal tax and so the driver will be increasing U.S. earnings, pull through greater efficiency and the avoidance of large episodic cost such as the loss on NSSB last year. Our total DTA increased by nearly $4 billion in 2012 and if you look at these drivers, you see that our core business consumed nearly $3 billion of DTA, but was more than offset by the drag from Citi Holdings and other items.

Now that I’ve covered our execution priorities, let me discuss the metrics by which you can measure our progress. Today we’re setting three 2015 financial targets. First, we believe Citicorp should operate with an efficiency ratio in the mid 50% range, with the upper end of the range reflecting a flat revenue environment.

I also want to provide Citigroup level targets today that include Citi Holding. For Citigroup, we are reiterating our target on ROTCE of 10% or higher and last, Citigroup should generate a return on asset of between 90 and 110 basis points. A significant improvement in operating conditions could provide upside to these targets. Of course, our ability to reach these targets will depend on the successful execution of the priorities that I just discussed.

Let me talk more about each of the targets and assumptions beginning with our efficiency ratio. Our Citicorp efficiency target assumes improvement across each of our core businesses. In global consumer we believe we can achieve an efficiency ratio of between 47% and 50%. Much of that improvement is expected to come from the rollout of our global technology platform and the standardization of products and processes or the drive to come in as we call it.

Today for example, we won different account opening procedures in almost every country. We have to ensure that this process is identical for both our customers and our employees, whether it’s happening in New York, Mexico City or Warsaw. In addition, we have to rationalize our product portfolio, while remaining flexible enough to meet specific market regulations. The implementation of this common global technology platform will help drive cost savings and improve our customer experience, as well as reduce the time to market for new products.

In securities and banking, we believe the ratio should improve to between 55% and 60%. The investments we made in 2010 and ’11 in S&B are now integrated into our business. As we showed in 2012, we have to continue to gain share across equity, fixed income and banking, while remaining vigilant on headcount and incentive compensation and we continue to expect benefits from the previously announced repositioning action. And to be clear, if we don’t execute on our plan, we’ll not be afraid to take further actions to restructure the business.

Moving onto transaction services, we expect the ratio should remain stable to improve at 48% to 52%. While we expect further efficiencies in CPS, in the absence of an improved great environment, it maybe difficult to materially improve the efficiency ratio, expenses, savings we achieved maybe offset by volume growth as we try to offset the impact of the low interest rate environment, and by contrast if rates do materially improve, we would expect to see upside from this target range.

On this slide we detail our ROTCE target of 10% or above. In 2012, on a reported basis we generated a 5% ROTCE and on adjusted basis, excluding CVA, DVA, the fourth quarter repositioning, the tax benefits and the impact of minority investments, we still earned less than an 8% return. This is partially the result of Citi Holdings and our DTA. Going forward, a significant driver will be getting Citi Holding closer to breakeven.

In 2012 holdings losses were a drag of nearly 2.5% on our ROTCE. Additionally our target assumes low single digit revenue growth and improvement in Citicorp’s efficiency ratio for the mid 50% range. And of course returns are also dependant on our level of TCE and our target clearly requires increasing our capital returns in the coming years, subject to regulatory approval.

For Citigroup, we believe we can achieve a return on assets of between 90 and 110 basis points, in a risk-balanced manner. This compares the 62 basis points ROA for Citigroup in 2012, adjusting to the items I described earlier. Our ROA target is driven by getting Citi Holdings closer to breakeven, generating low single digit revenue growth and improving our operating efficiency.

Citicorp generated an ROA of over 90 basis points last year, but this was offset by a drag from Citi Holding of nearly 30 basis points. We expect the returns, the consumer banking and transaction services to remain well above our target at 2% or greater, while securities and banking is expected to improve to 80 basis points or above.

We expect our assets to remain broadly stable at or below current level. However consumer banking and transaction services should grow as a proportion of the total, as we continue to re-deploy our assets from Citi Holding and our excess liquidity into higher returning business.

So in summary, I believe we have the right business model and the right execution priorities in place, to improve our return and demonstrate the value of our network to the market. Citi’s transformation has been a long process, but we’ve accomplished a lot along the way and I’m optimistic about the future and enthusiastic about the job ahead.

Our goal is to generate consistent and high quality earnings, by focusing our resources on the best opportunity and beginning to move past our legacy issue. We are a very strong believer in ‘you are what you measure’ and so we are driving measurement and accountability throughout the organization and likewise, it’s important to me that we give financial targets to the market, so that you, our investors can hold us accountable and measure us against our results.

I’m proud to lead the company where I’ve learnt so much and I’ve spend my career and I’m confident that we can deliver the results that you both expect and deserve.

And so with that, John and I will be happy to attempt to answer any of your questions. Thank you.

Question-and-Answer Session

Unidentified Participant

Okay, so try to keep it on the -- at your table you should have a remote control for the audio response system; Mike has his, John has his.

So the first question is, what do you believe is the most misunderstood part of the Citi story. Is it one, the long-term growth prospect and leverage for the global economy? Two, is there an ability to reduce cost and increase the long-term possibility of the franchise? Three, is there hidden value in the DCA? Four, is the unrecognized value and other Citi owned assets such as Bandamax. Five, is to see people are over estimating the thoughts of unwinding Citi Holding or six, nothing to stop if we exercise the current level.

So for those on the phone, the most frequent response is the second one, which is the ability to reduce cost and increase profitability, 28%. Typed in second will be the long-term growth prospects and also the hidden value in the DCA, that’s around 20%.

Mike, any thoughts on some of these responses?

Mike Corbat

What did you pick?

Unidentified Participant

Same as you.

Mike Corbat

So, I’m sure we are going to touch on many of these with Q&A, but we put a round two efficiency ratios and I think that what I’m mindful of is that we’ve had a discipline around expense reductions, but as we laid out the countries in the bucketing that we shouldn’t be, regards describe the peanut butter around simply reducing cost.

But we need to be targeted and we showed some areas where we think we’ve got clear places to be focused on and that we’ve got to go after those areas as opposed to lets do a 5% or 10% or whatever the reduction is, cost affirm and so I think our move towards efficiency ratio starts to put more transparency and all the metrics start to put more transparency around number two.

I think from number one perspective, I think it is under appreciated. I mentioned that today, I don’t think the market yet really realizes the uniqueness and again, we’ve got to prove the value of our model.

The things strategically we used to worry about, not that long ago, around people coming and having the ability to challenge us around the recreation of our foot print; I think today, I don’t think there is a lot of regulatory or political desire through M&A to see big banks get bigger and I think organically today, in particular in this rate environment, but also the regulatory environment, the time to invest and get to scale is a long protracted period and so again, I think the value of our footprint and the uniqueness of our footprint, we’ve got to prove it. But I think this is yet to be really strong.

And clearly we mentioned DTA. We are right there, but I think we need to show. We had DTA going in the wrong direction last year, with a net of what we were able to accomplish away from it. We’ve got to show it’s as changeable. We got to turn that and we’ve got to show the market our ability to start utilizing DTA.

Unidentified Participant

No, I’m just encouraged by the fact that three top answers are the three things that we addressed in the presentation.

Next question. So what do you as in an effective way for management to unlock long-term shareholder value? Is it to continue the strategy of focusing on the instructional clients and retail clients in the top cities globally? Is it number two, exiting on a new round of efficient initiatives?

Number three, is it just more aggressively pursue growth, where there is loan growth or just market share gains in our existing market. Four would be what I call transformational actions, seeing assets, pulling stuff out, breaking up the bank or five, is there significant increase in the pay-per-capital in terms of shareholders.

Mike Corbat

So you guys, you get to go first. Given the choices that you point out there, I’m actually surprised that number five didn’t get over 50% quite frankly. So I’m actually amazed that the three of the other four generated something around 20%. But obviously, increasing of the capital return to shareholder is something that we are very, very focused on in a rational manner. I think Mike and some of the comments that he’s made in the past has talked about our this year’s three-core process and I think that that reflects our thoughts there.

The other three are fairly well balance between one, two – the one continuing the strategy, two executing the new round of efficiency initiative and four, new transformational actions fairly balanced among those.

You talked a little bit about from a efficiency perspective how we are going to focus things and where we are going to be positive. I talked in my talk about the continued strategy and focusing on the institutional relationship.

From the new transformational action perspective, again I go back to a few things. Often when I travel, gee, can you sell a stake in this or can you sell a stake in that and you’d be selling other things, if you think about how your going to get certain activity grow.

Again, I think we’ve got to prove it, but I think the model has only become more valuable; again, we have to prove that. In terms of some of these actions, in terms of selling minority stakes and ways to monetize or to show value, but probably not many people in this room probably even recognize that we have it in our bank component. We have 25% minority stake that stokers have traded stock.

I can tell you not just in Poland, but having managed other ventures where we have monitory shareholders, life becomes very cumbersome, it becomes very difficult and when we talk about the actions of optimization, whether its investment or whether its re-channeling those resources, having to deal with minority investors changes the way that you think and come to work in most businesses.

And I think that our business model is quite cumbersome, and again I think we’ve got the ability to extract real value from these franchises and again, I’m not prepared to sell them cheaply and I think from an operational perspective, its not the right way to going in.

Unidentified Participant

So when you say prove it, how do you define that? Because if you are a big global bank, with the excess capital we have to hold, JP Morgan has to hold, you need to be the best-in-class individual business and you need the adjacencies that you talked about. So when you say prove it, is it proving it by just showing any other corporate goal or I thought maybe deliver a little bit more on (inaudible) or use to fund in a different way.

Michael Corbat

No, I think its delivering on the adjacencies and being able to do something that others maybe can’t or otherwise have a hard time doing. And I think that, again grew the way we’ve done this country bucketing, of making sure that we are getting the most out of those franchises.

But if you go back and you look at the underlined bucketing of where some of these things are, we are getting good things out of them and we in fact seem to focused on some areas away from these markets, to be able to make sure we are getting the efficiencies elsewhere in the system.

Unidentified Participant

Well, we got a question on this.

So this is dealing with risk management. So what do you perceive as Citi’s greatest risk management challenge?

So the first is with the geographic risk, operating in a 100 different countries, just the complexity involved in that. Two, is just market risk that we are talking here about one time trading losses or do you just have an exposure. Three is this overall credit risk that most banks have. Four is regulatory risk, the fact of an uneven playing field in terms of Dodd-Frank, in terms of S&P business, whether it’s a disadvantage. Five is litigation risk, and six is operational risk.

Okay, so the number one risk for Citi is actually regulatory risk at 31%, and then the second was geographic risk.

I guess my question for you is, when other people are concerned about global macro risk, Citi is always the one that kind of takes as the people having more risk in other firms. Can you just talk about your thoughts on why this might be a misperception and how you view the role of this?

Michael Corbat

We touched on a number of different risks that are here, which is the market; we got regulatory, we got credit, we got a whole series of risks. So the way we think of it, which was again those three lenses I mentioned earlier; combination of clients, combination of products and combination of geography. And in there you can look at concentration limits, you can look at exposure.

Again we know, as part of making sure around ROA targets, that we are mindful that not all assets are created equally and we got to have a risk adjustment to what those ROAs, there is a risk focus of what those will look like.

And so as an example, I’d give a good example of my time when I was running our European business, we radically changed the way that we come to work in Europe. We used to come to work from a central treasury; we used to think of the currency; the euro as being completely tangible and today we come to work much different; Spanish euros, German euros, Greek euros, French euros, all different and the balance sheet in those countries run in a different way rather than being run centrally.

A mix in country deposits, running a balanced asset liability mix and it think when you go into our disclosures and look at our gifts reporting as an example, you see a gift exposure, but in there what you actually don’t see is what’s underline does, its differentiated between the types of assets.

This is a long domicile under Spanish law. They are a Spanish company, given a loan to an international company. It is an international log loan and those things even they show up as Spanish exposure, they are very different. The way we fund and support those and so I think our real focus is on those kinds of things when we introduce them and obviously from a reputational perspective, what we’ve seen, if its not just the dollar fund that is cumulative, but around the franchise trying to stay out of the headline if it cuts directly.

Unidentified Participant

I know you have (inaudible) but you do deal with risks in your roll. I mean is this how you would kind of sort out the rest of the…

Michael Corbat

Actually the amazing thing I think is that if you take a look at the answers with number four being the most frequently there, I don’t think you’d get a different answer for any of your institutions. I think you’d end up with the same – you ask the same question, the same presentation at our peer institutions and I’ll do the same thing, as far as regulatory risk and an uneven global playing field. I think we are all facing that issue and we will continue to face this for several years, and so regulatory environment sort of sorts out.

Unidentified Participant

So if you strip that one out, then you look at your answers two through the next line with geographic risks, 25% and then it goes all the way down to 14% and 15% for operational risks and market risks. Any views on that?

John Gerspach

That’s the way people look at it. I think Mike gave the answer as far as the way we approach the risk. I think that the complexity of global businesses is somewhat – I won’t say that being global doesn’t add some degree or difficult for the way you operator, but I don’t necessarily think it makes you more complex.

I do believe that the way that we run our businesses right now, we’ve actually simplified most of our businesses greatly; simplified them in a couple of different manners. One is we’ve got as Mike laid out before, a very clear strategy for every business. We’ve identified for each person, whether they work on a product, or in a geography, the way we expect them to come to work everyday. So they know what they need to focus on, how they need to run their business, the customers that we want them to approach or the product.

And then by centralizing the way that we run everything from risks to finance to compliance, we standardized the systems, we standardize the support structures, the platforms for these business that they are operating in. So I think we’ve taken, we’ve eventually introduced a great deal of complexity into the world.

Unidentified Participant

Okay. Are there any questions in the audience?

Unidentified Participant

I’ll do the first one. Just to pick up on your point, you said that being global doesn’t mean you’re more complex. But do you think your regulator treats you as more complex or being global and how do you think you can educated them to change these views.

Michael Corbat

Well, I think that, I think you’ll get a back up on a couple of things. Traditionally there were probably a handful of regulators that were very actively involved in some of the regulation of the global bank. Today as I travel I see a level of interest from regulators around the world, regardless of dominance, at a heightened level from here it was and I think that’s a reality that as an industry we have to be awake.

That being said, a lot of the regulations that they are introducing are extremely well intentioned, but I think the challenge doesn’t necessary lie in the regulation itself. It lies in the harmonization of regulations and so we support things that make banks safer places, we don’t believe in taxpayer bailout and all those things going forward.

The challenge comes when you have multiple regulators trying to address those things from different areas and we’ve got a few of those and so I think its incumbent upon the regulators and us and us an industry working with them, educate them in terms of where some of these pensions, some of these frictions, some of these competitive objectives maybe, we as a company spend a lot of time on that, a lot of the industry association, trade associations and member associations are focused around those and I think we see an open ear.

Last summer I had the ability to present at what’s called the Collage of Supervisors, where a number of the largest regulators from around the world come together, and I think they themselves are very focused around their working relationships, understanding differences, the harmonization of regulation and really what’s best for the system. But right now the pace of regulation introduction is so brisk that right now probably the regulation is out there, a bit ahead of the harmonization and its ability to be implemented, I think in a way that works across the system. I think we are going to have to continue to work with those banks.

Unidentified Participant

The granted fees with the financial goals that you laid out Mike are for 2015, but just looking at the balance sheet as it stands today, the ROTCE goal would imply net income of $15.5 million whereas the ROA goal would imply net income of something higher than that $18.6 billion or so based on where the balance sheet was at year end.

How do you suggest we think about that discrepancy and come 2015, if there is a discrepancy between the ROTCE target and the ROA target. Would you encourage us to hope for the higher or the two?

John Gerspach

Larry, you should always aspire for higher, but I actually…

Unidentified Participant

Thank you John.

John Gerspach

I think if you actually had a couple of seconds to think about net income and its impact on capital; as we generate net income over the next two years, and to the extent that we will not pay a 100% of that capital out and I don’t think I’m telling any trade secrets, but the fact that we are likely not going to be paying a 100% of our earnings out in ’13, ’14 and ’15, the denominator for that ROTCE calculation will also grow. So I think you will see that your map actually works, that both kind of gets you to the same asset.

Unidentified Participant

In the vent that you generate taxable income in the Untied States, will you be able to use the DTA, therefore pay less in the way of tax, therefore and in the process capture, recapture some of the detail into the capital and will that combination of things conspire to make the TCE grow even faster.

John Gerspach

Well, the DCA is “already in the TCE”. The DTA is not a deduct in order to calculate your intangible comments. DTA is deducted to calculate regulatory capital. So in effect you have to think in terms of the DTA almost as being as chain reaction. We generate U.S. taxable income, and that causes us to utilize more of the DTA. By utilizing more of the DTA, we in effect generate higher amounts of regulatory capital, which hopefully then enable us to payout higher dividend, which therefore reduced TCE.

Unidentified Participant

I think that’s helpful.

Unidentified Participant

Can you just expand a bit on the use of the DTA. I’m not quite sure where the path is to usually have the DTA in America. And a lot of what you talked about seems to be renationalizing the overseas business and I consider reduction in Citi Holdings. Could you just talk about how you are going, the way that these profits are going to come from in the US to use up the GTA?

Michael Corbat

Our goal clearly is to drive efficiencies, drive revenues globally, that it’s part of the U.S. transaction services or market banking and our consumer businesses. Recently as an example, inorganically we saw us they agreed to bring on a best buy portfolio, roughly $7 billion of receivables, we’ll have it probably sometime in the third quarter.

That has the ability to drive incremental U.S. earnings, but obviously continued around those other businesses, continue to driving growth and that’s before any net impact of hopefully at some point in the future we start to get rates coming back up again, which has the ability to significantly enhance globally, but has the ability to enhance our European capabilities as well.

John Gerspach

And also as we continue to drive for greater efficiencies, in each of our businesses, that is not just efficiency target for businesses outside the U.S. We expect to generate additional efficiency in our US businesses as well. That will also then sever to driver higher amounts of U.S. earnings, which will enable us to utilize more of the DTA overtime.

Michael Corbat

A part of it very importantly as we talked about, I talked about before is that we’ve got to get some of this noise back and you got to get the judge from holding down. We got to stop some of these one offs that have caused us for right, for 2012 to be seen going in the wrong direction.

Unidentified Participant

Can I have a mic down here?

Michael Corbat

Right behind you.

Unidentified Participant

Thank you very much. How much do the efficiency ratio target, as well as the ROTCE target really require interest rate environment, sort of meaningfully different from the one that we are looking at today. Thank you.

Michael Corbat

So what we forecasted there is somewhere between flattish to marginally up revenues and I think if you look at it and kind of assume global growth rate and think of revenues in that range, we are not looking for a hockey stick style revenue growth rate to be able to drive businesses.

Unidentified Participant

I think the way you characterized it was low single digit growth rate, and so it’s not anticipating a drastic change in today’s interest rate environment.

Michael Corbat

And as I said, if you do see a pickup in rates, then we should expect to hopefully see it outperform as well.

Unidentified Participant

Great, thank you very much.

Michael Corbat

Is there a question in the back?

Unidentified Participant

So Mike, can you maybe just clarify on your 2015 10% ROTCE; what’s implied in terms of the size of Citi Holdings at that point and then also give us some color in terms of what you think the nature rate of attrition is in that portfolio. Because the 10% looks like a pretty conservative estimate if that business actually run a little faster. So just wondering what you guys have baked into your estimates.

Michael Corbat

So, in our plan is what’s been built into the Citi Holdings numbers is effectively a runoff. The challenge around Citi Holdings is – and we think we tried to give you enough information, so that you can get pretty darn close to where that portfolio is from an organic perspective. Its very difficult or impossible to budget and forecast what the environment is going to be around asset or business sales. But in this target we haven’t built in any sizable reduction through asset sales or business sales in Citi Holdings.

Unidentified Participant

Well, so again does that imply that Citi Holdings have in the next two years, some natural accretion to again arrive at that number you must have an estimate of what you think the size of that business is two or three years from now.

And I guess my follow up question would also be for you to maybe talk about just the loss rates within that business. Because the loss rates seemed to have peaked around 10% of asset decline on a quarter-over-quarter basis and that looks like the loss rates have actually slowed. So it looks like that is actually getting better and again I was just wondering, your view on that.

Michael Corbat

Well, I’ll talk the first part and you take the second. Again, we haven’t come out publicly and shown what the amortization rates for the portfolio and largely being mortgages. If it was just straight fully assets, it would be fairy easy to predict, but again based on prepayment rates, refinanced rates, we haven’t come public with that number. Again we try to provide enough insight in this and if you can run your own calculation around that, but again we haven’t put a public benchmark number out there.

John Gerspach

Then regarding as far as the second half of the question, as far as the loss rate in the portfolio, I’ll give you two answers on that. One is, we have continued to stay and will continue to say, that in the largest asset category that we have yet, into the holdings, the local consumer lending, we continue to believe that the combination of the pre-provision net revenues, plus the existing reserves that we have, are more than adequate to cover any losses that we have in that portfolio.

And when you think in terms of – I think we characterized it this way. As far as driving to that 10% ROTCE, the assumption there is that we drive holdings losses closer to breakeven by 2015, and that’s going to require basically addressing three things that we talked about in past.

Beyond going rep and warranty issue that we’ve got or some others as far as Fannie and Freddie; the litigation that continues to surround some of the items and holdings, participatory private label securitization; and then the credit losses, which continue to come down and at some point in time we should be able to begin to utilize those loan loss reserves that we have to offset those losses. And the combination of those three items should help us drive Citi Holdings closer to breakeven in that 2015 timeframe.

Unidentified Participant

Okay. We are out of time, so please join me in thanking Mike and John.

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