Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Citigroup Inc. (NYSE:C)

Q3 2006 Earnings Call

October 19, 2006 11:00 am ET

Executives

Chuck Prince - Chairman, CEO

Sallie Krawcheck - CFO

Art Tildesley - Director, IR

Analysts

Glenn Schorr - UBS

Andrew Collins - Piper Jaffray

Jason Goldberg - Lehman Brothers

Guy Moszkowski - Merrill Lynch

John McDonald - Banc of America Securities

Mike Mayo - Prudential Equity Group

Mike Holton - T. Rowe Price

Joseph Dickerson - Atlantic Equities

Meredith Whitney - CIBC

David Stumpf - A.G. Edwards

Jon Balkind - Fox-Pitt Kelton

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to Citigroup's third quarter 2006 earnings review featuring Citigroup Chairman and CEO, Chuck Prince and CFO Sallie Krawcheck. Today's call will be hosted by Art Tildesley, Director of Investor Relations. We ask that you hold all questions until the completion of the formal remarks, and at which time you will be given instructions for the question-and-answer session.

Also, as a reminder, this conference is being recorded today, October 19, 2006. If you have any objections, please disconnect at this time. Thank you.

Mr. Tildesley, you may begin.

Art Tildesley

Thank you very much, operator, and thank you all for joining us for our third quarter 2006 earnings presentation. The presentation we will go through today is available on our website. So, if you have not a chance to download that, please do so now. We will follow our usual format. Chuck will start with some opening comments, and then Sally will take you through the presentation. Then we will have some question and answers.

Before we get started, I'd like to remind you that today's presentation may contain forward-looking statements. Citigroup's financial results may differ materially from these statements, so please refer to our SEC filings for a description of the factors that could cause our actual results to differ from our expectations.

With that said, let me hand it over to Chuck.

Chuck Prince

Art, thank you, and good morning to everybody. Welcome to the call. Thanks for joining us. As usual, I am going to talk for a few minutes before I turn it over to Sally, and I would like to give you some candid thoughts on how I think we're doing. The bottom line, of course, is that we earned $5.5 billion or $1.10 a share, $5.3 billion from continuing ops, that's up 6%; and $1.06 EPS from continuing ops, up 9%, with ROE of 19% or just about 19%.

Now, I set out some very clear strategic direction for the Company, as all of you know who focused on Citigroup Day last December, and on some of those areas we executed very well this quarter. Now, I would like to describe those, and there are a couple of areas where we didn't execute as well, and I would like to describe those as well.

Where we executed well, I would like to start with US consumer. US consumer had record profits this quarter, but that is really not the issue I want to focus on. The issue I want to focus on is revenue growth in US consumer. As most of you know, I have been very pretty candid about this, in the sense that, with 40% of all of Citigroup in US consumer, and roughly one-quarter of the whole Company in US cards, we have to drive revenue growth in this business.

After a number of years of no real organic revenue growth in this business, driving organic revenue growth is absolutely key for Citigroup to be a growth company. In fact, at a macro level, we really have two goals, which is to drive revenue in US consumer and to diversify away from our weighting in the US consumer business that we have today.

Now, a year ago, I changed the organizational structure of the consumer business in the United States, and I also changed the leadership. This has been a big focus for us over the last year. I would say that, based on the third quarter, I am cautiously optimistic that the trend is a very positive one. We have got, on page 5 in the deck, some sequential revenue growth numbers. This is not credit, this is revenue growth, compared with flat expenses. This is a hard ship to turn, because it's so big, especially in a flat yield curve environment. By the way, I'm projecting personally that the flat yield curve is going to last for a while. So in our planning for this business, we're planning on the current conditions in terms of interest rates continuing.

If you look at that sequential revenue growth on page 5 and if you look at the dis-aggregation of net interest revenue ex-capital markets and banking on page 13, you can see that there are some trendlines over the last several quarters which we think are positive. Again, it's taking longer than I wanted, certainly longer than I expected. But the trendline is positive, and this is really the key for us, in terms of driving growth for the whole Company.

Other things that worked well this quarter that we executed well on: Smith Barney had a very good quarter revenue-wise. I want to say a special word of thanks to the financial advisors out there, who are on the front line with our clients day by day. GTS had a very good quarter, continuing to grow very nicely. Our strategic investments are doing quite well. We said we were going to do certain things this year. We are doing them.

I have talked a lot about consumer, so I'll just focus on that for a moment. In the third quarter, we opened 101 branches in the United States, 39 retail banks, 62 consumer finance. In the same third quarter, we opened 176 branches internationally, 66 and 110, for a total of 277 the third quarter. For comparison purposes, we opened about that same number in all of 2004. So we have really set out to accelerate the branch openings, the growth in distribution capability for the organization. I think we're doing a very, very good job in terms of pounding that out. We are on track for our 1,000 branches this year. I feel very comfortable we're going to make that.

In our direct bank, we just crossed $8 billion in deposits, up from zero, of course, when we started that early this year. There are a number of other areas detailed on page 15 of the deck which are areas where we are doing very well in terms of our investment spending. I feel very good about that, and it's important that we continue this. I can't overemphasize the need to invest to drive revenue growth. The issue for our company, given our size, is driving revenue growth. We can't do that if we are not investing to do that.

We're going to have a call coming up, a week from Friday, to review with you in more detail our investments, because they are so important to the future of the Company. We will do that periodically. We did about six months ago, I believe, in one of the conferences, and we will continue to do that on a periodic basis.

Another area where we executed well this quarter was in our tight control of business as usual expenses; that is, not the strategic investing, which I just described, but in our regular business as usual expenses. As you can see, those were up 5%. 3% were investments, and 2% is the 123 R charge. So on our business as usual, it's actually flat. In reality, it's actually down year over year, because of the special items we had in the third quarter of last year. It's down sequentially $800 million from the second quarter. Again, this is very important, because we need to maintain our tight control on BAU expenses in order to have the ability to continue the strategic investments. They are really tied together very closely in that sense.

The last thing I would like to highlight, in terms of executing well, is our recent transaction in Turkey. Akbank is by far the best private bank in Turkey, and Erol Sabanci and the Sabanci family are people who I respect very much. I believe this transaction is an excellent one for us. Not only did we get our 20% equity stake, but we have a right of first refusal in terms of future transactions, and we're in the middle of working out very detailed and, I think, going to be very impressive cooperation and joint business activity agreements. This will be accretive in year one, and I think this is really the model for our diversification further and further into the international markets.

You saw what we did in Korea before the Fed ban, and you see what we've done since the Fed ban was listed in India and Turkey. We have more that we're working on and the same kind of example. Turkey is a perfect example of what we want to do to grow our international franchise.

I would like to say, while I am talking about deals, every time I see in the paper or a wire story that we're about to buy Barclays or SocGen, I just grit my teeth. We can't comment when these rumors come up, because you can't comment on rumors as they come up. But I'm giving this not in the context of a rumor but just in terms of my general view. I think I have been crystal clear on the kinds of transactions we want to do and where we want to go, and when I see something that says we're about to buy SocGen, as fine an institution as that is, I don't know whether people are trying to intentionally manipulate markets or what. But I have been crystal clear that buying a big bank in Western Europe is not on my agenda. So hopefully, that won't come up too often in the future.

Now, areas we didn't execute on well in the third quarter. The main area, of course, is revenue. Our revenue growth for the whole Company was short of our target of mid to high single-digit revenue growth. There are three basic reasons for that. The first is that our capital markets and banking business had a poor competitive performance. Sure, it was a difficult environment. Sure, it was a choppy environment, all of which is true, but the bottom line is we didn't perform as well as our competitors.

Now, that is not something that I expect from our business. We have great people, we have a great team, and we have great leadership. We had a spectacular first half. We are ranked number one in 14 out of 25 Thomson Financials in the third quarter, 13 out of 25 year to date. We have a great business. We didn't have a good quarter, but I expect better. We have a record pipeline, but this is one of the reasons we did not hit our target of mid to high single revenue growth this quarter.

The second was in our alternative investment business. If the trading business is lumpy, this business is really lumpy. In this quarter, we had a lack of private equity gains and we also had, frankly, some poor performance in our liquid investments business. We changed the management there. The alternative investment business is a very important business, not only in terms of making money for the stockholders directly, but in terms of connecting with our high net worth businesses, with Smith Barney and the private bank and other high net worth businesses. This is an important business for us to get right. Again, we didn't have the same kind of quarter we wanted. Sallie will talk a little bit more about this in a moment. But this is a business where we're going to continue to act to strengthen the franchise.

The third of the three areas where we didn't do as well as we wanted to in revenue this quarter is in our international consumer business. Now, we had 9% revenue growth, but for me that's just okay. We have done better than that. We can do better than that. The grey zone issue in Japan took a little bit off that. But as I say, we have done better and I expect better performance revenue growth-wise in that business going forward. I will say, just to make sure it's clear, our target for revenue growth is unchanged. That is, we are still targeting mid to high single-digit revenue growth.

Now, a couple of other things. We had three government-inspired actions this quarter, two against us, one for us. As I said, the legislative action in Japan in the grey zone area cost us $160 million in terms of credits. The SEC accounting change in January of this year, which will flow through on a year-over-year basis the whole year, cost us $195 million this year. Those two were partially offset but not completely offset by a tax benefit of $237 million. So, overall, 9% continuing EPS in the face of a sharp quarterly decline at capital markets and banking and alternative investments.

The buildout is on track and will drive revenue growth going forward. We continue to have a tight focus on our BAU expenses, and our investment in Turkey is a great deal, and a perfect example of what we want to do more of going forward.

One last thing before I turn it over to Sallie. I want to say a special word of thanks to our colleagues in terms of our recent Moody's upgrade. Moody's upgraded Citibank to AAA status. I think that's a real badge of honor. It's a reflection on our business model. It's a reflection on how we run our business. No other financial institution in the world that has a business model even remotely like ours has a AAA rating. I think this is a significant accomplishment, and I do want to say a special word of thanks and congratulations to our team around the world who have worked on this so long.

So with that, Sallie, let me turn it over to you and ask you to go through the detailed deck.

Sallie Krawcheck

Thank you, Chuck, and good morning, everyone. Thank you all for joining us. Let me turn you first to the deck on page 1. Chuck has gone through a lot of the bullets on this page, so I will just start very briefly by reiterating that we earned $5.5 billion, bottom line, net earnings per share of $1.10. Continuing ops were $1.06, which is up 9% from last year. Our return on common equity was 18.9%.

He's mentioned the businesses, and I will get into more detail on some of them in a bit. So I'll pick up about halfway down the page, where we mention net interest margin. That declined for us 11 basis points quarter over quarter. Like last quarter, the biggest driver of that is the trading business. I will show you a little bit of detail on that in a bit.

We view the credit environment, which is the next bullet down, as being generally stable. You will see there are some ins and some outs and some pluses and some minuses through the business. But essentially, it is a stable environment. But I will tell you what we have been telling you for the past three years which is we certainly don't expect credit to be better from here. We plan for it to be worse from here, and we watch it just as closely at Citigroup as you would hope, as the owners of the company, that we do.

Chuck mentioned the three one-time in nature financial types of items that we saw: the Japan consumer finance credit cost for us in the quarter, the 123 R cost, that's a pretax number; and the tax benefit that we got during the quarter. That's a $254 million here on the page. So, on a continuing operations basis, that was $237 million. Capital management, as Chuck mentioned, we spent a record amount on investments this quarter, at $320 million -- I'm going to give you some more detail on that in a bit -- opening a record number of branches. Also, we purchased $2 billion worth of our common stock, continuing that from the past few quarters.

If I go to the next page, page 2, the income statement, you can see here net interest revenue up 1% after several quarters of decline in that number. Other revenue, with the weakness in the trading businesses, down 2% which takes us to the zero revenue growth. Operating expense is up 5%, and I'm going to give you some details on the operating leverage and the drivers of both the revenue growth and the expense growth in a while.

Credit was a good guy for us in the quarter. You can see declines in credit, but I'm going to remind you that we had about $800 million in credit items in 2005. I know the back of the press release has got a list of those items from last year, but we had $490 million, for example, in our EMEA business, as we conform the credit policies in EMEA to those of the Company. We had Katrina, and we have bankruptcies, somewhat offset here this year by what is going on with Japan in the grey zone.

Income taxes, we had a tax benefit of $237 million on continuing ops. I'm also going to remind you, however, that we had a $185 million benefit from the homeland Investment Act last year. This gets us to 6% growth from continuing operations, diluted EPS, 9% as I mentioned. In the net income, the $7.1 billion last year, you will remember we had the $2.12 billion gain from the sale of the life insurance business. So on a diluted EPS basis, while the number is down 20%, ex- that gain, it is up 13% over last year.

I will also touch on international revenue, up 11%. We put the year-to-date numbers for you over on the right-hand side of the page.

Revenue growth, I won't torture you through this page, but you can see global wealth management GWM, as we call it, very good revenue growth over last year. But what really sticks out on the left-hand side of the page is the corporate and investment bank, with revenues in the US down 29% over last year. In the capital markets and banking portion of that, because we have global transaction services as part of the corporate and investment bank, as well in capital markets and banking, the US revenue was down 34%. Citigroup alternative investments, down 54%. The combination of those two declines cost the Company 5 points in revenue growth.

On the right-hand side of the page, we break out the revenue growth in the regions for you. I think you will see what you have seen for a while, which is the overseas markets continue to be very good growth engines for us, while the US is lagging, again, this time because of capital markets and banking; and in Japan as well.

Turning to page 4 of the deck, we have some details here on US consumer. You can see here that revenue up 1%, although I would note that if you look down the page a bit, commercial business is down 25% over last year. We had a large gain, which we outlined, $162 million in revenues last year, which has pressured that. The cards business, growing 2%. The primary driver of that are higher revenues from excess servicing, not incremental securitizations, and not an IO write-up, but excess servicing revenues for us.

Expenses in comparison to the revenue, is up 4%. The team has really been working on tight expense control in the business, with just under half of the expense growth here being from investments, branch openings, in particular in the United States. Credit is very good for us in this business. Even adjusting for the bankruptcies last year, we continue to have favorable credit in our US consumer business. Net income there, you can see, up 23%.

Pleased very much by the volume growth on the page. As you go to the next page, page 5, you can see that even better. We think this demonstrates a bit of the reasons why you heard the optimism in Chuck's voice as he's talking about the US consumer business, and why I think the management of that business would describe themselves as cautiously optimistic on the emerging trends.

You can see here good focus on growing deposits. Deposits have been up over the past four quarters, average loans increasing as well. We're just beginning to see that move into revenues, as revenues on a sequential quarter basis increasing, you can see, $200 million over last quarter, while expenses are well-maintained and going down just a bit. So, there's still plenty of work to do on the US consumer business, but it's really no longer moving in the wrong direction.

Page 6, on international consumer: again, two-thirds down the page, you can see nice growth in the average loans and average deposits, which is translating into revenue growth of 9%. As Chuck mentioned, not what we like or what we look for in this business. We had some one-timers last year outlined in the press release which cost us a point of growth, and the pressure from the grey zone and from Taiwan also cost us a point or two. I will talk about those in a second on the next page.

The expense growth in this business is probably initially going to take you back a little bit, up 21%. But I will remind you that 6 points of that growth is from the VAT credit, tax credit that we had last year, which shows up in good part in expenses. 6 points of that growth is from the investment spending that we're doing. So, net income up 8% in the business despite, again, cards and consumer finance being affected by the credit issues.

Now, what I want to do on the next page, page 7, is to talk a little bit about what has been going on in our cards business in Taiwan first, and then what is going on in our consumer finance business in Japan. I know we have talked before about Taiwan. As many of you are aware, a couple of years ago, industry players started moving from credit card solely to a new product they have brought out, which is a cash card whereby people can really use the card like an ATM card. We, having seen the customer behavior that occurs when folks have cash as opposed to the credit card, declined to participate in the market. So we did not issue any cash cards.

Now, what happened as a result of that, you are probably all aware of, which is the credit in the business over the past year has really started to move up. The credit in the business is up to about, for the industry overall, 32% types of credit loss and then, for some players, in excess of 50%. Now, while we did not participate in that market, as I mentioned, it still affected us, as some of our cardholders, of course, would have multiple cards. So, they would go delinquent with us as well. So, this cost us.

What I wanted you to see in this exhibit here is we mentioned, I think, to you last quarter that we thought this was in the process of peaking. If you look at the 30 days past due, you can see here that it was going up quite a bit, at quite a clip, through the first part of the year and then has begun to decline. The net credit losses continue to increase, but those should, of course, decline as the delinquencies work their way through.

So, this is a business where we did take a hit in credit this quarter of $25 million, but down from last quarter, although it does as a business remain at a slight loss for us. But it is one where we really feel like the expertise of the folks on the ground and our independent risk function really helped us see what was going on and work our through it.

Now, let me turn to the consumer finance business in Japan, which is affecting us, as mentioned, this quarter. It cost us about $160 million more in credit than last year. I know many of you are aware of the grey zone business in Japan, but for those of you who are not, I think I will just take a second, if I could. What is grey zone? There's a range of interest rates that are charged on loans, on consumer loans in Japan. For most loans, the maximum rate is 29.2%. In contrast, bank rates range from 15% to 20%, depending on the loan size. In between the 20% bank rate and the 29.2% top rate is an area in which rates may not always be enforceable, and it's therefore called the grey zone.

There are current proposals in the country for a change in legislation to address various aspects of lending in the industry. At this point, there's a great deal of uncertainty around the outcome of the proposals, including not just the interest rates to be charged but things like the transition period, rates during the transition period and possible exceptions to rules. So, in the interim, there have been several implications for the industry as well as for our business. For us this quarter, as you can see in the results, we saw lower yields on our loans, as the team over there actively repriced some of the portfolio. We saw an increase in losses from claims and refunds, and we saw an increase in loan loss reserve for expected losses that are inherent in the portfolio, reflecting the loss experience we've had.

Now, going forward, because of the uncertainties in the outcome and the timing of legislation, it's very difficult for us to estimate the impact that any of the legislative changes may have on the business. However, rest assured the team is not waiting idle for possible changes. As I mentioned, they repriced a portion of the portfolio as a retention mechanism scheme, and they have been actively restructuring the business for a while. For example, for those of you who are familiar with the business, a few years ago it had more than 900 branches, and the number of branches now down more than 60% from its peak, moving toward a distribution mechanism called the automated loan machine or ALM, which is significantly lower in cost.

So here we have lowered the cost basis of the business over the past several years. Year-to-date revenues, for example, are down 4%. The team took expenses down 11%. In 2005, revenues were down 2% but expenses were down 9%. In 2004, revenues were down 5% but expenses were down 12%, and the team, which is really an excellent team over there, continues to work on the issue.

Moving forward over to the corporate and investment bank, on page 8, Chuck had really mentioned this before. You see revenues down 6%, and capital markets and banking down 12% on fixed income revenues down 16%. Of course, a very big business for us, on weakness in commodities, interest rate products and foreign exchange. Global transaction services up 20%, another record for us. The good news, I guess, if there is any in the quarter for the corporate and investment bank on a financial basis, is very much the very good expense control within the business, operating within the down revenue environment.

Page 9, global wealth management: revenues up 14%, net income up 30%, as we see the benefits of a transitioning to a more fee-based approach to the wealth management business really bearing fruit.

Page 10, alternative investments: revenues down 54%, net income down 65%, as Chuck mentioned. Lower results in private equity and liquid investments. The main driver here is essentially we had fewer portfolio sales this quarter on mark to market.

On the next page, page 11, I wanted to give you a feel for this business and how it's performed over some longer period of time, the past ten quarters. I know many of you are familiar with the business, but for those of you who are not, by its nature it's an inherently very volatile business. So, what you can see here from this exhibit on the bottom is we have been growing our assets in the business over time, both client assets and proprietary assets, those where we invest our own money. You can also see on the exhibit the volatility of the returns over time, defined here as 31% revenues as a percent of those assets at the high end and single digits at the low end.

Now, given the third quarter drop off, it naturally will raise the question for you of what our expectations are for the business going forward. I would say that in the fourth quarter, we have a couple of sales on deck that, if executed, with lead to net income that will have a “3” in front of it, and if not, that our best estimate is it will have a “1” in front of it, all other things being equal in this business. That, of course, compares to this quarter's $117 million in earnings.

On page 12, let me start just with a couple of topics that we're going to dig into a little bit for you. The first topic of interest is the growth in customer activity, and we remain very pleased with it across the Company this quarter. Page 13, the second topic is net interest margin and net interest revenues. As mentioned earlier, we continue to experience net interest margin pressure on a GAAP basis. But very importantly, the single largest driver of that pressure in this quarter was, again, the trading business. That's shown here through the sizable decline in the quarter in net interest revenue in the green bars, while net interest revenue on the non-trading businesses has been increasing.

Page 14, the third topic is the drivers of revenue and expense growth for the Company. In the past, every quarter, we have broken down for you the levers of expense growth by type of driver. We thought you might find it helpful to have revenues as well, and for us to show it to you also by business line. So, on revenues on the top, the investments are beginning to contribute, the ones that we started making really a year and a half and a bit ago. Those are responsible in this quarter for 2 points of investment growth. Over on the business side, again, you can see the capital markets and banking and the alternative investments business cost us 5 points of revenue growth in the quarter.

On expenses, you see there are 3 points of expense growth from investments, the 123 R impact as well. On the business decomposition slide on the right, you can see the biggest driver of the growth in our expenses is international consumer, and the biggest driver of that are the investments that we're making into that business.

On page 15, we've got a little bit more for investment spending for you. This really is just a small preview of the investments call that we're going to have next Friday afternoon at 2:00. We hope that you will join us for more on that, but you can see here that the biggest chunk of the investment spending we're doing this year has been on the international consumer side, again opening up 176 branches, and a lot of investors outside the branches as well, in terms of sales force, the cards business and so on.

Page 16, credit quality. As mentioned, there's some ins and outs on credit. But if you look, international consumer on a sequential basis, net credit losses pretty stable in the United States. Credit losses very stable, and on the corporate side as well, we actually remain in a net credit recovery position.

Page 17, we break out for you a little bit of a closer look at credit, because it is a topic that is on everyone's minds right now. You can see here again, the US looking pretty stable, and even getting a little bit better on a quarter-over-quarter basis.

Mexico, some increase in net credit losses as we have undergone pretty good growth in that business, and this is a natural aging of the portfolio. EMEA -- which is Europe, Middle East and Africa -- credit looking very good for us. Japan , we talked about issues with the grey zone. Asia, Taiwan, recall that is still going through the net credit losses, but the delinquencies are getting better. Latin America, a volatile and small portfolio for us.

On the corporate side, corporate credit also remains very good, while we added to loan loss reserves for the quarter. The biggest driver of that was growth in the portfolio.

Finally, last page is our capital page. We believe that we continue to exhibit good capital discipline. Share repurchases of $2 billion this quarter. Over the last 12 months, $10.4 billion of capital returned to the shareholders, as well as $9.7 billion in dividends returned to the shareholders. Our capital ratios remain very strong -- 8.6% on Tier 1; TCE to risk-weighted managed assets, 6.9%; and the ROE for the quarter is within our goal of 18% to 20%.

So, with that, let me open it up, if I could, to all of you for your questions.

Art Tildesley

Operator, we are ready to begin the question and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Glenn Schorr. Please state your affiliation before asking your question.

Glenn Schorr - UBS

Just on the excess spread in the non-interest revenue line in US cards, my gut is that's the just lower loss environment that we're in. But is that a lump sum, true it up and we move forward from here? In other words, I am just trying to figure it out on a go-forward basis.

Sallie Krawcheck

No. I would not say that's all of it, Glenn. Certainly, credit on excess spread is helpful, and was helpful for us in the quarter. But we also had good improvement in the revenues on the portfolio as well. We have worked with pricing a bit, jiggering pricing through the cards portfolio, as well as for the securitized receivables. So on this basis, I wouldn't necessarily define, and clearly these things are very volatile. So there's nothing in there where I look in and say this is a one-time lump of any type.

Glenn Schorr - UBS

Then, in the loan loss reserve increase in the investment bank, part of it was portfolio growth, as you mentioned, and part was changing credit rating of certain counterparties. Could you expand on that?

Chuck Prince

Autos.

Glenn Schorr - UBS

Then, I just noticed on the balance sheet there was a monster $57 billion increase in the quarter in investments.

Sallie Krawcheck

Yes, in terms of investments, I think part of that has been that we have been moving some of the loans in our consumer lending portfolio into mortgage-backed securities. What the team has been doing, and we have found it to be very helpful, rather than necessarily sell to whole loan, to turn some of them into mortgage-backed securities, which we then sell a good portion of, but we can hold on the balance sheet. So, movement in that has been causing some of that, as well as an increase in mortgage-backed securities overall.

Glenn Schorr - UBS

Also, on balance sheet, you saw $10 billion or a 7% sequential increase, and then approximately 30% year-over-year increase on the corporate loan side. Is a lot of that leverage finance side, or is that actual loan growth?

Sallie Krawcheck

My feeling on this is it is actual loan growth. A couple of years ago, they slowed down the growth in that portfolio. They really went through it and made sure that the loans made a lot of sense, the clients made a lot of sense, that these were very good return loans for us. They have returned to growth over the past couple of years, and I think in good part, that has driven the growth there. So we feel like it's very good growth in the portfolio, and I think they are very proud of what they and we are accomplishing with clients.

Operator

Your next question comes from Andrew Collins.

Andrew Collins - Piper Jaffray

Another question on the US cards. Margins were up to 10.3% from 9.9% last quarter. I guess some of that was Federated-related, but I was wondering kind of what the AAA rating might do for your funding costs going forward, and if you could elaborate any more on the increase in the NIM this quarter on that line of business?

Sallie Krawcheck

If I were characterizing the increase this quarter, I wouldn't characterize it really as being Federated. While we did have an additional closure of some additional Federated receivables, they were not big enough to swing that to that degree. But as I mentioned, the team has really gone through the portfolio and taken some very targeted pricing actions that have had some benefit for us in the quarter as well as, of course, working very hard on the cost of funds and managing through that.

In terms of the upgrade, we were thrilled with it, and we are very pleased with the hard work people have been doing. In terms of the cost of funds, we really already have been able to borrow very well, so we are pleased with that. Of course, we'll talk to our treasury folks about wanting to borrow at better and better rates. But you did not see in our credit spreads, for example, an enormous change on the upgrade. So we felt very good about that before.

In terms of looking at this going forward, I will warn you that in the fourth quarter, we do tend to see a seasonal downtick in the cards portfolio, as we bring and a lot of receivables as people are buying their Christmas and Hanukkah gifts and so on. So I wouldn't look for that to continue into the fourth quarter on a seasonal basis.

Andrew Collins - Piper Jaffray

What about in the investment banking area? You mentioned record pipelines. I was wondering if you could give us some color on that as well as, at the same time, the comp ratio went down linked quarter, and if you could kind of discuss that?

Sallie Krawcheck

Two comments: before I got on the call, the guys and gals downtown warned us; they called and said, you know, this is great and we feel terrific about it, but this can be volatile. But it is a terrific increase in the pipeline for us. From June, for example, our M&A pipeline is up nearly 20%, our equities pipeline is up, our high-yield pipeline is up many double-digit percent, and all of it is up even more over last year. So, there's very good pipeline and business for the investment bank. But, as they warn me, if the markets are ever unfriendly, of course, they worry about that. But it is terrific performance for them.

In terms of the change on the comp ratio for the quarter, when you have time, go to page 24 of the supplement that we've put out that has the revenue details. What you're going to see there is that global transactions. There's a mix change, and there are always mix changes in this business from one quarter to the next. Sometimes, that flows through and makes the comp ratio go up, sometimes it pressures it. In this quarter, global transactions services was 25% of the total for revenues, and that is up from 19% last year, because of good growth in that as well as some revenue pressure in our capital markets and banking business.

Now, I go through this with you in longhand to tell you in shorthand that part of the decline in the comp ratio is because of mix. Part of it, too, is as we get to this time of the year, we evaluate and re-evaluate every quarter, but we certainly sharpen our pencils as we get to the third and fourth quarter, and we have a clearer view to the year end.

Andrew Collins - Piper Jaffray

Real estate lending in the US consumer, there's about $1 billion in revenue there. It was up 20% year over year, 26% linked quarter. I don't know what's going on there, but I'd love any clarity.

Sallie Krawcheck

We had, I think, better hedge performance in the business, as well as we did have some sales of some securities, in the quarter as well.

Andrew Collins - Piper Jaffray

So, it's no change in your appetite for real estate lending?

Sallie Krawcheck

Our guys in real estate lending love the business, and they do a very good job in the business. It is a business that has been growing versus the industry for us. But in terms of have we had a significant change, no, we like the business. We, like everyone, are watching credit, of course, here very carefully, and are very conservative in the credit in the business.

Operator

Your next question comes from Jason Goldberg.

Jason Goldberg - Lehman Brothers

With respect to fixed-income markets, Sallie, I think you talked about commodities rates and FX driving the year-over-year decline. I was wondering if the same drivers kind of forced a linked-quarter decline. If you could maybe just talk to maybe how that performed during the quarter on an absolute or from a VAR standpoint? I guess, any initial thoughts on how this quarter is progressing?

Sallie Krawcheck

Sure. So, a couple of things, I think, in answer to the first part of the question -- were the components in the sequential growth rate and the sequential revenues the same as the annual revenues? I think the answer is pretty broadly yes. If you were to ask me, I'd say definitely the same.

In terms of the progression through the course of the quarter, July was the weakest of the months for us. In fact, July was down about 36% over June. August actually rebounded a bit, and of course, August is usually the weakest. September rebounded again for us, so there was an improving momentum that we saw during the course of the quarter. It started off badly, and it ended up better.

In terms of where we are this far in the quarter, I think it's awfully early to say. There's nothing we see in the quarter in the trading business to date that makes us do back flips one way or another. Now, this can change in a minute, of course, given the volatility of the business.

The VAR for the quarter for us versus the second quarter was as you would expect, and I think it was down in the course of the quarter. So for the corporate investment bankers, about let's call it $85 million-ish, which is down about 25% over the second quarter, as the business pulled in the risk.

Jason Goldberg - Lehman Brothers

That's helpful. Secondly, with respect to alternative investments, I think you said if we have a couple things hit, it will be more like a $300 million number, and if we don't, it will be more like a $100 million number. But I guess that line is consistently running in the $300 million area previously. Is $100 million kind of a new base? I know it's lumpy but how should we think about that?

Sallie Krawcheck

Yes, it is very lumpy. While it looked so stable there for a period of time, there were an enormous number of lumps underneath, as the sales or the mark-to-markets occurred. So, as we look at it, I don't know that we at the point of wanting to define sort of a new high or a new low for it. But instead, if I were you and I were modeling it, I would look over a period of time as you think about modeling it forward, rather than any one quarter.

Operator

Your next question comes from Guy Moszkowski.

Guy Moszkowski - Merrill Lynch

I wanted to ask a couple of questions about some of the international initiatives that you talked about. First of all, just with respect to the acquisition in Turkey, how do you reconcile yourselves to the issues of not having operating control, or the ability, at least for the time being, to fully deploy the brand? Is this just sort of the way it is now, with trying to get involved in some of these attractive acquisition opportunities, that you're going to just have to be very patient? Or do you think it's a special situation with respect to this particular acquisition?

Chuck Prince

I think the real answer is the former. In other words, this is a very attractive bank. It wasn't available for sale at 100% or 51%. In some of these markets, they are attractive enough that we have to be patient, and we have to see a very long-term scenario here. I think that's much better than buying a tiny little bank and then trying to compete against the larger, more established institutions.

So, in some markets like Korea, we will have the opportunity to do something on a 100% basis, and in some markets a majority basis. In some markets, it will be an interest like this, which ends up being a kind of a partnership for a period of time.

Guy Moszkowski - Merrill Lynch

Do you have any sense for what kind of timeframe the family may be thinking about?

Chuck Prince

I don't. It's a great family. I'm very impressed with them. This is not going to be six months or a year. It may be that our partnership, our relationship, goes on a good, long while. Again, it's a great market. It's the right way for us to get into Turkey, instead of having a tiny little franchise or buying some little broken-down thing. But again, we're not looking at this with the fixed timeframe, and I don't think the family is, either.

Guy Moszkowski - Merrill Lynch

With respect to the credit card acquisition in Brazil, Credicard, it seems from looking at the way you phrased what was going on with the revenue versus expense progression, that integrating the unit looks like it's a drag on the margin. Is that something that's temporary, or is some margin reduction in the international cards business the cost of growth here?

Sallie Krawcheck

I pause as I start to answer that, because I tell you, there's not a business that we are in and not a businessperson who is here who doesn't always tell us business is tougher today than it was yesterday, and it will be tougher tomorrow than it was today. Of course, the margins in all of our businesses are really very good, and we are very proud of them, and particularly some of these overseas businesses.

In terms of the integration of Credicard, though, however, you are correct, which is that we did take some credit for Credicard this quarter as we're bringing it into the business. So we have seen some weakness in credit there. So that's part and parcel of doing the business in the business we do overseas, where it will be good in one place, it will be a little bit tougher in another. We work to sort of manage through and bring the return to the bottom line.

Guy Moszkowski - Merrill Lynch

But then, it does sound as if that's somewhat temporary, and that over time you would expect the margins there to normalize to something closer to the rest of your card business? Or am I misinterpreting what you said?

Sallie Krawcheck

I don't see any reason why our Latin American cards business should have any different type of margin than the international cards business overall, no.

Guy Moszkowski - Merrill Lynch

With respect to the Japanese consumer, the finance business that you were talking about, as you reprice, do you see the opportunity to gain share by being proactive on repricing, especially given that you have lowered your cost base? Or are there reasons to be cautious in that regard?

Chuck Prince

I think there are reasons to be cautious in at least the short and medium term. We all should remember that the legislation here is not yet fully effective. That is, there is a proposal for legislation, but the Diet has not passed anything formally. That probably will happen in the fourth quarter.

So until that is fully resolved, the notion of expanding market share, I think, has to be put aside for at least the moment. Once it's resolved and we know exactly what the playing field looks like, then we can re-examine whether or not it's important to grow market share in that business or in a different line of business in Japan or in a different country. We have a pretty broad palette to play on.

Guy Moszkowski - Merrill Lynch

Just on the US retail side, you gave us pretty good color on where the office build outs were during the quarter outside the United States. But maybe you can give us some geographical flavor for where you're opening the new branches in the US. Is it more build outs in existing markets?

Chuck Prince

Right now, it's mostly a fill-out of the existing footprint. So we maximize the benefits upfront of the synergies that come from advertising and that sort of thing. As we roll through the balance of this year and into next year, we will begin to expand into newer markets.

The one area where we are expanding into new markets this year, right now this year, is in Boston and Philadelphia. You've heard me talk about those as test markets for different ways of integrating our various businesses. But except for Boston and Philadelphia, it's mostly in the existing footprint.

Sallie Krawcheck

I would say, as we look at that, as I am looking, scanning down some of the third quarter branch openings, with the consumer finance branches, they really are all over the United States.

Chuck Prince

I was talking about retail.

Sallie Krawcheck

Yes, for retail bank. With the retail bank, a handful in Connecticut, a handful in Illinois, Texas, New Jersey, some markets we are in or right next to them.

Chuck Prince

Florida, Texas --

Sallie Krawcheck

Where we can take advantage of the advertising and marketing and the infrastructure that we have in those markets.

Operator

Your next question comes from John McDonald.

John McDonald - Banc of America Securities

In the US consumer lending segment, you mentioned security gain helping on the sequential revenue growth in non-interest income. Could you tell us how much of the security gains were in there, and what drove that realization of those this quarter?

Sallie Krawcheck

Yes. I think, if you look at it on a sequential basis, I'm just turning to the page. I know we have also got some good head hedge performance, as well. Last quarter on page 14 of the supplement, we had a negative $11.7 million in the net servicing and gain/loss. So we had some hedging effectiveness in that quarter, and then we had a combination of that being more effective, as well as the sale of some securities, as well as better gains on sales of some of the home mortgages that we hold, which really drove that turnaround.

But I wouldn't say, if you eyeball it, the net servicing and gain/loss on sale is a better number this quarter versus the past couple of years. It's not a number that's extraordinarily out of the ordinary.

John McDonald - Banc of America Securities

So the $296 million?

Sallie Krawcheck

I was referring to the net servicing gains and losses that we have, which are on the second page, which is a good chunk of that, again.

John McDonald - Banc of America Securities

The $296 million seems outsized relative to the last couple of quarters, $93 million last quarter and $50 million. I was just wondering if there was some way to quantify how much gains contributed to that, so we can have a sense of the go-forward?

Sallie Krawcheck

The biggest single part of it is going to be the sales of the securities.

John McDonald - Banc of America Securities

Is that on one of the pages?

Sallie Krawcheck

No, it's not.

John McDonald - Banc of America Securities

We can follow up, maybe, and get that?

Sallie Krawcheck

Art stands ready to speak.

John McDonald - Banc of America Securities

The other thing was you had good improvement in the corporate/other segment. Could you explain some of the dynamics there, in terms of expense improvement in treasury and what the results were?

Sallie Krawcheck

Sure. Now, remember for our corporate/other segment, typically if I look over the past two years, just more than half of it has really been treasury that's been in there, although there is volatility in this line, both in treasury and in corporate treasury, where we have about a $300 billion balance sheet and fund some parts of the Company, as well as the other parts of the business.

So I would say treasury was okay this quarter for us, not a lot of difference in that, certainly, sequentially. As you may be aware, we had a lot of attention to expenses during the course of the quarter. So a tight look at expenses as well as some of the FAS 123 R. The other side of the expense, for folks who leave and forfeit, runs through the corporate/other line here. So we had a benefit from that, too.

John McDonald - Banc of America Securities

I know it's hard to predict, but would this level of corporate/other, given the attention on expenses, be a good baseline for us to model going forward, do you think?

Sallie Krawcheck

I've got to tell you, it is hard to predict, because we do have moves in corporate and it does tend to be a bit of a grab bag on occasion, with some of the inter-company eliminations coming through here as well. So, I would look for, as with many of the other lines, what I would look for is watch this over a period of time. To the extent that interest rates are increasing around the world, you would see pressure on it. To the extent that they are declining, all things being equal, you would see it get better.

John McDonald - Banc of America Securities

Then maybe just one last thing, a comment from you or Chuck. The business as usual expense performance was significantly better this quarter versus last. I think it was up 10% year over year last quarter and down 2% this quarter. Maybe just some color on what that reflects, your efforts over the summer to really change things, and where that was focused?

Chuck Prince

I think there are two things, really. I would like to take credit for the whole thing, in terms of good focus and so forth; that was clearly part of it. But Sally mentioned the mix. Obviously, in the second quarter, we had a terrific capital markets and banking revenue quarter, and that comes with a higher incentive comp charge, as it were. So, part of it was the mix issue this quarter, but I would say a good part of it was a renewed special focus on business-as-usual expenses.

Sallie Krawcheck

But I would also note that the investments that we're making in the business have not taken a hit at all, and, in fact, picked up in the third quarter over the second quarter.

Chuck Prince

We're going to do the investments. I have been very clear about that. It's driving revenues. You saw, without this, we would have had negative revenue growth, without these investments.

Operator

Your next question comes from Mike Mayo.

Mike Mayo - Prudential Equity Group

The fees in US consumer were up $279 million, linked quarter. Otherwise, the spread revenues were down. So it seems like all of the growth has come from fees there. I guess fee revenues in cards were up 11%, linked, even with sales volume down. US consumer lending fees were up threefold. So my question is, are those some of the sales of loans or gains on sale?

Sallie Krawcheck

I think we already talked about consumer lending, right? We talked about some of the hedge performance. I also talked about in US card, the excess servicing, which is driven by very good management of that portfolio by the businesspeople. So I think you've gotten some chunks on what's going on there. But all in all, I think we're pretty happy with how that's evolving.

Mike Mayo - Prudential Equity Group

So, kind of expect that higher level of fees in US consumer going ahead?

Sallie Krawcheck

I'm pausing. We showed you the trends that we're seeing in the revenues in US consumer, and I think we said that we're feeling cautiously optimistic about what's going on there. So, the idea is in the business, to grow it, not to shrink it.

Mike Mayo - Prudential Equity Group

I guess I'll tee up your conference call for next week, but Chuck, you said that you're disappointed with revenues, they've fallen short, and you continue to have record investment spending?

Chuck Prince

Yes.

Mike Mayo - Prudential Equity Group

So, I'm just wondering if there's a little disconnect there, and specifically like international consumer, linked quarter, it didn't have growth despite all the new branches. So, at what point do you as CEO say we need to cut back some?

Chuck Prince

That's a perfectly legitimate question. As you know, these investments don't pay off in 90 days. So, the fact that in this quarter we didn't have linked revenue growth, to me, is not the determining factor. I'm sure it isn't for you, either. These investments take different periods of time to pay off; some are shorter, some are longer. As long as we feel good about the payoff trajectories, and as long as we feel good about our ability to deliver a bottom line, then we are going to power ahead on these investments.

If we ever felt badly about either one of those, that is, if we felt that the investments were not tracking according to our planned returns, or if we felt that we were in a position where the bottom, bottom line wasn't able to sustain the investment spending, then I as CEO would immediately look at what we could do to cut back.

Right now, we're in a position where the investments are tracking very well; again, not over a 90-day period. It takes, sometimes, a year or two for the investments, some of them, to get to the right point. And where we're able to sustain 9% continuing EPS growth, I feel pretty good about this.

Sallie Krawcheck

Let me remind you, as you are looking at it sequentially, we talked about what's going on in Japan consumer finance, that there was a pulling back there. We talked about Taiwan, so there was a pulling-back there. We have been opening the branches. What we're going to show you next week, and what I know you know -- it's intuitively obvious -- is that the retail bank branches, those take a longer period of time to pay off. The consumer finance branches are smaller, but pay off more quickly and are adding very nicely to international consumer finance revenues right now. In fact, the branches that we have opened, a lot of branches, and the ones that we have opened in international consumer finance added $75 million in revenues for us in the quarter, which is a big increase over last year.

So, these are all getting layered in. I keep calling it the layer cake analysis. They are all getting layered in and you'll see consumer finance adding first and most quickly, international cards then and retail bank coming afterwards. The retail banks have really yet begun to add. Quite the opposite, they are more of a drag on us right now overseas. So, it's important that we sort of line these up so that the growth will come in over time.

Chuck Prince

I've said this before, so I'm just repeating myself from earlier in the year. If we don't invest, we're just going to sit here, and we're not going to have any revenue growth unless everybody wants us to wait for the yield curve to change. I'm not prepared to just sit and wait. So, the investments are paying off and are paying off very well. Again, as long as we're able to deliver the bottom-bottom line in a positive way, we're going to make these investments.

Mike Mayo - Prudential Equity Group

To the extent that you are feeling better about US consumer, does that mean your appetite might be one notch higher in the US? You said not Western Europe.

Chuck Prince

I'm laughing because, of course, people always want to talk about deals. I think I would say no, it is not one notch higher. I think that in a long-term sense, we want to diversify not further into the US but further into international. So what everybody likes to talk about, the classic big bank acquisition in the US, would not only be a very hard thing to justify in a financial sense but would re-weight us very significantly more towards the US, which is counter to what I want to do.

So these trends in consumer, with the sequential growth in revenues against flat expenses, that feels pretty good. Some of the repricing we've done in the cards business, that feels pretty good. But does that let me say, okay, now I really went to shift my focus inorganically back to the US? The answer is no.

Operator

Your next question comes from Mike Holton.

Mike Holton - T. Rowe Price

In US cards, the expense control that you showed in the quarter can you talk about the sources of that and how sustainable you feel that is?

Sallie Krawcheck

Looking at the US cards business, some portion of it is the marketing and the advertising. So you will, in the fourth quarter, see a bit of a pickup there. You want to the advertising to greater strength. But some portion of it is very much sustainable. So, for example, you may remember last quarter, we talked about converting some of the private label cards we had in one of the portfolios onto our platform, which cost us last quarter but will drive nice savings for us going forward. So, that and combined with the work the folks in the cards back-office area, along with Kevin Kessinger and his team in Operations and Technology are doing, will be driving some sustainable expense growth for us, and then marketing will move around on top of that.

Mike Holton - T. Rowe Price

Getting at the securities gains question, how much were securities gains in the quarter, and how did that compare versus last quarter within US consumer lending?

Sallie Krawcheck

We sort of worked around a little bit there. There were more this quarter than there were last quarter; we haven't given out the number for it.

Mike Holton - T. Rowe Price

That's why I'm asking.

Sallie Krawcheck

Why don't you give Art a call afterwards, and we can see if we can follow up.

Operator

Your next question comes from Joseph Dickerson.

Joseph Dickerson - Atlantic Equities

You've answered the question. But additionally, I'm glad to hear you're not interested in SocGen.

Chuck Prince

Well, I guess you weren't the source of the rumor, then. But it's a very fine institution. I don't want to get letters from our friends in France. It's a nice place.

Operator

Your next question comes from Meredith Whitney.

Meredith Whitney - CIBC

You guys have given some nice detail on your reserve releases and et cetera. I'm just wondering, since your businesses are largely not dissimilar from other trends that we're seeing with other companies in the industry, you guys are the only ones who are notably taking your allowance to total loan commitments outstanding. I'm looking at page 35 of the supplement. I'm just wondering directionally if you can tell us why? I know you are cautiously optimistic, but so, too, are others, and they are still taking their reserves up. How soon can we expect to see operating leverage? You said, of course, not in 90 days in Europe. But is it possible to run those businesses, those consumer businesses, off of sole platforms as opposed to off of country-by-country platforms?

Sallie Krawcheck

Let me talk about the credit first. I think as you look at us versus others, I think there always is an issue of mix in the business. I don't want to put aside, too, that I think there's some very hard work that is being done as well. One area that I would highlight, in terms of the hard work that's being done, is for the minimum payment, the minimum due, which as you know, we in the industry were quite worried about it last year, and I know some folks are talking about taking some sizable hits for it.

This is one that the team in the cards business has worked very, very hard on and has put in place some forbearance programs, for example, with some of their consumers to really help them work through any credit issues that they are having. I think you're seeing a little bit of spread compression as a result of it, but overall, the credit, because of their work, has really done quite a bit better on the minimum due than we had expected.

So, I think you can pick that up. You can pick up in Taiwan, where the performance was really significantly better than the industry. You go around the world, and I think we have to be very pleased with and very proud of the professionals here who are doing a very good job on credit.

Beyond that, I think you need to look at mix. In the US, we are seeing very good performance, whereas in Asia consumers, we mentioned, we do have some of these spots where it's been a little bit more a challenge for us.

You combine all that together and you can see the NPLs this quarter versus the provision for loan loss reserves, you can see that we were really net releasing for a period of time. This is a bit more stable. We are increasing the allowance for unfunded lending commitments, which is down a bit more on the page, and because of some of the securitizations. Again, not the securitization incremental and not up versus last year, but we do have some relief from that. That's a different issue, of course, because the receivables are no longer on our balance sheet.

All in all, we feel like this paints a picture of a pretty stable credit environment for us right now, which comes out of one mix but too, I think, more importantly, the very hard work of the professionals around here. Do you want to talk about operating leverage?

Chuck Prince

Yes. I apologize; I'm not sure I understood the question, whether it was just Europe or in general. Could you just repeat it for me, please?

Meredith Whitney - CIBC

Specifically, Europe, because I know you guys are running country by country. If you could potentially collapse that, find operating leverage there. Then, more generally, I know you had answered Mike Mayo's question about when do you get to operating leverage, and you said not in 90 days. But can you give maybe a more general outlook?

Chuck Prince

Sure. I thought Mike's question was not about operating leverage, but in terms of the investments and the fact that we had not had a sequential growth in one aspect of that. In terms of Europe, you're talking about the consumer businesses in Europe. Our consumer businesses in Europe are not a significant, right now, part of the mix. We have a new leader there, and I'm hoping that we can do much better.

I don't think that the real upside for us in Europe, from an operating leverage standpoint, is to have a single platform. The real opportunity for us is to have more robust businesses, and to get out of some of the hobbies. As you know, earlier this year, we withdrew from retail banking in France, because it just wasn't a big enough business for us. So, that is the way I think about it.

Obviously, around the world, we're trying to move to common platforms and we are trying to move to fewer data centers and a number of things we have talked about. That's a general, not a European focus. But I would not answer your question, I think, correctly if I said we have a specific focus in Europe, as compared to everywhere else, to do something from a platform standpoint. It's more of a general standpoint.

In terms of operating leverage, I said last December, I would be disappointed if we didn't get it this year. I was disappointed when the SEC, a month later, said they were going to add 2 points a quarter to our expense base, not in an economic sense but in an accounting sense. I was disappointed when the yield curve didn't turn, and I was disappointed when the consumer business didn't pick up quicker. So, I'm a disappointed guy, but the reality is that the trendlines are all moving in the correct direction. Even with a flat yield curve, and even with the investment spending, we're making pretty good progress.

So, I wish it was today. I wish it was yesterday. These are not the best questions for me. This is something that's a sore point, but I think we're headed in the right direction. I think the only way to get there is to have a better revenue picture. You can't cut your way to greatness, and we are doing the hard things that have to be done. It takes a little while, and a little while longer than I had hoped. But it's clear. The trends are clear. As long as that's case and, again, as long as we can deliver the bottom-bottom line in a healthy way, I feel very good about direction we're going in.

Operator

Your next question comes from David Stumpf.

David Stumpf - A.G. Edwards

Most of my questions have been answered, but just one kind of general one, Sallie. When you look at the significant growth in the balance sheet this quarter, you continue to actively buy back stock. Where are you with your capital ratios, in terms of their targets, number one? Or, maybe more specifically, how much excess capital do you sit on now, as we look at things?

Sallie Krawcheck

I appreciate the question. The ratio that has been a constraint for us for as long as I have been CFO is our tangible common equity to risk-managed asset ratio. That ratio in this quarter was 6.9% for us, and if you work through the calculation, the implied excess capital for us is in excess of $4 billion. We have been buying back stock for the past few quarters at a rate of about $2 billion.

First of all, I really like the idea of offsetting the impact of dilution from some of these compensation programs as a sort of a get-go. Then, after that, I would say the stock buyback decision is really an outgrowth of all the capital management decisions we make before that. So, we look at where the capital would best be deployed in the businesses, either in investments, be they in some of the opportunities they see in the training businesses or downtown or in global transaction services. We obviously settle that when we do the budget for ourselves, but we work to make those decisions more dynamically, too, during the course of the year, such that if you had some capital allocated and some investments allocated to a market where the credit doesn't look so good, or where the spreads are really thinning, that we can move that to other places.

So, we've set up a process by which we look at that on a more regular basis than just a major outlook or a budgeting process.

Once we determine that the businesses are using the capital at our average return on equity or, certainly, in most cases, above that return on equity, and we recognize and we think of our costs of equity as being about 13%, once we made those decisions, the outgrowth of that or the output of that is what we have left to return to you as stockholders in the share buyback.

So I think we have a pretty rigorous process around here. We want to keep very good ratios. We like our ratings. We like our low cost of borrowings they give us. We like having a very, very strong balance sheet. But we also like being able to return the capital to you as our shareholders.

Operator

Your next question comes from Jon Balkind.

Jon Balkind - Fox-Pitt Kelton

I'm all set, thank you.

Chuck Prince

If I can, then, I'll say thank you again, as we close the call. Thank you to those of you who are on the call who are our owners. Thank you to those of you on the call who are on the sell side, for all of your effort following us. And especially to all of our Citigroup colleagues around world, thank you for all your hard work. Art, thanks very much. Back to you.

Art Tildesley

Thanks, everyone, for joining us today. Please give us a call in investor relations with any other questions you have. That concludes the call.

Operator

Ladies and gentlemen, this does conclude Citigroup's third quarter 2006 earnings review.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Citigroup Q3 2006 Earnings Call Transcript
This Transcript
All Transcripts