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Citigroup Inc. (NYSE:C)

Sanford C Bernstein Strategic Decisions Conference

May 29, 2014 09:00 AM ET

Executives

Mike Corbat - CEO

Analysts

John McDonald - Stanford Bernstein

John McDonald - Stanford Bernstein

Good morning. Thanks for joining us today. I am John McDonald. I follow large cap banks here at Stanford Bernstein. We’re very happy to have Citigroup this morning. Mike Corbat returning this year. Mike is the CEO of Citigroup. He has been in the job a year and a half as the CEO. Mike, thanks for joining us again today.

Mike Corbat

Thank you, John. It’s great to be back here.

Question-And-Answer Session

John McDonald - Stanford Bernstein

I thought we’d start off and ask you for a little bit of a report card. How would you size up your performance in the last year and a half as CEO? Let’s just go over on the positive side. What would you kind of kick off as the key accomplishments.

Mike Corbat

I think, when I got into the job, we looked at a few things we needed to be focused on. One of the first actions we took was to announce a fairly sizeable restructuring. And in that restructuring we wanted to capture a fair amount of expense saves, and we committed to getting about $900 million of operating expenses out of 2013 and trying to get that up to run rate of about $1.2 billion in ‘14 and beyond. And I’m very pleased to say that we accomplished that.

We thought felt we had some work to do and that we saw the world as being a challenging place, and I think again we saw in this morning, GDP not visible, remains a challenging place and is a company that comes to work in 100 countries. We can’t come to work in those places in all the same way. So we wanted to go in and we did what we call a country bucketing, where we assigned different headings, or different strategies to each of our country buckets investor grow all the way down through optimized. And I then keep seeing some of the actions that we have taken in terms of some consumer exits and other things that we have done there and where we have made our investments.

We also put in place score-card for our managers, so that we could speak the common language, we could be focused on the same things. We introduced our financial targets, ROA, efficiency ratio for Citigroup and the ROTCE targets. And in the course of the year we are in 13.7 billion. Kind of taking one-timers and everything aside that was a 15% increase, almost a 15% increase year-on-year. We said we wanted to use DTA. We used about $2.5 billion of DTA. We said we wanted to continue to get some of the legal headwinds behind us and we made good progress. So from that side, pleased, but not satisfied; more work to do and the environment remains challenging.

John McDonald - Stanford Bernstein

What about some of the shortfalls and challenges you had in the last year and half?

Mike Corbat

Well, I think clearly I’d put at the top of the list, the disappointment in CCAR. That clearly, for the people in this room, and all of us who are shareholders, a big part of our storage capital returned. And I think that was an unfortunate setback and one that we’re very focused on making sure we get it to the right place in terms of our next submission. So we made some changes to the people, we’ve made some changes to the process and are committed to getting that to the right place.

John McDonald - Stanford Bernstein

And then what are your key priorities? When you think about the rest of this year and 2015; how would you rank the priorities, and how?

Mike Corbat

Well, I think CCAR is at the top of the list, and I think it will stay at the top of the list. I think that -- we have got a number of things underway in terms of our pathway to our targets. And again in a challenging revenue environment, you’ve got to keep the expense focused. And again what we have tried to do, and I think, our introduction of the efficiency ratio has been pretty effective in terms of really trying to force our managers to be engaged on a daily basis. So traditionally what you have seen out of banks or you have seen out of Wall Street firms, is this episodic series of restructurings and resizing based on volumes. What we tried to do is build that into the metrics and have them in fact focused on that as part of their normal operating business.

Well, that’s done, is on a quarterly basis. It raised our repositioning charges but we’ve had a little bit less volatility in there, and I think what you’ve seen as we put out, some of the real gains that we’ve gotten in terms of efficiency out of countries and out of our products. So that remains a focus. And then obviously some of the work we’re doing from both the consumer and the institutional perspective. On the consumer side, our focus on systems and the unification of our consumer bank from a confederation of individual consumer banks into a global consumer bank, work that we did over a decade ago on the institutional side, and has served as well. And I think a continued push together of what we’re calling trying to get more adjacencies out of our institutional clients and out of our institutional products.

John McDonald - Stanford Bernstein

Great, let’s drill a little bit into CCAR. We see a lot of investor interest in that. What’s your understanding of why your 2014 capital request was rejected, even though you had a large quantitative cushion to the CCAR minimum?

Mike Corbat

I think you are right in pointing out that there are two aspects to your CCAR submission and the Fed’s response. One is a quantitative piece. And on the quantitative piece, we had significant capital returning capabilities, but the Fed’s own numbers in their most severe case about $24 billion of capital, above the minimum in the most stressed scenario. And then there is the qualitative piece. And that it was the qualitative piece and it was the qualitative piece that Fed objected to and I would say that while our regulatory interaction is confidential, what I would say is that the Fed’s early response publicly around what they saw as our challenges I think have been very consistent and that is that across the work streams, while none of those work streams in itself was failing or was of poor (ph) quality, when they took the work streams and put them together and viewed the institution as systemically important as we are, they thought our qualitative submissions should have been higher. And to be clear these are work streams around the CCAR process, not your business or how you run the business.

John McDonald - Stanford Bernstein

You’ve kind of said this is not a business model as you would how you do the stress test issue. I guess can you just -- how sure are you that that’s the case and why do you have that sense? Is that based on discussions that you had.

Mike Corbat

Yes, so as you can imagine we’ve had many discussions and I think one thing that’s important and we’ve talked about this before is that the Fed very much -- we’d like and expect and it is the way we approach. The CCAR has to be embedded in the way you think about and run your businesses, all the way from your PPN (ph), your pre-provisioned revenue to your NIM, all the way through your risk models needs to be embedded in your businesses. And again we think we’ve got some work to do on modelling. We think we’ve got some work to do on process, the things we need to do there. But it’s not about it’s not a statement about the business model.

John McDonald - Stanford Bernstein

And could you give us a sense of how involved the process is in terms of number of people dedicated to it or do you have any sense of what it might cost to you this (indiscernible) go through?

Mike Corbat

Well we have -- so as you can imagine, from the CCAR perspective it’s -- we’ve got a number of people that it is their full time job and then as you can imagine from CCAR that it’s measuring financials, it’s measuring risk that we’re pulling people in from those functions to participate as part of these. So by the time we finish its well into the 1,000s of people that get involved in terms of our CCAR process and submission.

John McDonald - Stanford Bernstein

And what’s your understanding that there was just some misunderstandings and communication in terms of what you they wanted you to do last year as well as the take some additional things this year? Could you just talk about that? The Fed had said there was something that mentioned previously?

Mike Corbat

I think as in any institution, you are in dialog with the Fed and as well as other regulators, not only in the U.S. but around the world they’re coming back and citing things that you need to be working on. We have those things. We’re aware of those things. We’re in dialog with those things. And again I think at the end of the day the onus is on us to make sure that the communication is right and that we’re getting the right things done.

John McDonald - Stanford Bernstein

And you made a decision to spend this year getting it right, creating what you call an industrial strength, CCAR process. And just kind of what was your thought process in waiting out the year as supposed to trying to get something done?

Mike Corbat

Well, a couple of things we did is when you look at our stock, our stock has, we believe a significant capital return component in terms of valuation and future valuation. So it’s something we have to get right. So first thing we did is we took one of our most seasoned executive Gene McQuade, who ran our Citibank, our largest legal regulated entity and Gene was on the verge or retiring and we asked him to stay and we said I’d like you to stay but not only stay but I want this to be the only thing you do. So Gene has no other responsibilities in the firm other than CCAR. I think second thing from Gene’s pedigree is in running a large regulated legal entity Citibank that really interacts or is really ingrained in many parts of the institution. Gene is used to working both in the direct and indirect basis to be able to get things done. CCAR is a process where you’ve got to go into all kinds of portals at the firm to pull information, to call out people, to corral people, to get the right things but we saw Gene is the right person to do that.

From a timing perspective, we made the decision that rather than going for the quick fix and a late year submission, let’s use that time to really get things right rather than use some band aids to get some quick fixes. Let’s -- again you quoted the words unused but let’s create industrial strength solutions that are clearly not only sustainable but things that we can continue to build and grow upon because I think as the Fed has been very clear, as far they said that they’re going to continue to raise the bar along the way. And I think that we need to be in a position with our systems and our procedures and policies and processes to make sure that we can continue to not only go over but clear that bar in a meaningful way.

John McDonald - Stanford Bernstein

Yeah, the return over time is worth getting it right absolutely this year. So again with that in mind that you are going to take the year, it’s obviously early to be talking about next March. But I’ve already heard from a number of investors, I’m sure you have too that. They don’t want just the safe path next year. They want a meaningful return that’s befitting of the quantitative cushion you have. So I guess in other words if you do get the qualitative aspects but you’re dedicating resources to Gene’s team and the year; is there any reason that you think you couldn’t make a request that would again match the quantitative aspects?

Mike Corbat

Sure. I’ll answer it John the way I answered it when everybody asked me and that is that clearly right now we’re focused on getting CCAR right. We’ve got -- still got three quarters of year ahead of us, half the year ahead of us. Let’s see what the year brings. Let’s get to the right place in terms of our submission of CCAR and then we’ll make the choice or the decision, in terms, of what the right amount and the right mix is. But again, we understand based on our capital generating capabilities, very strong capital generating capabilities, we’d probably get to a point, where we could have meaningful capital return over time.

John McDonald - Stanford Bernstein

Fair enough. In terms of capital targets, late last year I believe you’ve just added a target of Basel III (indiscernible) 9.5. This is after the global community, kind of, lowered your G-SIFI. And I guess what are the factors that you think led to that lowering of the G-SIFI buffer? And what led to kind of target the 9.5 level?

Mike Corbat

Well, the way they go out of this is a peer group comparison around a whole series of metrics. And I think as they look at our institution and a couple others, they move this down 50 basis points in terms of what they felt our SIFI surcharge should be to 59% (ph). We then looked in terms of what buffer we should run above that. We’re kind of looking at a few things, kind of based on volatility, based on AFS volatility, except where we came up with a 50 basis point cushion, still yet to fully be decided because we don’t know the final rules around some of the liquidity regimes that might influence that. We also think the 9.5 fits well when you look at our formulas against our supplemental leverage ratio. So 5% at the holding company and we think the balance of those two fits us well. But again we’ll see where that takes us over time, but we feel comfortable there.

John McDonald - Stanford Bernstein

Okay. Switching gears a bit, talking about your 2015 financial targets, you laid those on March of 2013. So I guess what is the process you went through? And how are you thinking about the process so far of these targets and what you need to get there next year?

Mike Corbat

So we felt it was important that we could put some visible public guide posts out for people by which to judge our progress against and we put three targets out there a year ago in March, one was in our way and being a large financial institution with a $1.9 trillion balance sheet, we wanted to show people in a fairly simple metric that everyone could calculate, our progress and what we were earning on our assets.

Second one, we put out was efficiency ratio and again what I wanted to do in there is just take the primary focus away from just expenses and expense cutting to the balance between expenses and revenues. And I’ll come back and touch on that. And the third piece was a return on tangible common equity. Our target, we put out an intermediate target of 10% going back to CCAR. We said that there was some amount of capital return required in order to be able to hit that target. We’ve come out and said that they’ve given -- we didn’t get the ability to return and we’re very public with what our ask was for this year. We said that target is going to be delayed in terms of it. In terms of the ROA target, it’s 90 to 110 basis points for Citigroup and from an efficiency perspective we’ve said it’s a mid-50s for Citi throughout the combination of our ICG and our consumer business. And we feel like -- and we’ve continued to show progress against those targets on the past to 2015.

John McDonald - Stanford Bernstein

What do you think are the key drivers from getting there and depending on the given quarter we look at, you could be at 75, 80 today. So getting to on a ROA basis, so getting to 90 to 110, will it be legal cost, repositioning cost of just kind of how of it’s been on revenue growth? Can you talk a little bit about that?

Mike Corbat

So we’ve laid the targets out. We said that we weren’t basing these targets based on a major move up in terms of interest rates or in terms of revenue. We said we’re factoring in low single digit revenue growth. I think that’s proven so far to be very much the case.

John McDonald - Stanford Bernstein

We might be hoping for that.

Mike Corbat

We might be hoping for that. We’ve said that in terms of our priorities, one of those was to continue to take holdings -- to move to take holdings to breakeven by ‘15. And I think we’ve made progress in that and what you’ve seen as we’ve largely got holdings to breakeven today in an operating basis, meaning that kind of the biggest drag in holdings today continues to be the historic legal cost associated with that. And I think by 2015, we believe we can start to get some of those down.

Continued expense improvement, continued balance sheet optimization, one of the things we’ve said is that from a balance sheet and again no one has told us this, but we’ve made our own decision not to grow our balance sheet and believe that through the combination of holdings run-off, as well as what I would describe is some lazy assets in the world, we can get more out of our balance sheet, obviously, the whole time being very mindful of risk, but we think there is more we can generate from our own balance sheet without having to grow it.

John McDonald - Stanford Bernstein

The restructuring costs have been elevated as John has described. Do you think those should tail down as you got to the bulk of the early part of restructuring and you still have some probably (ph) that should those drilled down as we go through 14 and 15.

Mike Corbat

I think we’ve got a bit more work to do. I think John been very public in terms of taking about it right now, a restructuring that we launched and are going through in Korea in terms of -- in particular getting our consumer business to the right place there that matches our strategy and we’ve been going through very large transformation of our consumer businesses, I described of one under Walter Wriston and John Reed that was put together as really a confederation of individually country-run consumer banks for really being a global consumer bank over the past 12 to 18 months. You’ve seen us exit six or seven products and countries from a consumer perspective where we didn’t see the path to scale or we didn’t see the path to our return targets, where we thought those ventures would be accretive to our shareholders, and we’re continuing to do some work in there.

And last year we announced, I think, a fairly sizeable shift to restructuring in the way we think about our transaction service business, our global transaction service business, where in essence we took away an entire layer of management and reporting and really tried to take those businesses and more directly align them. So when you think of -- a very important business to us is our treasury service business. We’re one of the largest, if not the largest, movers of cash in the world today. We move over $3 trillion a day of cash around the world through our closed pipes.

When you think of that business, its synergies are really with the fund administration business, much more aligned with foreign exchange. So by taking those things down and getting them aligned, we think we can get more out of that, on the fund administration and securities funds services custody and clearly much more aligned with the markets businesses. So we took out a whole layer of management, a big layer of expense, and have integrated those. And so I think you will -- again trying to get that mentality in this environment, and our business managers are managing your businesses every day. Let’s not wait for the episodic point in time where we’re going to take the restructuring charge and do a one-off.

John McDonald - Stanford Bernstein

Any broad sense of where we are on that -- the kind of unification in the consumer in terms of platforms and Ops (ph). And then the GTS restructuring, I mean, (indiscernible) or later innings, just a broad characterization of how far long you are on this project?

Mike Corbat

Yes. I think on the consumer side of things, certainly from a management, from a mentality, from the way we come to work approach, we’re there. I think, right now what we’re really focused is on the installment of the systems. The systems are built. We’ve talked about Rainbow. We have chosen very consciously to have the rollout of Rainbow, really being sequential or being over time as opposed to doing a big bang. It’s quite a large undertaking and we think it’s better to roll it out overtime, and that’s what we have been doing.

And so I think we’re along the way but it probably won’t be till 2016 or so, that we probably -- late 2016 or so that we probably finish that and feel like we’re at the right place. But, in many countries today we’re up and running and we’re starting to see the tangible benefits of those things, and from a mentality perspective we are running it that way. And I think on the institutional side, and I’m sure we’ll get to it, you know the challenge is today in terms of what’s the right size to be in this environment, and the whole cyclical sector argument and where we are. But again, what we haven’t done and we talked about -- John talked about the numbers at our last quarterly announcement, is that without putting hiring freezes, without doing a lot of things, our businesses have managed themselves from the day I arrived at about 263,000 employees to the end of the first quarter at 248,000 employees. We’ve done it in a quiet way. We’ve tried to do it in a responsible way with our people. But we’re keeping the pressure on our businesses to making sure that they’ve got themselves structured properly for the environment.

John McDonald - Stanford Bernstein

Yes, on that note, what is your take on the softness in trading? And John mentioned at a conference earlier this week, like other big banks you are seeing a soft trading environment for sales and trading revenues. What’s your take on kind of the low volatility aspect versus maybe some structural impact on the regulations?

Mike Corbat

I would describe the regulation as secular. I would describe low interest rates as cyclical. And I would describe volatility as cyclical. In fact I think I can make a fairly strong argument that I think over time we’re actually going to see heightened volatility. If you look at the consequences of the regulation of smaller bank and broker dealer balance sheets, you look at the continued AUM growth in terms of all types of money managers in the world; that the bank and broker balance sheets aren’t going to be there to be that shock absorber in the markets. In fact they are going to have be that shock absorber. So I can actually argue that there is probably more volatility. I think today what we see is the combination of low rates, the combination of lack of conviction in terms of direction; some world events going on. I think we have got people pull back from the market. I don’t see those things as being permanent. And in fact, what you see and probably someone in the room feel this is that, you know – we come into this year, probably unlike many years in the past where people have had pretty strong first and second quarters and we have a handful of years, we’re a few years here, where second half of the year, certainly last year, post May 22, we saw a lot of the buy side go into defensive mode. We find ourselves heading into June and people still have years to make. So I think we’re going to continue to see a push when those opportunities arise. I think those volumes have the ability there. And the volatility has the ability to come back in a reasonable way.

John McDonald - Stanford Bernstein

And is this low volatility, low volume effecting any particular segments more than others if you think about the trading for this or the FX rates, credit commodities and what not?

Mike Corbat

As we talked about that it’s probably and I don’t think we’re alone here – that has probably hit the industry harder in terms of both rates and foreign exchange and probably in particular on the advanced market side of things.

John McDonald - Stanford Bernstein

So some of the kind of non-banking specialists often have difficulty as their differentiating between the securities unit with the various investment banks and money in the banks. So what are the distinguishing characteristics of Citi’s franchise in trading and investment banking?

Mike Corbat

Well, I think starting on the banking side of things, I’d actually go broader than investment banking. I mentioned the unique network we have, that our corporate relationships really grow out of this unique network, our presence in a 100 countries and our ability through a closed payment loop system to actually help corporations manage their movements of cash around the world. And again people can put cash into our system and we can move it and they can know we’ve made big investments in terms of technology and dashboards. They can see where it is, they can see the currencies. We know sources and uses and in this day of heightened anti-money laundering, know your customer, et cetera, we think we’re well positioned to take advantage of that. Off of that comes foreign exchange, comes borrowing, comes advisory, comes debt financing, comes all of those, and that’s a combination of corporations and governments.

On the market side of things, we have trading desks in over 80 countries and 82 countries in the world and that I think is also unique. And again I think today our businesses -- really all of them and not many people can say this, our business are of scale. And the challenge in the businesses today is if you are not off scale it’s very difficult to get scale, meaning that regulators aren’t going to allow you to buy your way to get the scale because they’re not letting big banks or brokerages get bigger. And if you want to go build it in this environment, in this lower volatility, lower interest rate environment, it’s -- your time to recovery of that investment is difficult. I think what you’ve seen is you’ve seen market participants reacting to the acknowledgement of lack of scale and making adjustments to their business model and I think we’re fortunate that really most, if not all of our businesses are at that point of being able to have that.

John McDonald - Stanford Bernstein

As a reminder, there are some cards going around and you can turn out questions along the way and I’ll pretend that I’m asking them. Actually I’ll get to as many of them as I can. So feel free to hand those up. Mike again on the global side you mentioned 82 countries gives you unique view of what’s happening. How do you feel about the world more broadly and maybe talk about some of the markets that you feel better about, countries regions and where you’re little more cautious?

Mike Corbat

Sure. I think as you look at the world today, the world is I think clearly in a -- is in the stage of recovery despite this morning’s numbers. We’ll get growth in the developed markets this year somewhere around 2%. We’ll get growth in the emerging markets somewhere around 4.5%. That’s probably – when you look historically about as tight as those two have been from a global growth perspective coming in around 3% that is a historically low number. But I think the world is getting better. I think when we look at the U.S. starting right at home here, we said coming out of the crisis that it was important that we get a consumer led recovery. We had QE. We had to get a flow into housing prices. We’ve seen not only the floor but we’ve seen some recovery.

I think the important next leg of the recovery here needs to come on the corporate side and I think we’ve started to see some signs of that with some companies starting to reinvest and invest into CapEx. I think you’ve seen interest and confidence resume in terms of M&A but I think you’ve seen some interesting reactions there that in my 31 years I haven’t necessarily seen much of and that is in today’s age the market’s rewarding not only the company being acquired in terms of the stock going up but we’re seeing the acquiring company, the stock trading up and that people are looking for growth the growth to-date has -- top line growth has been stingy and I think people want to see companies reinvesting back in and I think backs, along with shale and the other things is a pretty important catalyst towards the resurgence of U.S. growth.

I think as part of that, if you are at all constructive in terms of the U.S., I think over the intermediate and longer term you’ve got to be very constructive in terms of Mexico because when we think of Mexico and the significant role that Mexico has played towards the U.S. it’s obviously been on the labor side of things. And if you look at what’s happened over the last five or six years from a unit labor perspective, unit labor cost perspective, Mexico is probably as competitive as any country in the world in terms of unit labor and when we draw the math in terms of shale gas, we often tend to stop at the U.S. border but we know that gas goes down into Mexico and when you look at some of the reforms that the President is pushing through there, one of the big ones being energy, we think there is going to be a push towards the harvesting of that and we think the combination of a well-priced labor force and energy makes Mexico a pretty competitive global economy and obviously a terrific partner for the U.S.

I think Latin America’s a bit of a mixed tale, you know with the continued volatility and challenge of governments in Venezuela and the transitioning in Argentina. We’ve gone through some devaluations and some challenges, but you’ve got some real bright spots. You’ve got as an example -- Panama today, predicted to grow at about 6.2% - 6.3%, probably second only in the world to China. A week or so ago I was down in and John last week was in Columbia, again going through an election cycle but economy growing solidly at 4%, you look at what’s going on in Peru, underwhelmed by Brazil but stable, and so I think you’ve got a mixed picture. Europe recovering, long slow recovery, probably still has some fragility to it but getting better and I think Asia doing okay. I think some questions around China and kind of where China’s headed -- can China really achieve its 6.2% - 6.3% growth and some of the vulnerabilities in terms of the amount of credit in particular in the shadow banking systems there but you know the world in spite of some of these things out there feels like it’s healing.

John McDonald - Stanford Bernstein

And you mentioned for you Korea’s been a drag. You have a big presence there. You feel like that’s stabilizing and perhaps ready to turn a corner?

Mike Corbat

Yes, if you look at it, the challenge of Korea I think for the industry and for us hasn’t necessarily been the economy. The economy’s probably going to grow 3% this year. In the scheme of the world that’s okay. The challenge has been there, change of some of the regulations and those regulations have affected the consumer business. So our institutional business before has performed very well, and the challenges on raised caps and other things that they’ve introduced from a regulatory perspective, which is obviously dramatically compressed those margins and what we’ve done is we’ve announced that we’re shrinking and closing and really again reiterating our strategy all over the world, is there’s really moving towards urban Korea, moving towards the higher credit quality segment of the Korea consumer market which is consistently the way we’re doing things everywhere in the world and candidly we’ve got to get those costs out and we’re well along in the process today and feel like in the second half of the year we’ll start to show some real visible progress towards that.

John McDonald - Stanford Bernstein

Okay, good. And regarding the Mexican product, how comfortable are you it’s been contained and it’s limited to the issues that you’ve disclosed and talked about?

Mike Corbat

Well when we discovered the fraud we went into what we described as a rapid review where we went and reviewed about 1,100 of these facilities, all 1,100 facilities that we have around the world. Those 1,100 facilities have about $14 billion of outstanding receivables financing around the world and we went through those and got ourselves comfortable away from this one supplier, the Penmex supplier program that follows the guideline policies, the way they were being initiated with proper. So we’re comfortable that it is contained to this situation.

John McDonald - Stanford Bernstein

And what are the lessons learned from this, and should investors view this and say this company is too big to manage, too diverse, too complicated, some of those questions that I’m sure you get asked.

Mike Corbat

You know so Pete, if you look at our reaction to this, what we’ve said is that we were going to hold people accountable not only for their actions but their inactions. And actually what we saw here and when I was down in Mexico a few weeks ago and we terminated about a dozen people as part of this, it was probably more the inactions, that there were tale tales along the way that people should have escalated and they didn’t and I think in this the lesson is that we need to continue to instill that comfort and that motivation of escalation in our people as they see things that to be comfortable to raise them up to their supervisors or raise them to compliance or raise them to audit, that doesn’t look right, doesn’t feel right, would somebody go take a look at this.

John McDonald - Stanford Bernstein

So ramping up on the global front, how do you think the stock ultimately gets credit for some of the global assets and the global diversification? Sometimes the market worries (ph) you’re too diversified globally, stock kind of sounds (ph) off on emerging market concerns and you don’t seem to outperform in those better, just over time and kind of seeing that these businesses perform well over a different environment?

Mike Corbat

I think that there’s a couple of things I would touch on, is that one is that away from us -- away from the financial services industry, the world’s only becoming more global, and you know our job is to service our customers and clients around the world, and our responsibility based on the franchise we have -- the unique franchise we have is to really in a positive way exploit that for both. What we’ve seen in many instances is our competitors pulling back not only in some cases from products but some cases geography and going back to my earlier point is that our franchise in many ways is only becoming more unique and the bright side of regulation in this is that it’s created barriers to entry and barriers to replication, that people don’t have the ability. So our responsibility is to make sure that in this world, it’s only becoming more global that we’re there and we’ll properly sized. We’re not too big and we’re not too small but we’ve got the adequate resources on the ground to support our customers and clients as they move around the world.

Second thing we’ve got to make sure that we can do is we can show that from a risk management perspective we can manage our firm and that Citi is not versification, it truly is diversification. And I think that takes time to prove. But I think we’ve shown through a number of things so far and whether it’s been a series of Venezuela or Argentine or Egyptian or European crisis, we’ve managed ourselves pretty well and managed stay in an outsized way out of harm’s way. We’ve got to remain very focused on that.

And then I think we’ve got to prove that value over time and we’ve said that we want to be focused on continuing to maximize our earnings out of our Citi core businesses -- our core go forward businesses. We want to continue to utilize our DTA and again over the last couple of years, over the last -- actually the last trailing 12 months we’ve actually used 3.5 billion of DTA and it wasn’t that long ago when people were questioning could we use it. And just last quarter we actually utilized about 1.1 billion of that and that flows off obviously a significant amount of capital as we utilized it and we continue to take holdings towards breakeven.

And I think again on an operating basis we’ve made significant progress. We’ve got some more legal issues and challenging legal environment that we’ve got to get behind us but I think we’ve shown progress on this. And I think we need to stay on that path.

John McDonald - Stanford Bernstein

Yes, so couple of questions to shift gears to the holding side of it, the mortgage credit environments improved dramatically. You still have a sizeable amount of loan loss reserves allocated to holdings in the North America mortgage portfolio. Do those go away over time? Are there is some issues that are keeping you cautious about releasing them too quickly right now? How do you see that playing out?

Mike Corbat

So as you know we finished the first quarter with holdings at about $114 billion down, from $700 billion not that long ago. Of the remaining portfolio today, of that $114 billion, about $71 billion of that is mortgages, a combination of first and second mortgages that are in there, are pretty fairly even split; the $4.6 billion of reserves at the end of the first quarter against that portfolio and what you’ve seen us doing with that portfolio is largely releasing reserves that largely mask the (indiscernible) charge off.

We also last year I think sold about $6 billion of that portfolio, largely focused on the non-performing side of things. Because again the sales, what we’re trying to accomplish is a couple or three things. One is we trying to get rid of risk. Second we’re trying to get rid of embedded costs that are there and obviously fair way, we’re going for the asset reduction and capital release that’s associated with it. And as prices present themselves, we’re going to continue to take advantage of that.

I think what we’ve seen in this environment today is when we look at and we’re constantly looking at the value of those mortgages and what the market is willing to pay for those mortgages, we’ve said get any place close to what we think the value of those mortgages are and we’re happy to sell it. But we’re not going to sell them at a distressed price and take a capital hit if it doesn’t make sense for our shareholders. So, we’re going to continue to work that and as the opportunities present themselves, we’ll continue to sell but we’re not in a mode or mentality of doing any kind of fire sale against those (indiscernible).

John McDonald - Stanford Bernstein

Even though you have lots of capital to use against it you do something that’s (indiscernible).

Mike Corbat

Our objective of capital is not to -- in my opinion we’ll only use that capital to get rid of something in hurry. My objective over time is to maximize that capital and give that capital back to our shareholders.

John McDonald - Stanford Bernstein

And recently the securitization of some of the OneMain assets -- how is that helpful? What does that do for you in the long run, getting rid of some of these assets?

Mike Corbat

So OneMain today is our largest operating business in Citi Holdings. It is a U.S. based upscale of 1,200 branches subprime personal loan consumer lending business, really in some ways unique and it is one of the last big business so to speak we’ve had. We have had the opportunity to sell it. We didn’t think the prices for the business are right. So being subprime, not kind of fitting the Citi model, in spite of the fact that that it’s a terrific business, it’s not a business that in the long term we’ll be in. We started preparing that business for exit or sell and some form I’ll touch on. And so as you mentioned in the first quarter this year, we did $760 million financing to start to establish arms length funding for that entity. And I think as we get later into this year, we’re going to start to explore what those exit options may be, as you saw us do in Primerica and you saw us do in some other things, we’re open to – it could be anything from a private equity sale . It could be an IPO, it could be a combination of the two. And so we’re leaving that open. But again we think the business has a lot of value and we’re aiming to try and harvest that sometime late this year, early next year if the markets are right.

John McDonald - Stanford Bernstein

One of the issues I would assume is that it generates a good amount of earnings for you and you already have a lot of capital. So maybe that affects the timeline for you to do it, or you’re appetite for doing it?

Mike Corbat

Well, I think there’s a couple of things. One is being U.S. business and generating U.S. earnings, it’s a business that obviously heads-off well against DTA, utilization. And again, it is a good earning business. So we want to make sure that we get paid proper value for it.

John McDonald - Stanford Bernstein

So holdings is virtually running at a breakeven. If you take out the legal costs, you basically are running a breakeven. Maybe if you can -- just kind of give us a sense of what’s left on the legal front to deal with? You got to give some firms (ph) as settlement when some of your private label securitization is done. You’ve settled a number of government issues in the past year and early this y ear. So what’s left in terms of big ticket items?

Mike Corbat

Sure, as always we can’t -- we don’t disclose things at a granular level in terms of what’s going on, but if you mentioned something is on a mortgage side and I think you can look at what’s going on in the industry and you can extrapolate where we are there and feel we’ve -- probably got another issue to in holdings that we’ve got to get behind us. And again, as we’ve said before the challenge of that is, we don’t get to pick the timing, we’ve got to wait until the agencies and the enforcement peers and so for, are wanting to engage with us and then we obviously want to engage and get those to replace, but again we’ve worked hard to try and get those to places in a pretty tough environment that all things considered have been pretty reasonable. And we’re going to continue on that path to try and get some of the stuff. We’d love to get this stuff behind us this year.

John McDonald - Stanford Bernstein

Great. Only couple of questions. I’ve seen that run through the questions -- this came up yesterday with Bank of America too, can you talk about the benefits of the Universal Banking model. There’s obviously a tax on being big and complex in the new world from a regulatory tax. It’s probably a complexity tax. What are the benefits of being so big and so diversified that outweigh that tax and the regulatory burdens that make them all worthwhile in your view?

Mike Corbat

Okay. I think if you go back to this concept or this reality of globalization and what’s going on, and our ability to lead in the company, our customers and clients around the world, I think is critical, because when you look at the aspirations of most companies and you look at the history of our company, our history is that in general we were following or leading a company, the Fortune 500 into -- in many cases the emerging markets. Today, a lot of what we’re experiencing is leading -- accompanying the global champions out of the emerging markets and whether it’s a senior going to Canada -- pick your stories around those. Those flows today are very much becoming more and more two ways. And I think our ability to be there and be supportive against across to the gamut, from the scale of operation, I think gives us an advantage in terms of serving them.

John McDonald - Stanford Bernstein

And this actually comes up in three or four different cards. The question of does it make sense to be together consumer and institutional? Have you seen strength in each one? Why do they need to be together?

Mike Corbat

Well, I think, if you look at few things -- under the Basel rules, deposits and then particular consumer deposits of high value in terms of funding. And so when you think of the way we come to work from an outgo (ph) perspective in a country to have in many cases from a risk management perspective a balanced, in country balance sheet. And in an environment -- in particular parts of the consumer world or even parts of the institutional world where your loan demand, loan growth and we’ve actually hit pretty good -- we’ve had actually 12% loan growth in our institutional side -- about 5% loan growth in the consumer side of things, but financial institutions and we’re not alone -- are just wash with liquidity and I think having the balance of those allows us to operate and in particular risk manage our businesses better. Examples when Europe was in crisis in Greece, the balance of the portfolios in Spain, the credit card business, consumer deposits, we weren’t dependent upon cross border funding around those. And again, lesson learned and Europe is an example, that in spite of a single currency, we never allowed ourselves to be fooled that German Euros and Spanish Euros were the same thing. They weren’t. And I think having that deposit funding on a local basis was important.

John McDonald - Stanford Bernstein

On that note another question has come up. Can you comment on strategy in terms of U.S. retail, what’s the status of your deposit franchise, what are the differentiating characteristics of it and what are your plans for that for the next couple of years? Plus as we think about rates rising potentially hopefully some day in the U.S., how does year deposit franchise stack up?

Mike Corbat

Well, I think when you look at what we’re doing in the U.S. again, very consistent to what we we’re doing other places in the world and that is that we are not a rural consumer bank. We are an urban based, high credit quality consumer bank that offers a wide array of products ranging from credit card mortgages, wealth management, et cetera. And that’s what we’ve been doing, is really concentrating and focusing our work around the urban centers and the urban consumer and focused on that and that’s the strategy that James and team were doing. Second piece is that, again when you go back in Citi’s history, we were a very product rather than customer centric organization. For those who’ve been Citi customers over time, you would go to our web pages, an example; and you would go to a very distinct Citi Cards page, or you would go to a Citi Mortgage page et cetera. Through this work that we’ve done and we’ve talked about Rainbow, we actually bring the client to the center, and in there, in spite of being the largest issuer of credit cards in the world, we candidly haven’t gotten our share of cross sell against all those credit card clients because the history was products. And so we have got the ability from a client perspective that I think we have much better, much more robust conversations around the total financial lives of those people rather than being product specific.

John McDonald - Stanford Bernstein

And just on that note, in credit cards, you are very large both in private and in the branded card space and you really invested some efforts, some money under Joe Limb (ph) over the last year or two. Are you seeing some traction from that in terms of client adoption spending and maybe evolving growth?

Mike Corbat

I think when you look at the credit card space, in the U.S., not specifically, I think what we have seen is as an industry, we’ve seen a consumer that’s gone through a pretty distinct period of deleveraging. And I think you have seen that really manifest itself in terms of reduced ANR, in terms of outstanding ANRs in those programs.

I think, the good news what we have seen is, we have seen I think a flattening out or stopping of that deleveraging, and what we have actually seen is an increase in terms of purchase sales. I think from our perspective, we would probably, and I think in some ways necessarily so, we’re probably a bit late in terms of RB engagement, in terms of marketing spend through the crisis based on what we went through. I think we saw some others out there ahead of us. We over the last couple of years have addressed that and Jud has been ramping up his marketing spend, and I think we’ve started to see that work its way into purchase sales.

I think second thing is we made some really good investments in terms of the programs. In terms of new programs, consolidation, we had some very fragmented credit card programs. We’ve really narrowed the number of products we offer and we’ve made investments in those. Our next big investment here in the U.S. is probably into a really good cashback card which I think is missing in our portfolio.

And I think the third piece of that is around the American Airlines Program which is an important program for us. And I think with the American Airlines going through bankruptcy, it currently took, in many cases that card off of top of wallet. I think, with that behind us and I think very strongly with the U.S. Air, American Airlines merger in essence being done and moving forward, us being the single card operator for them; and again I think importantly going back and renegotiating our way back into an essence, being the only card accepted in the American Lounges, again which we had lost for a period of time. I think is an important step in terms of the rebuilding of that business.

John McDonald - Stanford Bernstein

So we have been seeing in the spend already, it seems that new accounts and the spend, and hopefully it leads to some new revolve as well.

Mike Corbat

Exactly. And you know the American card has been a terrific card on all those metrics historically.

John McDonald - Stanford Bernstein

Great. Mike, thanks very much, I appreciate your time today.

Mike Corbat

Thank you very much.

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