Citigroup's (C) CEO Mike Corbat Presents at the Goldman Sachs 2014 U.S. Financial Services Conference (Transcript)

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Citigroup Inc. (NYSE:C) Goldman Sachs 2014 U.S. Financial Services Conference December 9, 2014 10:00 AM ET

Executives

Mike Corbat - CEO

Unidentified Analyst

Okay. I'm delighted to have Mike Corbat here with me today. In the two years that he's been the CEO of Citigroup, he has helped drive a 4 point improvement in the core efficiency ratio. He's also set out an incredible path to cost of equity returns. He's had 30 years' experience at Citigroup. He's had experience running almost every single division at one point of his career and I think we’re going to get a very enlightening perspective both on the Company but as well as the global economy. So Mike thank you very much for joining us.

Mike Corbat

Thank you.

Question-And-Answer Session

Q - Unidentified Analyst

So I thought before we go into longer-term trends, let’s start with the current operating environment. Can you talk a little bit about what you’re seeing so far this quarter and what your expectations are for next year?

Mike Corbat

Sure. I think as we look around the global economy and look at markets, again I think I see things that are continuing to heal but certainly with challenges out there. If you looked at the positive, you see a growing expanding U.S. I still think has some fragility. I think very importantly 10, 11 months or so ago we saw a significant mind set shift in terms of corporate confidence and I think this manifested itself in terms of M&A. We continue to see a healing consumer around the world but the world remains an uneven place.

As I look to our quarter, a few things I would point to is, that one is I think a lot of work that we’ve done in our consumer business and some things that we’ve been able to get behind us, whether it’s the comparables year-over-year in mortgages, the career repositioning I think bode well for the consumer business.

Our transaction service business, our treasury and trade service business continues with momentum and we’ve got some -- a bit of revenue uplift which in a low interest rate environment I think is quite good. But I’d say the real challenge is out there and in particular early in the fourth quarter, the first couple of weeks of the fourth quarter were the trading environment, where we saw sharp moves in terms of rates, spread, foreign exchange. We didn’t escape that and right now that we’re looking through our fourth quarter where we’re going to see markets and in particular fixed income revenues, but market revenues down on a year-over-year basis, somewhere in the 5% range, maybe a bit more, but I would say somewhere in that range.

The second piece I’d like to talk about is around repositioning and that our repositioning costs have been running high and we’ve told you we’re going to bring them down as we go forward. As John and I went through the fourth quarter budget work, we saw some opportunities in this quarter to go ahead and pull some restructuring and repositioning forward and so we’re going to -- as part of the fourth quarter take about $800 million of reposition in the quarter.

With that we can talk more about it later. The expectation should be that going into ‘15 repositioning is largely behind us and that number should come off significantly.

Unidentified Analyst

Can you just spend a second on what the $800 million is for? Other specific initiatives within that?

Mike Corbat

So little over two years since I have been CEO we’ve reduced headcount by about 20,000 people. The 20,000 people is net of about 10,000 hires in terms of regulatory compliance, safety and soundness. So a big piece has gone against people. The second big piece has gone against real estate, that we have reduced our real estate foot print by about 15%, about 10 million square feet of real estate reduction and those have been the two primary drivers of the repositioning. In the past nine quarters in Citicorp inclusive of this $800 million, we'll have utilized about $3.2 billion of repositioning. We believe that is driving and will drive about $3.4 billion of sales -- of run rate sales.

About 50% of that as we’ve described has been reinvested in terms of regulatory compliance CCAR exception, 30% of that has been invested into technology and investment programs running our businesses and about 20% of that we drag to the bottom line.

Unidentified Analyst

On restructuring you’ve obviously done a lot in terms of rationalizing the footprint and most recently you’ve announced that you’re getting out of 11 consumer markets. Are you still looking for areas to restructure and I guess specifically how do you balance keeping in place what makes Citigroup unique, which is your global footprint with the need to improve returns in the business?

Mike Corbat

I think it’s important to recognize that while we have been doing restructuring and really getting the firm focused, and the focus, rather than simply geography has really been around the combination of client, client segment, both on the institutional as well as the consumer side, products and product offerings as well as the markets. So when I got into the job two years ago we were in 101 countries. This morning we opened our doors in 101 countries. We’ve pretty radically changed the consumer footprint, the institutional network, the payment system, all those things I think that are critical to the institutional businesses are very much still there. So I would say that the bulk of really what we’re doing is really creating the focus of the institution around the things that we think give us a competitive advantage and I think our customers and clients recognize.

Unidentified Analyst

Can you spend a minute on your priorities for 2015? Obviously CCAR took out a lot of your time this year. When you think about 2015 and beyond what are the two or three strategic priorities that you really have got at the top of the agenda.

Mike Corbat

Before I do that if I can, I’d like to go back and just close out the fourth quarter if I can. I've got one more point I’d like to make on the fourth quarter. And that is that clearly the industry -- clearly we’ve been operating in a heightened legal and settlement environment and if you look at our disclosure and the things that are out there, I think we’ve done a good job this year in terms of getting mortgage and getting some other important things behind us. I think as we look forward, the big things as an industry, the big things for us that remain out there are the combination of foreign exchange, LIBOR and AML process controls with some other small ones.

I think as you know, in terms of being able to reserve against those you have to meet the criteria of both those challenges being probable, which I think there hasn’t been a challenge historically in terms of believing that these things were probable and they needed to be estimable. From our perspective based on the conversations that we’ve had, and I think a number of precedents that have been established in the market, we're at a point in the fourth quarter where we’re going to go and recognize what we believe are the charges necessary to largely put those behind us, which will be about $2.7 billion charge in the fourth quarter.

Again we think that largely addresses those issues, but again, until they’re closed you can’t say they’re done and behind you. And Richard when I take the combination of the increased repositioning as well as the legal reserve charges in the fourth quarter and legal reserve charges we largely assume are not tax deductible, that will leave us somewhere for the quarter of marginally profitable.

Unidentified Analyst

Oka. So on the priorities for next year and beyond?

Mike Corbat

Two years ago we laid out three priorities, quality and consistency of earnings, utilization of DTA and getting holdings to breakeven sometime in ‘15. I think on an operating basis, on consumer and institutional we have showed very good momentum in terms of expense discipline. Our earnings in a tough market and interest rate environment and feel like we’ve got the firm positioned well for the continuation of quality and consistent earnings as we look forward.

From a DTA perspective, in the past two years we’ve used approximately $5 billion of DTA, just two years ago I think there was a question as to whether we could actually turn that and the third piece is in the second and third quarter we’ve shown our ability to get holdings to breakeven and we believe from this point forward, inclusive of one main and other divestitures which we’re going stay focused on, we’ve got that path to holdings.

From a 2015 perspective, delivery against our targets our Citicorp efficiency in the mid-50s our Citigroup ROA between 90 and 110 and again we’ve guided people to the lower end of that range. Building continuing to build and executing against capital return and continuing to wind down holdings in a responsible manner. So those three would and will be the focus for 2015.

Unidentified Analyst

Can you spend a minute on the targets? And I guess the specific question is, there is obviously still a material gap relative to the mid-50 efficiency ratio in particular. How do you expect to bridge that gap going into ’15 and ’16?

Mike Corbat

I would say as you look at the levers we have to pull, in many ways the good news is we’re not overly reliant on any one lever to get there. I think it’s a combination of low to mid-single digit revenue growth in Citicorp and I think that’s a combination of continued business, consumer business rebound, continued market share gains in terms of our institutional clients business and we haven’t built in much of a rate increase into that. Continued expense discipline, the flow through of the repositioning actions we’ve taken, significantly lower repositioning and legal, holdings at breakeven or better and balance sheet discipline. Our balance sheet for the past few years has been plus or minus right at $1.9 trillion and I would expect again balance sheet discipline as we go into 2015 around the ROA targets.

Unidentified Analyst

Can we turn to CCAR for a second? It’s a really important year for you this year. What’s different about your process this year versus last year and what gives you the confidence that this year’s submission is going to be received favorably?

Mike Corbat

I think in taking the feedback from the Fed, I would place our significant changes probably into four buckets. One is our risk identification and scenario or narrative design. What are the risks out there? How do they affect the firm? How do we stitch that together across the fabric of the firm and think about it.

Second stream would be significant work around our models. We’ve completed a re-work or re-write of probably slightly in excess of half of our models and revalidation of those models. I think the third piece is around management and business engagement, fully bottoms up in terms of not only the scenario design but how we think about it, what are the ramifications from a business perspective, and the fourth piece is around communication. And as an institution we owe a lot of lot gratitude to the Fed for their engagement and it’s been at the local New York team level, at the Washington team level and across the horizontal work streams where I think the Fed has met us more than half way in terms of communication.

Unidentified Analyst

Okay. And how do you define a successful CCAR for Citigroup?

Mike Corbat

Well one is that we need to make sure we get a pass in terms of the qualitative piece. Last year as you remember the numbers side, the quantitative piece had ample cushion in it for our capital asked, but we also know that it simply just can’t be a pass. And with that pass, there’s got to be some reasonable amount of capital return. And again, as we think of the future of the firm and what’s important, we’ll probably spend some time on it, but we’ve in some ways got this unique ability to generate regulatory capital and we understand that we’ve got to have the firm positioned to be able to return that capital to our shareholders over time.

Unidentified Analyst

Do you see the qualitative fair last year impacts your quantitative asked for this year?

Mike Corbat

No. I view it as a separate process and again based on the changes we’ve taken, our numbers are the numbers and we’re taking a fresh approach to it.

Unidentified Analyst

Can you spend a second on how we should think about the longer-term capital returns to Citigroup? So you’ve generated $7 of regulatory capital a year. At least you did in 2013. I think you’re going to generate that level going into 2015, but against that you generate $5.5 of GAAP earnings. What’s the right number do you think for investors to focus on, in terms of the potential for Citigroup to actually return capital to shareholders?

Mike Corbat

I think over time we’ve got to be in a position to be returning that capital. Otherwise we’re going to have a denominator problem. When people own Citigroup, and you think of the equity allocations, and we came out late last spring, early summer with our business segment allocations of capital, you saw how we think about that. And when you own a share of Citigroup, you own shares in essence of the go forward business, you own shares in terms of capital dedicated to Citi Holdings and you have capital that’s dedicated against the DTA.

When we position the firm as you’ve seen us do, where we can drive the earnings in Citicorp, we can get the drag of Citi Holdings or get Citi Holdings to breakeven, we stop creating DTA. Citicorp uses DTA and as we shrink holdings, it also liberates capital on the asset sale. So we’ve got this ability, which as you described for every dollar of capital we generate, we have the ability to generate in excess of that from a regulatory perspective. We’ve got to be in a position to get that capital over time back to our shareholders or we’re going to have a denominator problem. But when you look at -- and we’ve shown you the segment level analysis of the businesses, our businesses against the allocated capital are earning reasonably above their cost of capital.

Unidentified Analyst

And in terms of returns, when you took over as CEO, you outlined the 10% ROTC target for the 2015. You’ve indicated that you’re not going to make it because of equity levels. Do you think that target still holds though going into ‘16 or ‘17?

Mike Corbat

Again, just to go back and clarify, when we said that, we declared that as an intermediate target. We don’t believe that’s the end-state target for where we believe we can and we need to get the firm. To your point with our lack of capital return this year i.e., a denominator build, that number is going to be difficult to hit in ‘15, but we need to make sure going forward, that we’ve got the ability to return that excess capital to our shareholders and we’ve got to make sure the firm's positioned in that way.

Unidentified Analyst

There’s obviously a lot of new rules coming out on TLAG and as so far there’s going to be Fed capital surcharges I think announced at 03:00 PM today. Can you talk about the implications to Citigroup in aggregate from the upcoming rule set? And is it in anyway impacting your ability to service clients in a way that you would like?

Mike Corbat

We’ve gotten guidance so far from both the FSB as well as Basel in terms of net stable funding ratios, in terms of TLAG et cetera, and it will get U.S. clarity today from Governor Tarullo maybe in terms of some of those. What you’ve seen from Citi is our ability I think quite quickly to be able to absorb these rules and regulations as they’ve been put out, whether it’s the implementation of Basel today, Tier 1 Basel III at 10.7% against our stated today of 2% surcharge plus a 50% buffer, i.e. running the firm at 9.5% to 10.7%. We’ll get guidance in terms of TLAG and in particular short-term wholesale funding, which I think has been a focus of the Fed, a focus of Governor Tarullo.

Today our balance sheet is financed with about 10% repo, which I think from an industry perspective is quite competitive and we’ve got flexibility around that. We got the ability to go to the capital markets. We’ve got the ability to pair that book. In fact over the past several quarters, we’ve shrunk our repo book both in terms of financing the firm, as well as what we’re doing from a customer perspective, and at the same time, we’ve lengthened some of those things. So I think addressing some of the systemic concerns that the Fed has put out there.

From our perspective as of today, the leverage ratio is not our binding constraint and we’ve seen the willingness and desire from our institutional clients in particular to in essence pay for or reward us with business around access to our repo book and financing. And so the same way, and the same mentality with which we run our corporate book that we don’t in general make institutional, multinational corporate loans for the sake of the loan, we make it for the cross sell of the business, the foreign exchange, the bond, the transaction service revenue. In many ways the repo book is positioning itself in that way and we believe and we’ve been told by our clients that Citi is an easy counterparty to reward because there’s many places they can pay us for giving that balance sheet and so I think the value of that’s going up and I think that we’re positioned to take advantage of that.

Unidentified Analyst

You are a global bank that competes locally and obviously different regulators are moving in different directions. Can you talk a little bit about some of the complexities that imposes upon on you when you're competing against local competitors that are not necessarily held to the same rule set as you are in the U.S.

Mike Corbat

As you can imagine our desire is a couple folds. One is that there is harmony of regulation around the globe, that the rules and regs are the same for everybody and importantly that they apply in a similar way on a local basis. The candid answer is we don’t necessarily always see that. But importantly if you look at the client segments that we chose to serve and whether it’s on the institutional side, the multi-national, the global investor or whether it’s on the consumer side, the more affluently urban based types of customers, we can provide services that’s often hard for the local institutions. And again whether it’s our global payments business, whether it’s international capital raising, whether it’s a global rewards program or the things we’re able to do in digital, I believe we’ve got the ability to distinguish ourselves. So we’d love to see harmonization, love to see a level playing field, but the segments we go after are often -- we're really competing more against the other key cities or the global banks as opposed to the true locals in the competition.

Unidentified Analyst

The leverage ratio is not a constraint for you but it is obviously for some of your peers. Can you talk a little bit about bank balance sheet re-pricing? Do you think it’s starting to take place in certain businesses and over time how material do you think it could be?

Mike Corbat

I think it has. I think it’s been a long time in coming. We often, John and I often challenge our businesses and challenge our people around the fact that the world has changed and if you look at lending today, Europe is an example, the vast majority of corporate borrowings today still exist on bank balance sheets in Europe. It’s coming down, but it’s down slowly. And what you see or what you notice -- a lot of that borrowing that’s occurring, that Company actually has access to unsecured financing in many cases. It rates better than its bank. So that loan should only exist on a bank balance sheet to the extent it’s a relationship asset, it’s a relationship lend and there is cross sell against it.

And I think you’re seeing an evolution of that. It’s not a step function. I think there is positive ramifications around the world because as those loans come off of bank balance sheets, the capital markets is going to be the place that I think fills that gap and it leads to more primary issuance and again you've seen record years in terms of fixed income issuance. I think the demographics around that continue on the refinancing calendar to be quite strong and it creates better secondary volumes and better secondary revenues.

As part of that we touched a little bit in terms of the repo book, but again I think you’re going to continue to see pressure because when you go after supplemental leverage, the places you start, you start with cash. But with the LCR, you’re limited in terms of what you can do there.

Next on your list would be your repo-books and again the balance, finding the right balance between financing the firm as well as creating enough capacity to be able to finance your customers and the things that they'd like to do, I think without a doubt the value around that, the charging for that I think is going to become more explicit.

Mike Corbat

Okay. Can you spend a second on what you’re seeing across your portfolio of businesses globally? And as you think about ‘15, are there some markets or some countries that you’re more constructive on and are there others that you are at the margin more concerned about.

Mike Corbat

As you look around the world few big themes or trends happening, a few of which I touched on. One is we have a recovery occurring in the U.S. We knew coming out of the crisis that we first had to re-engage the consumer, quantitative easing, low mortgage rates, refinancing, all those things did that. About nine, 10 months ago, very important transition and I saw it in my conversations with CEOs in the U.S., are real re-engagement. But through the crisis what we saw is companies very tightly managing expanses, because they knew top line was going to be difficult, deferring CapEx, deferring other types of investments, managing shareholders through buyback and other forms of financial engineering.

10, 11 months ago what we saw is a change of mindset. And that change of mindset I think was driven from a couple of things. One is investors who are giving companies feedback. We’ve invested in your company, we want to see the top line growth, and it’s okay to go do that. And so we first saw a freeing up or a reinvestment in terms of some hiring, but in particular investment into CapEx. And then interestingly what happened is we saw companies start to push on the edges of being acquisitive and we saw the markets react well.

And typically, what we’ve seen historically is company goes out and announces an acquisition price. So if the target goes up, price of the acquiring company goes down. What we’ve actually seen recently in the past several quarters is both stocks trading up, because investors are rewarding. I think that’s created a confidence in the C-suite. Its created confidence in boards that it’s okay let go do this and I think importantly, we’ve seen that engagement.

Europe continues on its long slow path to recovery. What we don’t know today is -- or what’s not necessarily factored in today is the impact of what we believe is the structurally stronger dollar i.e., weaker euro. And what 70, 75 whatever the number is in terms of energy prices pointing at what I got to believe, that Germany was €110, €115 and $75 energy is a pretty competitive country. And so, I think we still need to see the flow throughs of benefits there.

While we’re on energy and oil, our analysts estimate that where energy prices are right now, the average U.S. family has a windfall of about $900. We expect on the consumer side to see that money come into the market in the form of purchase sales, in the form of leverage, probably give people a bit more confidence in terms of housing and so I think there’s some positive aspects there.

And I also think the world is a better place, because we’re not completely reliant on China for growth. Right now we’re forecasting China to be somewhere in the 7% range, I think as more importantly job creation creating about 800,000, 900,000 jobs a month in China is critical. I saw the article in the paper probably this morning in terms of the banks positioned and wanting to lend more. So I think there’s the ability to continue to support that economy. I think Southeast Asia is just fine and we’re quite constructive in terms of India.

I think in terms of areas of concern [indiscernible] we’ve got to be mindful in terms of the challenges of a place like Russia and the geopolitical ramifications of and economy right now that’s not growing some of the challenges that are there and some of the repercussions, not just in Europe but around the globe.

Unidentified Analyst

Let me open it up to the audience.

Unidentified Analyst

[Indiscernible] China is under some pressure in terms of the leverage, reducing excess capacity. Brazil also has some pressure. So could you possibly talk about your exposure to those countries and how you’re feeling about those exposures, what you’re expecting?

Mike Corbat

When you look at the emerging markets away from Mexico, we have no country in our portfolio that contributes more than 3% of our revenue. Mexico is about 10 and in the emerging markets beyond that it drops down quite considerably to about 3% of revenues. I think as you look at the global economy today, you’ve got to be mindful of those places. Russia is an example where there's a real dependence from an economic perspective on energy and energy extraction and energy export. I think we’ve seen those challenges starting to manifest themselves in terms of the economy there. But I also think it’s important to differentiate really what extraction costs are and what government budgets are. And oftentimes people look and say the government has budgeted energy or oil at $90 and below that, there’s a challenge. That $90 doesn’t simply extrapolate into that’s the extraction cost. That’s the price at which the government has budgeted energy into their plan.

You talked about Brazil. From our perspective Brazil continues low single-digit growth, probably with a focus on employment, probably underperforms it’s potential, but we don’t seen an economy that given the nature of foreign reserves floating exchange rates that in anyways is overly vulnerable.

Unidentified Analyst

And then more generally on emerging market, the strong dollar rising U.S. interest rates are generally presenting challenges and then overall price is good for some and bad for others. So how do you feel overall about your EM exposure? And then secondly, how do you think about potential revenue growth for next from your emerging markets exposures compared to your U.S. exposure?

Mike Corbat

I think it’s important to understand that our emerging markets exposures are largely to global multinationals. You’ve seen places in Brazil as an example where from a consumer perspective, a year or so ago we exited the mass market -- our mass market credit cards business and we tend to be very focused in terms of the things that we do in the emerging markets. So I wouldn’t constitute our credit profile or our counterparties as a blend, but I would call it a targeted group of typically investment grade multinationals.

Unidentified Analyst

U.S. retail, a lot smaller for you versus some of your rivals, but it is a significant part of your business. And I noticed you had sold some branches in Houston recently, which it seemed in one of the larger faster growing cities in the world, which I think you are focusing on in terms of your retail business. So could you just review for us your strategy for retail in the U.S.?

Mike Corbat

I think we ought to actually step back and I had a talk just for a second about our retail strategy global. We announced in October that we would be exiting 11 consumer markets, which bring us to 24 markets around the globe. We talked about those 11 exits and talked about the contribution of those 11 countries to our consumer business, which in many ways were quite small. We believe the focus around the remaining 24 is the right focus. And the big change that we’ve been taking our consumer business through is this shift from a confederation of individually country run consumer banks to being a global consumer bank, supported by technology, supported by product offerings, supported by a move to digital, supported by common and shared service centers, a simplification of products.

I would say that our U.S. strategy is simply an extension of that, with our focus in the U.S. predominantly around six major cities, our focus around the mass affluent and a focus around a series of products that we think give the ability to distinguish ourselves vis-à-vis our competition. It’s important in there and the U.S. is an example, but probably in any of those 24 countries other than Mexico, on a standalone basis those businesses don’t have scale or certainly in my opinion have competitive scale. And so the creation of this global network and the creation of scale out of that network is critical to our ability to compete and I think our ability to create and to put products into the market and I think the U.S. is an extension of that.

If you look right here in New York, if you look at the investments we’ve made in terms of our branches, in terms of our products, in terms of service and the things we’re doing, I think that’s exemplary of five of the major cities in the U.S. where we see real opportunities.

Unidentified Analyst

So in the past you've talked about how regulation was going to shift to absorb market shocks from banks to essentially the markets. Do we get a preview of that in October? And it looks like it might have been a little bit of a headwind in your 4Q results. But do you think longer term that’s like good or bad thing for your business?

Mike Corbat

I think we have gotten some previews and I wouldn’t just limit it to October. I think we’ve seen times going back to the taper tantrum back in the late spring of ‘13. I think we saw it in the first couple of weeks of October. We’ve talked about the realities of bank and broker balance sheets just being smaller, of being out of certain areas of risk and whether that’s parts of leverage lending, whether that’s subprime whatever those places maybe.

And as markets transition and we get volatility back into the market, I think we should expect to see heightened periods of volatility. I think the challenge comes where there is a taper tantrum or October, where that volatility comes very sharply and comes in many ways unexpectedly; what you’d love to see or what we love to see is a trending market with sustained reasonable levels of volatility.

What we haven’t seen -- markets today I think lack trend, lack direction and I think they lack any uniformity in terms of view, the volatility. So if actually we saw a transitioning rate environment where people set a path against that, became comfortable investing around that path, I think that’s good and in that volatility you might expect or we would hope to be able to catch and capture some wider bid to offer spreads, but it’s that one-off nature, or some of this volatility we’re seeing today that I think is quite difficult to trade. And I think you’ve not only seen it potentially in the bank and broker results, but I think you've seen it in terms of some of the hedge funds. Some of the investors have had quite a hard time with it as well.

Unidentified Analyst

So I kind of feel like Lucy and the football, as it relates to these repositioning charges and legal costs and it’s not just you but it’s a lot of banks. How much confidence -- it’s not unusual for a banks to kitchen sink the quarter. It’s not been a particularly good year. You've already had a large mortgage settlement cost. You failed the CCAR obviously, all of which I hope will be reflected when the management compensation is evaluated for next year. But I guess my question is how much confidence do you have in ‘15 that these things don’t recur because of the rumor is that the DOJ is not part of the FX settlement.

Mike Corbat

Let’s take it and break it into components. From a repositioning perspective we have the full ability to control that. That is at our discretion in terms of what we choose to do. We think that the work we’ve done in terms of repositioning has been good, important and accretive work. Yes, we’ve used $3.2 billion in repositioning but we’ve gotten $3.4 billion or will end up getting $3.4 billion of saves and you can see that in terms of -- in spite of the regulatory headwinds and things that have been there from an environmental perspective, I think we show very good expense discipline. You've seen it in our stated headcount numbers in spite of investments in terms of regulatory and compliance, what we’ve been able to do and we’ve showed and broken out in terms of real-estate, real-estate footprint and sites and product simplifications, how we’ve been spending that money. For 2015, it should be your expectation, should be investors’ expectations and certainly our expectation that repositioning is going to come down considerably.

From a legal and regulatory perspective, we are operating in a heightened environment. This quarter, we tried to recognize based on conversations, based on things in the market. What we think is a number that puts us in the ballpark of what those should be, but candidly, we don’t control that at the end of the day. We don’t control timing and at the end of the day we don’t ultimately control what that number is going to be. But we’ve tried to put our best estimate on what those numbers should be like and try and really shoot for a clean ‘15. We thought that based on the information we had that we could take this reserve and feel like we were in the right neighborhood and with the strive towards absolutely wanting to hit our targets in ‘15 and we -- I think laid out a path to where we think we can get there.

As for CCAR, we’ve made a tremendous investment in CCAR. We feel good about where we are, but the submission is going to be the submission and that will be judged and we’ll get the result on that. But, I can put my hand on heart and say that we’ve done everything that we can do to try and position that ask in a way that’s of a qualitative nature, that’s as good as it can be and clearly, with an eye towards wanting to continue to improve that and build on that in the future.

Unidentified Analyst

Two questions. First off, could you ferret out the repo issue a little bit more? How much of the repo book is actually used to fund your business? And how much of the repo book is actually used to fund leverage market players? That’s my first question. And the second question is there’s been some growing issues around your payments business where people are a little concerned about how money is moved around the globe. Given what that business is to you and how complicated it is, what are some of the upcoming issues that you think we’re going to have deal with?

Mike Corbat

John, we don’t breakout -- we don’t breakout -- 30% of the book is used to finance the firm. The remaining 70% is used to finance customers of the firm. I don’t have to breakout in terms of the leverage of that. But again it’s all -- the nature of the repo book is a collateralized typically daily mark type of book.

In terms of the payments business, in many ways we believe that a lot of the regulation that’s out there acts as a significant barrier to entry to the recreation of what we have in the payments business. We operate what we describe as a close loop payment business in 101 countries. Customers try and put money into our system. We have the ability to move that money within our pipes to capture the natural frictions that occur to know sources uses to be able to give dashboard reporting in a way that other financial institutions aren’t able to do.

Part of the challenges that’s out there, clearly and it’s not for us -- in many ways our system actually helps elevate some of the pressures. It's around KYC, know your customer, it’s around AML. And given the nature of our customers and clients, given the nature of the stability of them operating in our systems, we believe we have a good view to what our customers are doing, who they are, what their sources and uses are of those monies and over time, we believe that continues to give us a competitive advantage in terms of having this closed loop payment system. And very difficult to replicate, because today we believe that regulators aren’t going to approve inorganic growth i.e., acquisitions of banks by banks to grow network. So if you want to recreate what it is we have, you’ve got to go build it, got to put the bricks in more to underground, you've got to take the deposits, you've got to make the loans, you've got to get the banking licenses and I think in an environment of heightened regulation, of lower interest rates, I think that the barriers to entry are probably quite high right now, are certainly higher than they’ve been historically.

Unidentified Analyst

Thank you.

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