Citigroup : Citi Second Quarter 2024 Transcript

T R A N S C R I P T

Citi Second Quarter 2024 Earnings Call

July 12, 2024

Host

Jennifer Landis, Head of Citi Investor Relations

Speakers

Jane Fraser, Citi Chief Executive Officer

Mark Mason, Citi Chief Financial Officer

PRESENTATION

OPERATOR: Hello and welcome to Citi's Second Quarter 2024 Earnings Call. Today's call will be hosted by Jenn Landis, Head of Citi Investor Relations. We ask that you please hold all questions until the completion of the formal remarks at which time you will be given instructions for the question-and-answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time.

Ms. Landis, you may begin.

JENNIFER LANDIS: Thank you, operator. Good morning and thank you all for joining our second quarter 2024 earnings call. I am joined today by our Chief Executive Officer, Jane Fraser, and our Chief Financial Officer, Mark Mason.

I'd like to remind you that today's presentation, which is available for download on our website, citigroup.com, may contain forward-looking statements which are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these statements due to a variety of factors, including those described in our earnings materials as well as in our SEC filings.

And with that, I'll turn it over to Jane.

JANE FRASER: Thank you, Jenn, and good morning to everyone. Before I discuss the results of the quarter, let me first address the regulatory actions by the Federal Reserve and the Office of the Comptroller of the Currency which were announced on Wednesday. These actions pertain to the consent orders we entered into with both agencies in 2020 and those orders covered four primary areas: risk management, data governance, controls and compliance. Addressing these areas is the primary goal of our Transformation, our number one priority. It is a multi-year effort to modernize our infrastructure, unify disparate tech

management. We have been public this year about the fact that we were behind in this particular area and that we had increased our investment as a result. The regulatory actions consisted of two civil money penalties and, under the amended consent order with the OCC, a new process designed to ensure we are allocating sufficient resources to meet our remediation milestones, called the Resource Review Plan. We are currently developing the Plan for submission to the OCC.

By way of background, while the Federal Reserve is the primary regulator for Citigroup, our bank holding company, the OCC is the primary regulator for Citibank, N.A. or CBNA, which is our largest banking vehicle with approximately 70% of our assets. The amended consent order with the OCC allows CBNA, to continue paying to Citigroup, at a minimum, the dividends necessary for debt service, preferred dividends, and other non-discretionary obligations. While we are developing and seeking OCC consent for our Resource Review

-objection. These dividends are intercompany payments that are made from CBNA ultimately to the parent, Citigroup. They should not be confused with the common dividends Citigroup pays to its shareholders. Indeed, there is no restriction on k

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shares. And let me be very clear, even with the investments needed for our Transformation, Citigroup has more than sufficient resources to also invest in our businesses, and make the planned return of capital to our shareholders. We will increase our dividend from 53 to 56 cents a share, as we announced in late June, and will resume modest buybacks this quarter.

While these actions were not entirely unexpected to us, it is no doubt disappointing for our investors and our people. We completely understand that. At the same time, we are confident in our ability to get these specific areas where they need to be, as we have been able to do in other areas of the Transformation. And we are pleased that it was acknowledged on Wednesday that we have made meaningful progress in executing our Transformation, and simplifying our firm. A multi-year undertaking such as this was never going to be linear. The investments we have been making are starting to come together to reduce risk, improve controls and deliver tangible outcomes. The tech investments we have made are making a difference. We have reduced the time it takes to book loans; automated controls for our traders to reduce errors; moved risk analytics to a cloud-based infrastructure; and increased the resiliency of our platforms to reduce downtime. The changes to our organization and our culture are making a difference. We have eliminated managerial constructs and layers whilst empowering our leaders. We introduced new tools to better manage human capital needs. Our focus on culture has increased accountability and attracted great

commitment that we will address any area of the consent order where we are behind by putting the necessary resources and focus behind it. We will get this work where it needs to be, as we have with the execution of our strategy and the simplification of our organization.

Now, turning to what was another good quarter, our results show the relentless focus we have in executing our strategy as we continue to drive towards our medium-term return targets. We reported net income of $3.2 billion with an earnings per share of $1.52 and an ROTCE of 7.2%. Revenues were up 4% overall, as well as up in each of our five core businesses, where all but one had positive operating leverage. Expenses were down 2% year-over-year. The steps we are taking to simplify our organization, right-size businesses such as Markets and Wealth, and reduce stranded costs are beginning to take hold, even as we increase investment in our Transformation. Over the medium term, we expect these simplification and stranded cost actions to drive the $2 to $2.5 billion in annual run-rate saves. Services grew 3% driven by solid fee growth, which we have prioritized. TTS saw increased activity in cross border payments and in commercial cards. Securities Services was up 10%, with new client onboardings, deepening with existing clients, and market valuations helping increase our assets under custody by a preliminary 9%. At our recent Services Investor Day, we very much enjoyed the opportunity to talk to you in-depth about how we are going to continue to grow this high-returning business. And we are very pleased that people are starting to recognize why we describe it as our crown jewel.

Overall, Markets had a strong finish to the quarter leading to better performance than we had anticipated. Fixed Income was slightly down year-on-year due to lower FX and Rates, but we had good issuance and loan growth in Financing & Securitization, an area which generates attractive returns. Equities was up 37%, driven by strong performance in derivatives which includes a gain on the Visa B exchange offer.

Banking was up 38% as the wallet rebound gained some momentum and we again grew share. Our clients continued to access the debt capital markets with investment grade issuance near record levels. Equity issuance increased, particularly in convertibles, as companies wait for a fuller opening of the IPO window. Investment Banking fees were up 63% versus the prior year. We have seen some healthy volumes associated with announced deals year to date, particularly in Natural Resources and Technology. Combined with a strong pipeline, advisory activity looks promising as we think about the rest of the year and into next year.

Wealth is starting to improve. Growth in client investment assets drove stronger Investment revenue, especially in Citigold, and was up a preliminary 15%. Our focus on rationalizing the expense base is starting

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to pay off, with expenses down 4%. Andy and his team continue to attract top talent from the industry as they focus on our investments business and on enhancing the client experience.

U.S. Personal Banking saw revenue growth of 6%, with all three businesses again contributing to the topline. There was good revolving balance and loan growth in both branded cards and retail services. We continue to see differentiation in the credit segments with the lower income customers seeing pressure. Retail Banking benefitted from higher mortgage loans and improved deposit spreads, while delivering strong referrals to Wealth. Overall, while we saw operating margin expansion, our poor returns were pressured by the combination of credit seasonality and the normalization of certain vintages. We certainly

The recent stress tests again showcased the strength of our balance sheet. Our CET1 ratio now stands at 13.6%, and we expect our regulatory capital requirement to decrease to 12.1% as of October 1st given the reduction of our stress capital buffer. Our tangible book value per share grew to $87.53. During the quarter, we returned $1 billion in capital to our common shareholders, and we are increasing our dividend by 6%. We expect to buyback $1 billion in common shares this quarter and we will continue to assess the level of buybacks on a quarterly basis, particularly given the uncertainty around the Basel III endgame.

structurally sound economy. After a break in progress, inflation now appears back on a downward trajectory. Services spending has remained on an upward trend although there are clear signs of a softening labor market and the tightening of the consumer budget. And of course, you might have heard there is an mpetitiveness continues to be a drag on growth. In Asia, China is growing moderately, albeit with government stimulus, and their

pivot to high-tech manufacturing is being challenged by tariffs on EVs and semi-conductors. Despite this uncertainty, as you saw at our Services Investor Day, when we went through our performance over the last two years, our business model can produce good results in a variety of macro environments. And there is plenty of upside for us across our five businesses.

We have made an incredible amount of progress in simplification- both strategically and organizationally. We have completed most of the exits of our international consumer markets. We streamlined our organization to catalyze agility and faster decision making. We are modernizing our infrastructure to improve our client service and automating processes to strengthen controls. We are on a deliberate path. We will continue to execute our Transformation and our strategy so we can meet our medium-term targets and then continue to further improve our returns over time. With that, I would like to turn it over to Mark and then we would be delighted, as always, to take your questions.

MARK MASON: Thanks, Jane and good morning, everyone. I am going to start with the firmwide financial results, focusing on year-over-year comparisons for the second quarter unless I indicate otherwise, and then spend a little more time on the businesses.

On slide 6, we show financial results for the full firm. For the quarter, we reported net income of approximately $3.2 billion, EPS of $1.52 and an RoTCE of 7.2% on $20.1 billion of revenues. Total revenues were up 4%, driven by growth across all businesses as well as an approximate $400 million gain related to the Visa B exchange offer. A significant portion of this gain is reflected in Equity Markets, with the remainder reflected in All Other. Expenses were $13.4 billion, down 2%, and 6% on a sequential basis. The combination of revenue growth and expense decline drove positive operating leverage for the firm and the majority of our businesses. Cost of credit was $2.5 billion, primarily driven by higher Card net credit losses, which were partially offset by ACL releases in all businesses except USPB, where we built for loan growth. At the end of the quarter, we had nearly $22 billion in total reserves with a reserve-to-funded loans ratio of approximately 2.7%.

On slide 7, we show the expense trend over the past five quarters. This quarter we reported expenses of

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$13.4 billion, down 2%, and 6% sequentially, which includes the $136 million civil money penalties imposed by the Fed and OCC earlier this week. The decrease in expenses was primarily driven by savings associated with our organizational simplification, stranded cost reductions, and lower repositioning costs, partially offset by continued investment in Transformation and the Fed and the OCC penalties. As we said over the past few months, we will continue to invest in the Transformation and technology to modernize our operations and risk and control infrastructure. We expect these investments to offset some of our saves and headcount reduction going forward. However, based on what we now know today, we will likely be at the higher end of the expense guidance range, excluding the FDIC special assessment and the civil money penalties. With that said, we will, of course, look for opportunities to absorb the CMP.

on the Transformation and address what the Fed and OCC announced Wednesday. We have made good progress on our Transformation in certain areas over the last few years, and I want to highlight some of those areas before discussing the announcement. First, Wholesale Credit and Loan operations, where we implemented a consistent end to end operating model and consolidated multiple systems with enhanced technology. This has not only reduced risk but enhanced operating efficiency and the client experience. We have also made improvements in risk and compliance as we enhanced our risk assessments and technology capabilities to increase automation for monitoring. And in Data, while there is a lot more to do, we have stood up a data governance process and streamlined our data architecture to ultimately facilitate straight through processing. Overall, we have improved risk management, and consolidated and upgraded systems and platforms to improve our resiliency. These efforts represent meaningful examples of how we are making progress against our Transformation milestones. That said, we have fallen short in data quality management particularly related to regulatory reporting, which we have acknowledged publicly since the beginning of the year. As such, we have begun to put additional investments and resources in place to not only address data quality management related to regulatory reporting and data governance, but also related to stress testing capabilities, including DFAST and Resolution Recovery. We also re-prioritized our efforts to ensure we are focused on data that impacts these reports first. We take this feedback from our regulators very seriously and we are committed to allocating all the resources necessary to meet their expectations.

Now turning back to the quarterly results. On slide 9, we show net interest income, deposits, and loans where

In the second quarter, net interest income was roughly flat. Excluding Markets, net interest income was down 3%, largely driven by the impact of foreign exchange translation, seasonally lower revolving card balances and lower interest rates in Argentina, partially offset by higher deposit spreads in Wealth. Average loans were roughly flat, as growth in Cards and Mexico Consumer was largely offset by slight declines across businesses. And average deposits decreased by 1%, largely driven by seasonal outflows and transfers to investments in Wealth as well as non-operational outflows in TTS.

On slide 10, we show key consumer and corporate credit metrics, which reflect our disciplined risk appetite framework. Across our card portfolios, approximately 86% of our card loans are to consumers with FICO scores of 660 or higher. And while we continue to see an overall resilient US consumer, we also continue to see a divergence in performance and behavior across FICO and income bands. When we look across our consumer clients, only the highest income quartile has more savings than they did at the beginning of 2019. And it is the over 740 FICO customers that are driving the spend growth and maintaining high payment rates. Lower FICO band customers are seeing sharper drops in payment rates and borrowing more as they are more acutely impacted by high inflation and interest rates. That said, as we will discuss later, we are seeing signs of stabilization in delinquency performance across our cards portfolios. And we have taken this all into account in our reserving and we remain well reserved with a reserve-to-funded loan ratio of 8.1% for our total card portfolio. Our Corporate portfolio is largely investment grade, at approximately 82% as of the second quarter. And we saw a nearly $500 million sequential decrease in corporate non-accrual loans, largely driven by upgrades and repayments. Additionally, this quarter we saw an improvement in our macro assumptions driven by HPI, oil prices and equity market valuations. And our credit loss reserves continue to incorporate a scenario-weighted average unemployment rate of nearly 5%, and a downside scenario unemployment rate of nearly 7%. As such, we feel very comfortable with the nearly $22 billion of reserves that we have in the current environment.

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t to highlight the strength of our balance sheet, capital and liquidity. It is this strength that allows us to support clients through periods of uncertainty and volatility. Our balance sheet is a reflection of our risk appetite, strategy and diversified business model. Our $1.3 trillion deposit base is well diversified across regions, industries, customers and account types. The majority of our deposits are corporate, at $807 billion, and span 90 countries. And as you heard at the Services ID, most of these deposits are held in operating accounts that are crucial to how our clients fund their daily operations around the world, making them operational in nature and therefore very stable. The majority of our remaining deposits, about $404 billion, are well diversified across the Private Bank, Citigold, Retail and Wealth at Work offerings, as well as across regions and products. Of our total deposits, 68% are US dollar denominated with the remainder spanning over 60 currencies. Our asset mix also reflects our strong risk appetite framework. Our $688 billion loan portfolio is well diversified across consumer and corporate loans. And about one-third of our balance sheet is held in cash and high-quality, short duration investment securities that contribute to our approximately $900 billion of available liquidity resources. We continue to feel very good about the strength of our balance sheet and the quality of our assets and liabilities, which position us to be a source of strength for the industry and, importantly, for our clients.

On slide 12, we show a sequential walk to provide more detail on the drivers of our CET1 ratio this quarter. We ended the quarter with a preliminary 13.6% CET1 capital ratio, approximately 130 basis points, or approximately $15 billion, above our current regulatory capital requirement of 12.3%. We expect our regulatory capital requirement to decrease to 12.1% as of October 1st, which incorporates the reduction in our Stress Capital Buffer from 4.3% to the indicative SCB of 4.1% we announced a couple weeks ago. We were pleased to see the improvement in our DFAST results, and the corresponding reduction in our SCB. That said, even with the reduction, our capital requirement does not yet fully reflect our simplification efforts, the benefits of our transformation or the full execution of our strategy, all of which we expect to reduce our capital requirements over time. And as a reminder, we announced an increase to our common dividend from $0.53 per share to $0.56 per share following the SCB results. And as Jane mentioned earlier, we plan on doing $1 billion of buybacks this quarter.

So now turning to slide 13. Before I get into the businesses, as a reminder, in the fourth quarter of last year, we implemented a revenue sharing arrangement within Banking, and between Banking, Services and Markets to reflect the benefit the businesses get from our relationship-based lending. The impact of revenue rvices, revenues were up 3% this quarter, reflecting continued underlying momentum across both TTS and Securities

Services. Net interest income was down 1%, largely driven by lower earnings on our net investment in Argentina, partially offset by the benefit of higher U.S. and Non-US interest rates relative to the prior-year period. Non-interest revenue increased 11%, driven by continued strength across underlying fee drivers, as well as a smaller impact from currency devaluation in Argentina. The underlying growth in both businesses is a result of our continued investments in product innovation, client experience and platform modernization that we highlighted during our Services Investor Day last month. Expenses increased 9%, largely driven by an Argentina-related transaction tax expense, a legal settlement expense and continued investments in product innovation and technology. Cost of credit was a benefit of $27 million, driven by an ACL release in the quarter. Average loans were up 3%, primarily driven by continued demand for export and agency finance, particularly in Asia, as well as working capital loans to corporate and commercial clients in Latin America and Asia. Average deposits were down 1%, driven by non-operating deposit outflows. At the same time, we continue to see good operating deposit inflows. Net income was approximately $1.5 billion. And Services continues to deliver a high RoTCE, coming in at 23.8% for the quarter.

On slide 14, we show the results for Markets for the second quarter. Markets revenues were up 6%. Fixed Income revenues decreased 3%, driven by Rates and Currencies, which were down 11% on the back of lower volatility and tighter spreads. This was partially offset by strength in Spread Products and Other Fixed Income, which was up 20% primarily driven by continued loan growth and higher securitization and underwriting fees. In addition to a benefit from the Visa B exchange offer, we continued to see good underlying momentum in Equities, primarily driven by Equity Derivatives. And we continued to make progress in prime with balances up approximately 18%. Expenses decreased 1%, driven by productivity

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savings, partially offset by higher volume-related expenses. Cost of credit was a benefit of $11 million, as an ACL release more than offset net credit losses. Average loans increased 11%, largely driven by asset-backed lending in Spread Products. Average trading assets increased 12%, largely driven by client demand for Treasuries and mortgage-backed securities. Markets generated positive operating leverage and delivered net income of approximately $1.4 billion with an RoTCE of 10.7% for the quarter.

On slide 15, we show the results for Banking for the second quarter. Banking revenues increased 38%, driven by growth in Investment banking and Corporate Lending. Investment Banking revenues increased 60%, driven by strength across Capital Markets and Advisory, given favorable market conditions. DCM continued to benefit from strong issuance activity, mainly in Investment Grade, as issuers continued to de-risk funding plans in advance of what could be a more volatile second half in the context of a number of important global elections as well as the macro environment. In ECM, excluding China A- activity, led by the US, as well as continued convertible issuance, as issuers take advantage of strong equity market performance and expectations for rates to be higher for longer. And in Advisory, we are seeing revenues from the relatively low announced activity in 2023 coming to fruition as those transactions close. Both year-to-date and in the quarter, we gained share across DCM, ECM and Advisory, particularly in Corporate Lending revenues, excluding mark-to-market on loan hedges, increased 7%, largely driven by higher revenue share. We generated positive operating leverage again this quarter as expenses decreased 10%, primarily driven by actions taken to right size the expense base. Cost of credit was a benefit of $32 million, driven by an ACL release reflecting an improvement in the macroeconomic outlook, partially offset by net credit losses. Average loans decreased 4% as we maintained strict discipline around returns combined with lower overall demand for credit. Net income was $406 million and RoTCE was 7.5% for the quarter.

On slide 16, we show the results for Wealth for the second quarter. Wealth revenues increased 2%, driven by a 13% increase in NIR from higher investment fee revenues, partially offset by a 4% decrease in NII from higher mortgage funding costs. We continue to see good momentum in non-interest revenue as we benefited from double-digit client investment asset growth, both in North America and internationally, driven by net new client investment assets as well as market valuations. Expenses were down 4%, driven by the initial benefits of expense reductions as we right size the workforce and expense base. Cost of credit was a benefit of $9 million, as an ACL release more than offset net credit losses. Preliminary end-of-period client balances increased 9%, driven by higher client investment assets as well as higher deposits. Average loans were flat, as we continued to optimize capital usage. Average deposits increased 2%, largely reflecting the transfer of relationships and the associated deposits from USPB, partially offset by a shift in deposits to

higher-Client investment assets were up 15%, driven by net new investment asset flows and the benefit of higher market valuations. Wealth generated positive operating leverage this quarter and delivered Net income of $210 million with an RoTCE of 6.4% for the quarter.

On slide 17, we show the results for US Personal Banking for the second quarter. US Personal Banking revenues increased 6%, driven by NII growth of 5% and lower partner payments. Branded Cards revenues increased 8%, driven by interest-earning balance growth of 9% as payment rates continue to moderate. And we continue to see growth in spend volumes up 3%, primarily driven by customers with FICO scores of 740 or higher. Retail Services revenues increased 6%, primarily driven by lower payments from Citi to our partners due to higher net credit losses. And interest-earning balances grew 8%. Retail Banking revenues increased 3%, driven by higher deposit spreads, as well as mortgage and installment loan growth. USPB also generated positive operating leverage this quarter, with expenses down 2%, driven by lower technology and compensation costs, partially offset by higher volume-related expenses. Cost of credit increased to $2.3 billion, largely driven by higher NCLs of $1.9 billion and an ACL build of approximately $400 million reflecting volume growth in the quarter. But let me remind you of the three things driving our NCLs this quarter. First, card loan vintages that were originated over the last few years are all maturing at the same time. These vintages were delayed in their maturation due to the unprecedented levels of government stimulus during the pandemic. Second, we continue to see seasonally higher NCLs in the second quarter. Third, certain pockets of customers continue to be impacted by persistent inflation and high interest rates resulting in higher losses. However, across both portfolios we are seeing signs of stabilization in delinquency

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performance, but we will continue to watch the impact of persistent inflation and high interest rates as the year progresses. Despite these factors we still expect Branded Cards to be in the 3.5% to 4.0% NCL range for the full year and Retail services to be at the high end of the range of 5.75% to 6.25%. Average deposits decreased 18%, as the transfer of relationships and the associated deposits to our Wealth business more than offset the underlying growth. Net income was $121 million and RoTCE for the quarter was 1.9%. said before, we will continue to take actions to manage through regulatory headwinds, lap the credit cycle and grow revenue while improving the overall operating efficiency of the business to ultimately get to a high- teens return over the medium term.

On slide 18, we show results for All Other on a managed basis, which includes Corporate Other and Legacy Franchises and excludes divestiture-related items. Revenues decreased 22%, primarily driven by the closed exits and wind-downs and higher funding costs, partially offset by growth in Mexico as well as the impact from the Visa B exchange offer. And expenses decreased 7%, primarily driven by closed exits and wind- downs.

Slide 19 shows our full year 2024 outlook and medium-term guidance, both of which remain unchanged. We continue to remain laser focused on executing on our transformation and enhancing the businesses performance. And while we recognize there is a lot more to do on Transformation, we are pleased with the progress we are making towards our 2024 and Medium-term targets and remain committed to these targets. With that, Jane and I will be happy to take your questions.

QUESTION AND ANSWER

OPERATOR: Our first question will come from Mike Mayo with Wells Fargo. Your line is now open. Please go ahead.

MIKE MAYO: Hi. Could you elaborate more on the amended consent order, Jane? You said it was disappointing to have gotten that this week. It's almost four years into the consent order. And a little bit why it hasn't been resolved and what's on, that's the loss column and maybe a little bit more on the win column too. I mean, you have what 12,000 people thrown at the problem. Billions of dollars. Is it not enough people? Is it not enough money? Do you need to look at it in a different way? Are you not talking the same language?

I mean, you have John Dugan as your lead independent director, ex head of the OCC, and it seems like you got your report card. I guess you passed overall. They went out of their way to say some nice things, but it looks like you got failing grades in data and regulatory management. So, you're confident it's going to be resolved, but it's already been four years and it hasn't been resolved. So what is it going to take from here and how can you resolve the regulatory concerns while continuing or serving shareholders better? And then in the win column, since it's so nebulous this back office, what are you achieving? You mentioned some items, but if you could put more meat on those bones. Thanks.

JANE FRASER: Yes. Thank you, Mike. That's a few different parts to that, so let's start by just taking a step back. Our transformation is addressing decades of under-investment in large parts of Citi's infrastructure and in our risk and control environment. And when you unpack that, those areas where we had an absence of enforced enterprise-wide standards and governance, we've had a siloed organization that's prevented scale, a culture where a lot of groups were allowed to solve problem the same problem in different ways, fragmented tech platforms, manual processes and controls, and a weak first line of defense, too few subject matter experts. So, this is a massive body of work that goes well beyond the consent order and this is not old Citi putting in Band-Aids. This is Citi tackling the root issues head on. It's a multiyear undertaking as we've talked about and you saw the statement by one of our regulators this week, we have made meaningful progress on our transformation and on our simplification.

Mark?

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MARK MASON: Yeah, and so as Jane says, the progress that we've made, it spans multiple parts of the consent order and transformation work. Remember, that consent order and transformation work includes risk, it includes controls, it includes compliance, it includes data and data related to the regulatory reporting, and we've got evidence and proof points of progress against all of those things.

JANE FRASER: Thank you, Mark. So transforming, to answer your question about how do we fix it and serve our investors at the same time. Transforming Citi will drive benefits for our shareholders, our clients, and our regulators. This is not mutually exclusive. At the beginning of the year, we honed in on two priorities, the transformation and improving our business performance, and we're able to do so because we've largely cleared the decks. We have a clear focus strategy, we've executed the divestitures, we've got a much simpler organization, so we can focus on these two priorities and we are able to do both.

You can see that in our results again this quarter, multiple, solid proof points on the execution of the strategy and we know what we need to do on both fronts. We have plans in place on the transformation and on the strategy and we're executing against them. We have been and we will be transparent when we have issues and how we're addressing them.

MARK MASON: And just to add a couple of data points to that, Mike. You've heard us mention some of these before, but we've retired platforms. We've reduced the number of data centers. Platforms are down some

300. We've moved from 39 corporate loan platforms down to south of 20. We've got 20 cash equities execution platforms down to 1; we've reduced the 6 reporting ledgers down to 1; 11 sanctions platforms down to 1. So, we've been making considerable progress over the past couple of years.

With that said, there's a lot more work to be done around the data regulatory reporting work. If you think about Citi, we've got 11,000 global total reg reports, right. So, we've got to make sure that the data that's going into those reports is the quality of the data that we want it to be, but more importantly, that we're doing it efficiently, that it doesn't take thousands of people to reconcile that information and so this is an end-to- end process in the way we're approaching it.

One example is the 2052a liquidity report that we have. It has 750,000 lines of data and that data is, it's important again that we're efficiently collecting it from multiple systems with standards and governance that ensures it's of the quality that we want it to be without again having to have manual activity supporting it.

OPERATOR: The next question is from Glenn Schorr at Evercore. Your line is now open. Please go ahead.

GLENN SCHORR: Hi. Thank you. So, Mark, I heard your comments on credit this year. I'm talking the US Personal Banking. I heard your comments for credit the rest of this year and I think in a position that you're very conservatively reserved. But right now, you put up a 3% margin and credit costs are almost half of what revenues are in this space. I guess, my question is this: As we roll forward, in a slowing economy with likely a little bit lower some rate cuts, how does the P&L evolve? How does it improve from here? Because can we be expecting credit costs to come in, in a slowing economy? I'm just trying to figure out the path forward because it could be impactful if USPB obviously marches to where you need it to be.

MARK MASON: Yeah, look, like I said, we do think that there is certainly upside to USPB. We're looking for that upside in the medium-term targets that we've set for ourselves. You've got to remember that when you look at the quarter and you look at the half, frankly, that we're still in a period where we're seeing the normalization of the cost of credit. And as I mentioned in the prepared remarks, you have kind of a compounding effect of multiple vintages now maturing at the same time that's playing through the P&L. That's not just true for us, that's true for others as well. And so we'd expect and we are we do believe we're seeing some signs of a cresting when you look at delinquencies now and so we would expect that those losses start to normalize and loss rates start to come down as we go towards the medium term.

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At the same time, we're investing in the business and we're looking to see continued growth in volume and on the top line. And the combination of those things, as we drive towards the medium term, will help us to deliver both the top line growth and certainly improve returns from where we sit today and in line with what we've guided to.

So, it's a combination of top line performance from volume and obviously the environment plays into that, but we feel like we've got a reasonable assumption around top line growth there, cost of credit normalizing, continued discipline on the expense line, allowing for us to get improved returns across that USPB business.

GLENN SCHORR: Okay. Appreciate all that. One quickie on DCM. You had amazingly good performance. There's been plenty of conversation about pull forward this year on just refi driving like three-quarters of the activity. Could you just help us think through the second half when thinking about DCM just to make sure that we don't like start modelling this into perpetuity?

JANE FRASER: Look, I think when we think about the back half of 2024, we're going to see a different mix of activity in Banking. We do still expect demand to be quite strong across our capital market products because you've got a wall of maturing debt securities coming up in the second half that carry on for a couple of years. But, we did see some clients accelerating issuances into the first half getting ahead of potential market volatility. So, if you put it all together, I think we expect the rate environment and the financing markets to continue to be accommodative as well as to continue deal making with M&A being a bit larger in the overall mix, although some of the regulatory elements have put a damper on part of that.

MARK MASON: Yeah. Only thing I'd add to that is, look, the wallet for the year is obviously going to depend on a couple things, so, one, the return of a more normalized IPO market, two, the direction and volatility of interest rates, the ongoing global conflicts that we're all kind of seeing and witnessing, and then finally, as Jane mentioned in her remarks, the elections and what those outcomes look like, not just in the US, but abroad. And so there are a number of factors there that will play to the wallet. But as we said, we believe we're well-positioned to be there to serve our clients and to do so in a way that makes good economic sense.

OPERATOR: The next question is from Jim Mitchell at Seaport Global. Your line is now open. Please go ahead.

JIM MITCHELL: Hey. Good morning. Just, Mark, maybe on NII, down almost 4% year-over-year. Seems a little bit more than the guidance was down modestly for the year. So, can you discuss sort of the puts and takes this quarter and how we should think about the quarterly trajectory for the rest of the year?

MARK MASON: Yeah. So, I'd say a couple things. So, one, as I mentioned, in the quarter and you see it on slide 9, ex-Markets, we're down about 3%. That's largely driven by some FX translation that played through, but also some seasonally lower revolving card balances and then lower interest rates in Argentina. And what that is in Argentina, we have capital there, the policy rate was adjusted downward and as that happened, we obviously earned less on that capital that flows through the NII line.

As I think about the back half of the year and the guidance we have of modestly down, there are a couple of puts and takes to keep in mind. So, one is going to be rates, right, so as I think about the higher yield that we can earn on reinvestment, that'll be a tailwind that plays through from an NII point of view.

The second would be volume growth, particularly in our card loans portfolio and we do expect to see continued volume growth across certainly the Branded portfolio and so that'll be another tailwind for us on the NII line.

In terms of the headwinds, you've got the lower NII earned in Argentina from rates, that'll continue to play through. We've got assumed higher average betas in 2024, specifically on the non-US side. We still have in our forecast the impact of CFPB late fees, so assuming that that goes into effect for this year, that will have

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T R A N S C R I P T

Citi Second Quarter 2024 Earnings Call

July 12, 2024

an impact and it's in the forecast, and then the impact of lost NII from the exits that we have. And so, the combination of those things will probably mean that NII in the back half of the year is a little bit higher than the first half, but again, consistent with the guidance that we gave of modestly down.

JIM MITCHELL: That's helpful. And maybe just quickly, kind of a similar question on expenses. Better-than- expected this quarter, but there was no restructuring or repositioning charges. I think to get to the high end of your range, you'd have to be up a little bit in the back half from 2Q run rate. Is that because you expect more repositioning, restructuring in the second half or maybe just talk through expense trajectory from here?

MARK MASON: Yeah, so that's right. When I talk about it at the first quarter, I talked about kind of a downward trend for each of the quarters after Q1. The second quarter came in a bit lower than we were expecting. I'm sticking with the guidance and it does mean that the back half of the year will likely come in will come in higher than the second quarter. That's a combination of a couple of things, including the pace of hiring and investment that we will do in the transformation work that has to be done. It also includes repositioning charges that we might take or need to take as we continue to work through our businesses across the firm and the franchise and then the second quarter did or yeah, the second quarter did have a one-time or so and some delayed spending that will pick up in the third and fourth quarter around advertising and marketing and some of the other line items. So, yes, the third and fourth quarter, the back half will be higher than the second quarter, but consistent with the guidance that I've given.

OPERATOR: The next question is from Erika Najarian at UBS. Your line is now open. Please go ahead.

ERIKA NAJARIAN: Hi. I had two questions and I'll ask the first one on expenses first since it's a good follow- up to the previous. Mark, just to clarify. Let's just say, take the highest end of your range at $53.8 billion. Just trying to think about how consensus will move. So, we take that $53.8 billion and then add the $285 million of FDIC expenses year-to-date so far and add the civil money penalties of $136 million, so that gets us to $54.2 billion for the year and any other repositioning charges in the second half of the year would already be included in the $53.8 billion?

MARK MASON: So, yes. The answer to the last part of your question is yes. So in the range that I've given, $53.5 billion to $53.8 billion, that includes our estimate for the full year of repositioning and any restructuring charges. That range excludes the FDIC Special Assessment that we saw earlier in the year and it excludes the CMP of $136 million.

ERIKA NAJARIAN: Got it. And my second question is for Jane and I'm sure you're getting tired of the question on capital return. So, you're buying back $1 billion, you plan to buy back $1 billion this quarter. It looks like you didn't buy back any in the second quarter. And I'm asking this question in this context because consensus has a buyback of nearly $1 billion in the fourth quarter and staying at this rate for the first half of next year and ramping higher. And I guess, is the $1 billion number a catch-up pace because you didn't buy back any in the second quarter? And I fully appreciate that you also have the Banamex IPO coming, which is different from peers that are also waiting for Basel clarification. But I'm just wondering, do we need to wait for that Banamex IPO for the company to feel comfortable moving away from that quarter-to-quarter guidance? And also, of course, I just want to readdress the beginning of the question when I asked specifically about the pace.

JANE FRASER: Okay. So, we are not going to be giving guidance going forward around our buybacks. We are going to continue to give quarterly and make it a quarterly determination as to the level. And a lot of that is to do with the uncertainty about the forthcoming regulatory changes. I think we were delighted to see a slight reduction in our Stress Capital Buffer, reflecting the financial strength and resiliency of our business model and also good to see the benefits of our strategy playing out. But with the regulatory changes uncertain, that's one of the major factors for us to continue with the quarterly guidance.

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