Citigroup Earnings Call Insights: International Aspects and Core Expenses

Citigroup (NYSE:C) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

International Aspects

Glenn Schorr – Nomura Securities: So, I like disclosure on 17, you showed us that 60% NCLs were offset with loan loss reserve releases with between the sales and then just the improving conditions in general, should we be thinking 60% offset is the right number or should that grow over time as the portfolio shrinks and the market keeps getting better?

Michael Corbat – CEO: I would say that if the portfolio continues to demonstrate the improving credit trends and if the housing market remains stable, you should assume that we would likely increase that percentage coverage, as we move through the year.

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Glenn Schorr – Nomura Securities: The comment, John, that you made earlier related to the tax rates in certain international entities, is that a comment on thoughts on repatriation? I guess it’s the same question, is it at all related to what I think is a growing subsidiarization trend meaning, the U.S. Pushes foreign banks to hold more capital in the U.S., now are other markets doing that? How much of it is that a risk that we should be thinking of trap capital around the world for you guys?

John C. Gerspach – CFO: Well that is an ongoing area that I think everyone is looking at. But that’s not what’s driving this decision. Glenn when you look at the requirements under APB 23, one of the things that you have got to assert is that the capital in the offshore legal entities is to be permanently reinvested outside the States. Specific legal entities and here think in terms of our bank in Singapore and our bank in Ireland we have built up now substantial capital and as you look at the capital levels we have enough capital to meet the investment requirements that we see out into the future. So it’s likely that at some point in time current earnings and the future earnings in those legal entities, could be repatriated into the States and therefore we are going to provide the U.S. taxes, the differential between the U.S. tax rate and the local tax rate on those earnings.

Glenn Schorr – Nomura Securities: Last one, so post stress test where you had super-high capital ratios at the stress test. You have very high Basel III now and growing pretty quickly. That leads people to towards getting real excited about next year’s CCAR. I’m just – the question I have is, how are the rating agencies thinking about removing some of the implicit government support and the OLA coming rules play into your role about Citi’s ideal capital structure?

John C. Gerspach – CFO: Those are all things that are developing and maybe will get further developed as 2013 unfolds. For now, we’re waiting to see what rules come out regarding OLA.

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Glenn Schorr – Nomura Securities: Have there been any pre-funding of it, in other words, I thought I saw you do some sub debt issuance and your funding costs have come way down given your good performance?

John C. Gerspach – CFO: Yeah, to the extent that we’ve had debt maturities. We’ve rolled over some of those maturities although we’ve been in a process of reducing long-term debt. I think you’ve seen issue some preferred stock in the last couple of quarters, that’s – you take a look at the capital structure. We think preferred stock is a piece of that structure that we need to do some issuance with as we think ahead to what the Basel III capital requirements are both not just for Tier 1 common, but also for Tier 1.

Core Expenses

John McDonald – Sanford Bernstein: John, on the expenses, I was wondering you mentioned that on the core expenses about $11.5 billion. We should start to see those start to come down, as you get the repositioning benefits, is there a new range of core expenses, we should think about over the next couple of quarters?

John C. Gerspach – CFO: No, John. We’re staying with what we said at year-end and you should expect as we just said to see the core expenses decline over the next couple of quarters.

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John McDonald – Sanford Bernstein: From that $11.5 billion is that right?

John C. Gerspach – CFO: Correct.

John McDonald – Sanford Bernstein: Then on the legal repositioning side, I think you just said kind of volatile and likely to remain elevated, is this the neighborhood we should kind of think about or too tough to predict?

John C. Gerspach – CFO: I’d say it’s kind of too tough to predict. I think if you take a look at legal expenses, thought what did we run last year $2.8 billion for the full year or something like that, and now you’ve got $700 million or so in the first quarter. I’ll leave it at that.

John McDonald – Sanford Bernstein: So you’re running at the same pace as last year.

John C. Gerspach – CFO: Roughly, on average.

John McDonald – Sanford Bernstein: Then in terms of the net interest income, your net interest income dollars fell in the first quarter, I assume there is some day count pressure and you mentioned the NIM outlook, was just wondering though, do you hope to grow the net interest income dollars in 2013 given the earning asset expansion you’re doing?

John C. Gerspach – CFO: I’m sorry John. What was the…?

John McDonald – Sanford Bernstein: Do you expect the net interest income dollars to grow this year in 2013? You were down on NII in the first quarter, sequentially. I was just wondering if you mentioned the NIM outlook. I was wondering…

John C. Gerspach – CFO: John, I don’t give net interest revenue outlooks. That kind of gets into really going forward-looking. On a day count basis though, if you take a look at the average net interest revenue for us, it was about $132 million in the fourth quarter and the same number in the first quarter.

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John McDonald – Sanford Bernstein: Then last thing for me on the DTA, could you give us some sense of the drivers of the consumption, how much from improving just U.S. net income versus other factors that might have been at play?

John C. Gerspach – CFO: Yeah, if you look at the moving pieces of the DTA, there was about $100 million of DTA that was actually added by the CVA/DVA loss. Citi Holdings losses added about $500 million of DTA and then Citicorp earnings actually consumed, enabled us to consume about $1 billion of DTA this quarter and then the balance of $300 million basically came out of OCI.

John McDonald – Sanford Bernstein: So hard to run rate this, so to give an outlook I guess we are still down some a little bit. Do you have any outlook on the consumption or the ability to consume?

John C. Gerspach – CFO: No. you have to think about it this way. As long as we can continue to do some growth in U.S. earnings that should be helpful and that includes winding further wind downs in the Citi Holdings losses and also the AP – the change in the APB 23 assertion that change in the effective tax rate on a dollar for dollar basis, those incremental taxes will also serve to offset the DTA.

John McDonald – Sanford Bernstein: Where do we stand at year end under on the other numbers, sorry at the quarter end in terms of the total?

John C. Gerspach – CFO: It’s down about $700 million John off the 55.3, so I guess that makes it right 54.6.

A Closer Look: Citigroup Inc Earnings Cheat Sheet>>