Citigroup Earnings Call Insights: Repositioning Savings and Emerging Markets

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

Repositioning Savings

John McDonald – Sanford Bernstein: John, a question on expenses. Recall, in terms of the repositioning savings you are shooting for $900 million this year. In the first quarter, you said you didn’t get much of that. How much of that did you get in the second quarter? So where do we stand right now on realizing $900 million that you are shooting for this year?

John C. Gerspach – CFO: You probably have seen about $200 million of the repositioning savings reflected in the second quarter results.

John McDonald – Sanford Bernstein: That $900 million, we should think of that as a year-over-year savings ’13 versus ’12 is that how we should look at it?

John C. Gerspach – CFO: I guess the way I would think of it, John, is, if you go back to the fourth quarter when we first talked about the $900 million and the whole repositioning action, I think we had core operating expenses in that quarter of about $11.5 billion. Now, since then, we’ve taken out credit card, we’ve moved that to discontinued operations, and we certainly had some impact of FX, and so if you adjust for those two items, that would probably adjust that $11.5 billion to just a little bit north of $11.3 billion. So the fourth quarter repositioning actions, we’ve said would yield full year saves of $1.2 billion, which means that $300 million of that save should be visible in our fourth quarter numbers. So if you start with $11.3 billion in the fourth quarter of last year and you look at $300 million of saves that should be embedded in our fourth quarter numbers, you should expect a fourth quarter core operating expense number somewhere around $11 billion, again, depending upon how performance-related ISC could flow for the balance of the year.

John McDonald – Sanford Bernstein: That was around $11.2 billion to $11.173 billion this quarter is that the right comparable number?

John C. Gerspach – CFO: Yeah, so this quarter we’re at 11.173 and I’d say and that includes the higher performance related (ISC) that we’ve had this quarter, and I’d say that we’re on target to deliver the annual savings by the end of the year.

John McDonald – Sanford Bernstein: In terms of the legal expenses remaining high $800 million this quarter, it seems like you are on track to be similar to last quarter or last year, we did about $2.8 billion for the total. As far as to predict that, any color you can give us on the outlook there or just what’s driving that to remaining high, is this kind of private-label stuff or any color you could offer there?

John C. Gerspach – CFO: Certainly private-label litigation is one of the legacy issues that we’re dealing with, and you know, you’re quite right. We had $2.8 billion of legal and related expense last year. We had $700 million or so in the first quarter of this year, so, I would expect legal and related cost to as we said you know remain high and somewhat volatile.

John McDonald – Sanford Bernstein: In terms of the DTA utilization, $1.3 billion for the first half. Are we on a steady pace here, can we think of $600 million to $700 million per quarter as a reasonably sustainable pace in this kind of environment John or, are they funny factors we need to think about that might drive this to be volatile in the next several quarter?

John C. Gerspach – CFO: Well, John, it’s actually going to depend on the level and component pieces of our earnings stream. In looking at this quarter, Citicorp earnings actually utilized $1.3 billion of DTA that would’ve been partially offset by $300 million of DTA that was created by Holdings. Then you had had CVA that actually utilized because CVA was a revenue item this quarter, CVA utilized $200 million of DTA this quarter and then OCI created DTA. So, there is a lot of moving pieces that go into that 600…

John McDonald – Sanford Bernstein: But gradual trend of a smaller drag of Holdings is the key thing that we’ll get this higher over time I guess?

John C. Gerspach – CFO: I say the two key things would be continued strong earnings in Citicorp, especially – and then the gradual decline hopefully in Citi Holdings losses, yes.

John McDonald – Sanford Bernstein: Then final thing for me John, in terms of that new supplemental leverage ratio any thoughts on where you would look in terms of the bank level that will ultimately need to be into the 6% standard?

John C. Gerspach – CFO: We did not have enough time to run the bank ratios for the second quarter. As we mentioned at you’re going to run each month and then the average of three months, and it just a little bit more involved in running the bank. We had run the bank for the month of March, and at least as we ran the bank for the month of March, we were right around 6% for the month of March.


Emerging Markets

Matt O’Connor – Deutsche Bank: Just beginning with some questions in terms of why we didn’t see maybe more negative impact from the volatility in emerging markets, either within your capital or some of the fixed income businesses, well, it’s two different things, but just in the volatility we saw in FX, the spread widening and the credit problems, it didn’t really assume that goes all that material in the grand scheme of things?

John C. Gerspach – CFO: Well, as a matter of fact I think that we managed our emerging markets business quite well in the quarter. In the fixed income numbers, one of our real strong performers was our local markets FX business. That business, if I recall, it generated revenue – we think revenue growth of 25% year-over-year and 7% sequentially. So we actually performed quite well this quarter…

Matt O’Connor – Deutsche Bank: Just somewhat related on fixed-income trading, any meaningful impacts from the OTC clearing of the swaps or do you think we will have them going forward?

John C. Gerspach – CFO: We still have to see how everything settles out. I still haven’t seen the final guidance and everything that’s coming out of the – all the debates from last week. I think that that’s still something that is yet to be developed.

Matt O’Connor – Deutsche Bank: Then just lastly you gave some net interest margin guidance. What about for net interest income dollars to overall. Do you think we will see them trend up from here?

John C. Gerspach – CFO: That’s a little bit different. If you look over the last couple of quarters we’ve been relatively stable and in our daily net interest revenue. I think our daily net interest revenue this quarter was $130 million a day, last quarter was $131 million a day. I wouldn’t – it’s going to be somewhat dependent on day count and a few other things. I really wouldn’t want to go out on a limb and start predicting big increases in net interest revenue at this point.

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