Citigroup Earnings Call Nuggets: Freeing Reserves and Net Interest Margins

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

Freeing Reserves

Glenn Schorr – Nomura Securities: I guess, John, you gave some good detail on some of the improving credit trends in holdings on the mortgage portfolio. I guess, the blunt question and I know we’ve asked it in the past is what more do you need to see to start freeing up the reserves. There is 8.4 billion you have 33 months now. It is a big difference because it goes hand in hand with the question of how do we get that P&L impact of holdings lower. So, just curious on your thoughts there?

John C. Gerspach – CFO: Glenn, your observations are absolutely right as far as. And the main point there is alpha as far as being able to begin charging those NCLs against the reserves is one way of driving Holdings towards breakeven. But as we’ve said last quarter, we want to make sure that those trends and we do see some strong positive trends in the housing market. We want to make sure that they are sustainable. At the end of last quarter, we pointed out to – we wanted to see the U.S. get pass the whole fiscal cliff issues…

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…Well, unfortunately at the end of the year, the resolution of the fiscal cliff was basically kicking the can down the road. So, I think what we would like to see now is how the U.S. deals with the ongoing debt ceiling debate, and the upcoming sequester on expense reductions. We get through that and see how the economy performs. We see whether or not those trends that we see now are sustainable and then we have got decisions to make.

Glenn Schorr – Nomura Securities: Crystal ball, let’s say 2013 as (indiscernible).

Michael Corbat – CEO: You tell me how we’re going to come through the debt ceiling.

Glenn Schorr – Nomura Securities: They’re going to put another ban date on it.

Michael Corbat – CEO: Will take a look.

Glenn Schorr – Nomura Securities: The $10 billion in pay downs this quarter that you mentioned. Are there specifics to the portfolio that would make fourth quarter more or less or is $10 billion a quarter fair enough to think about?

Michael Corbat – CEO: Glenn, I just want to make sure that we’re focused on the same items. When we were talking about the net pay downs and that’s not overall in the mortgage portfolio. I don’t think…

Glenn Schorr – Nomura Securities: I’m with you but it’s inside Holdings’ assets, correct?

Michael Corbat – CEO: Yeah, okay, that’s fine. We’ve guided you for some time now that the pace of reduction in Holdings is going to slow and it would necessarily be smooth quarter-after-quarter. So, I wouldn’t look at that $10 billion of net pay down necessarily as being indicative, but we don’t anticipate that it should drop-off dramatically in the next quarter or two.

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Glenn Schorr – Nomura Securities: Back in Slide 26 in the appendix you gave us the Basel I to Basel III work through, and I guess there’s a 24% increase when you go from one to the other and that’s been kind of consistent. What we’ve seen at some of the competitors is as portfolios have reduced and as credit has continued to get better, some changes to the models and therefore Basel III assets go down, therefore your Basel III cap ratio goes up. Curious on what would be on Citi’s portfolio that we wouldn’t see something similar?

John C. Gerspach – CFO: So, if the overall – assuming that we continue to reduce the risk in the portfolio and there’s an improving environment that is the way the model should work.

Glenn Schorr – Nomura Securities: So, bottom line is that at year-end you didn’t make big changes to the models for what you’ve seen on credit and so there no big reduction of Basel III?

John C. Gerspach – CFO: No, the reduction that you see in Basel III primarily reflect again movements in the actual books itself.

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Glenn Schorr – Nomura Securities: One last quickie is, you mentioned on the $1.3 billion of legal cost this quarter related to some consumer management. I’m not much sure if you – I mean, I can take a guess, but it wouldn’t mind just a little bit more color there this way we can make our own decisions on whether or not we think that’s the appropriate run rate or fourth quarter was unusually high?

John C. Gerspach – CFO: We don’t go into detail on specific reserving actions unless it’s in connection, with a settlement that we are announcing. But look – many different aspects of U.S. consumer related products and offerings are the focus of reviews across the industry. Including by several of our regulators. I don’t think it is any secret that the CFPB has been reviewing various consumer products and in fact they are currently reviewing us. But I am not going to say anything more about individual regulator discussions.

Net Interest Margins

John McDonald – Sanford Bernstein: Couple of clarifying questions about your outlook comments. You indicated that you hope to keep the net interest margin stable would that imply that you expect to have some expansion of net interest income dollar given that the balance sheet is growing?

John C. Gerspach – CFO: The answer to that is, it somewhat depends and I am going to have to fudge it little bit only because of the impact of the trading book and how that impacts net debt interest. So when you look at our core banking operation. We should have some improvement in net interest revenue the difficult thing to project always though is the exact movements of interest revenue and therefore NIM on the trading book. In this quarter for instance I mentioned a roughly half 4 basis points of the 7 basis point improvement came about as a result of the trading portfolio.

John McDonald – Sanford Bernstein: Then on the expense outlook you said core operating expenses should be turning at 11.5 billion per quarter, right?

John C. Gerspach – CFO: I said but that’s a good base on which to start to think about it.

John McDonald – Sanford Bernstein: For the year, you expect that core operating expense to be lower in 2013 versus ’12, what’s the amount in ’12 you’re looking at when you say it will be below that?

John C. Gerspach – CFO: Take a look at the full year reported operating expenses for Citigroup.

John McDonald – Sanford Bernstein: Do you have the number that you’re looking at?

John C. Gerspach – CFO: I think there is a slide in appendix…

John McDonald – Sanford Bernstein: 46, 47…

John C. Gerspach – CFO: About 29, so it’s 46.3.

John McDonald – Sanford Bernstein: So, expect the core operating expense to coming below that in ’13 that’s what you are shooting for and that’s before the $900 million of repositioning saves, just how does that – how do you think?

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John C. Gerspach – CFO: I rolled it altogether. I am trying to stay away from giving you a specific number. But think in terms of the 11.5, as I said as being an indicative base for moving forward. Of that 11.5 base, we are going to deliver the $900 million of expense saves coming off the repositioning. We’re going to drive down expenses in Citi Holdings. We’re going to have to spend some amount of money off of those two reductions in order to fuel volume growth that we’ll see in the business, but we’re also anticipating continuing or reengineering program and therefore driving out more expenses on top of the $900 million.

John McDonald – Sanford Bernstein: Then finally, we heard you say legal and related costs a lot today as you went through your remarks, just a little bit of color on what’s included in that type of category, because there was a lot of expense increase in this quarter attributed to legal and related, and what are your thoughts as we go to it. It’s obviously tough to predict this stuff, do you expect to make some improvement on that front in 2013?

John C. Gerspach – CFO: As I said we don’t think legal unrelated, what does this include, let me get to one of your specific question. It certainly includes the results of announced settlements. I mean we call that out for you just as we did with the $305 million settlement that we reached in connection with the foreclosure review. It would include other reserves that we take in relation to ongoing legal and regulatory matters, for which we don’t comment because they are just things that we are not going to comment on publicly until they become a fact. So, given that those are the types of items that you look at and given the environment that we are in, that’s why we would expect legal and related expenses to remain somewhat elevated as we move forward. Legal and related to this year ran about $2 billion plus, closer to 3, $2.9 billion. It’s a $600 million or $700 million increase of where we were last year. I think you are going to be looking at those types of levels going at least in the near-term.

John McDonald – Sanford Bernstein: And one final specific question, can you talk how much you had in expenses related to mortgage (Indiscernible) and that might be ending with the independent foreclosure review settlement?

John C. Gerspach – CFO: One of the good things coming out of that settlement is that we can stop incurring those expenses, those expenses were running us just south of $200 million a year.

John McDonald – Sanford Bernstein: And were they disproportionately in holdings.

John C. Gerspach – CFO: They were all in holdings.

A Closer Look: Citigroup Earnings Cheat Sheet>>