Citigroup Inc. (NYSE:CPK) Goldman Sachs 2022 US Financial Services Conference December 7, 2022 11:20 am ET
corporate participant
Jane Fraser - Directora General
Conference call participants
Richard Ramsden - Goldman Sachs
ricardo ramsden
So I'm pleased to welcome our next speaker, Jane Fraser, CEO of Citigroup. Jane, I think she's been at Citigroup for 18 years, is that correct? 18 years?
jane fraser
At least we sound old, Richard.
ricardo ramsden
I was going to say how long you've been in the banking industry, but I won't. And she has been CEO since March 2021. This is the first time Jane has presented at this conference. I'm glad to have you. I hope you are the first for many.
jane fraser
Thanks for the invitation.
questions and answers session
F - Richard Ramsden
No, it's a pleasure. And we have a lot to talk about. So we start with the same question for almost everyone. But given his footprint, he obviously has a unique picture of what's going on with the global economy.
So maybe you can talk a little bit about what you're looking at, maybe focus on some of the key regions that you operate in and maybe just talk broadly about what you expect in terms of the macro picture for next year. And how big do you think the divergence is between some of the regions in which you operate?
jane fraser
Yes. So I think this year has played out largely as we expected from a macro perspective as we discussed various earnings calls. So now we are in a phase of progressive recessions in countries, instead of all coming at once. And I think that's a good thing.
When we look around the world, we start withEurope because that's where we are, the UK and Europe are in recession right now. We believe, and you have the convergence of all the tensions on the energy front together, obviously fueled by the war in the Ukraine, the skyrocketing inflation. And that would be nice, but what I think is worrying us in Europe, particularly in the UK, Germany, Eastern Europe and Italy, is that we're starting to see more of the structural implications in energy costs.
So we think because of the implications that you're talking about, '25, '26, now before the energy situation is properly resolved, we could see a drop in Europe's competitiveness and that will drive some more of that production to Asia and the states. So good news for us here. That is one of the dynamics that I think worries us a bit more, that has a bigger impact on Europe's competitiveness.
If you go to the United States, it's good to be an American compared to other parts of the world and I think we've seen the resilience of the economy. Obviously things are slowing down, but if you look at the two most important pieces of data, which is services inflation, I think our economist puts it very well, which is painfully persistent.
And that obviously relates to the strength in the labor market, where in turn we still see that resilience and strength. So we assume that the power of the president will have the rights. As they show, they are likely to be higher and longer than the market would like.
And that, that's more of a recession sometime in the second half of next year. But all else being equal, and that means nobody on the geopolitical front is doing anything wrong that then looks pretty dovish because banks are in good shape, businesses are very healthy, consumers are healthy, we'll get to that talk.
If we then look at Asia, it's interesting because China is the weakest country in Asia. We're seeing the rest of Asia doing quite well, we're seeing mobility again, people are traveling again, they're on the move again. And so the Asian consumer is coming back online in a more significant way. India is a special ray of hope that we look forward to.
They have a growth rate of 7%, 8% there to have more people than China next year and they have a bit of a swagger about that these days. And entrepreneurship only lives well there, it's China. And we care about China. And it's just a psychological impact, we're seeing it in our people on the ground, we think these extended lockdowns are affecting consumer behavior.
The fact that we see them looking for an opening is a good thing, but I think this is going to be a bumpy reopening. And you look at ESOL employment, you look at the low female participation in the workforce, you look at the aging population in their housing market. I'm not sure if that's being yelled at like some people are hoping.
ricardo ramsden
IT'S OKAY. So some questions. The first question is what risks outside of credit normalization are you most concerned about? And related to that, I think what's the best way to prepare Citigroup for the economic outlook that it's had, particularly in the short term.
jane fraser
Yes. So I think the risk that we're seeing right now is much less on the credit side. And I'm looking at our own loan portfolio, our corporate loan portfolio in the last two quarters that we announced. We had $22 million in losses across the entire portfolio, that's a couple hundred billion.
I mean they just don't. And that's also now a testament to the quality of our corporate client base that we have, and it's obviously developing in a very focused way. But we are more concerned with the liquidity of the market and we are more concerned with some of the counterparties, so we have seen it with the metals exchanges. We've seen it with London IDLs where these different things show up. So what about the warranty? Because there are a lot of unregulated financial players that sit on a lot of assets and are quite opaque.
ricardo ramsden
So what are you doing to protect Citi from this?
jane fraser
Yes. A lot of these are first and foremost very, very sensible about customer due diligence, which I think is one of the areas that you looked at. I don't want to tempt fate, but we weren't involved in many of the issues. I'm sure that hasn't gone unnoticed and that's a good judgment on customer choice.
And the second part is knowing exactly where the problems arise or where we see stress acting quickly and decisively and managing risk. I know how we did that with Russia, for example.
ricardo ramsden
IT'S OKAY. So before we dive into strategy, maybe we can talk a little bit about the current environment. Maybe you can talk about the fourth quarter, what it looks like, and other things we need to keep in mind.
jane fraser
Well, Mark and I put out a number of different expectations for the year at Investor Day in March and it's very important for us to deliver on what we've promised and what we've got this year. So for this year we're looking at earnings for the next full year in the low single digits excluding the impact on divestments same for the expense guidance despite what's going on in the world we said 7 % to 8% % for this year: Divestment is having an impact and we'll make it too.
Of course, because we had to raise capital and as you saw, we increased our CET1 by 90 basis points in two quarters. So we're pretty disciplined with what we say, what we do, what we're going to do. So looking at the fourth quarter in that light, how's it going? So we're a little nervous about answering this question in early December, since December always turns out to be beautiful. With this exception if we look at the trading page for example. So October and November were good months in terms of business activity.
With the caveat that December is always an interesting month in the market, particularly one where liquidity is where it is, we expect to be 10th in the markets this quarter in terms of % revenue growth mark. Investment banking had a harder time there and I didn't. We didn't see the wallet in the capital markets go up like I think some of us expected we might see in the fourth quarter.
So all eyes will be on the first. And there we assume that we're going to be close to where the portfolio is and we're just 60% below the pretty extraordinary highs of last year, it seems like a long time ago. And then, as I said, the expenses will be in line with what we said. And on the credits side, which I think has gotten a lot of attention. They have a few different things going. We are seeing the normalization of lending and it is happening, albeit at levels well below pre-COVID levels.
The only area where we're really seeing movement in our consumer loan books is CRS, where it's starting to normalize, I would say retail services. And where it tends to be in the lower FICO and some of the ranges that are the newer crops, we're seeing it, but again well below average. And on the corporate side, it's more about anticipating where things are going.
So that's normalized. There's also volume growth as people borrow and we've seen demand on the corporate side of the loan books as the capital markets are closed as well and very strong growth in trading as well.
Putting all of this together in models and CECL scenarios, we expect total credit costs for the fourth quarter to likely be in the 17-19 range. And again, I want to point out that we still expect more data to come in December. And some of these data streams are quite material. So this number could change, but we'll look at it in the total cost of credit.
And I think that makes us feel very, very good about the quality of our portfolios and I feel very comfortable with the quality of our reserves. And the fact that we were very conservative in that sense. So I expect a refund.
ricardo ramsden
Ok great. So is there anything about spending trends, credit demand or deposit flows that you think is discouraging?
jane fraser
Yes. I just got back to Europe and they hate us there because they say you're American because we have a demand problem and Europe has that, they don't have a demand problem. They haven't seen spending levels and other parts return to pre-COVID levels while it's still shooting up quite a bit in the United States. So softening.
If we look at the consumer first, we're still seeing very strong growth in terms of our core portfolios like Walmart, some activities are getting strong recognition in the markets. I look at Costco, I look at American, the travel industry is dormant. Consumers are still spending a lot there, they're spending less in the luxury segments, they're spending less in some areas of home entertainment, and I think there was another closet in America that could accommodate more of these devices.
So you get a nuanced story of where the spending is and isn't, but our spending is very robust. Pay rates are still very strong. Like I said, they're coming back to Citi's retail services a little bit. But the brand map side of things we'd like to see come out a bit more. And then on the corporate side, as I mentioned, we've seen pretty strong growth on the demand side and on the credit side. Trading, especially since I hear a lot of people say, oh, does trading really exist? if it happens. There's a lot of input there and I think the closed capital market is also driving demand for corporate credit.
So it's pretty impressive, it's softening up, but it's pretty beefy out there. And also on the deposit side, we expect it to be flat on a year-over-year basis, both on the consumer side and on the wholesale side.
Wholesale, we were, I mean, the repositories weren't, the betas didn't work the way we envisioned. And I can assume they'll catch up faster now, because of the speed of the rate increase, but we're very comfortable there. And on the consumer side, it's really on the higher end, but more wealth clients are switching to some of the higher performing product suites within fixed income and cash. We see these movements, but yeah, I feel pretty healthy.
ricardo ramsden
Good. So, let's move from shorter maturities to longer maturities, and I know in March you had your first investor day in five years. I thought it would be like [Unrecognizable], but a lot has changed since then. Maybe you can talk a little bit about the progress he's made since he became CEO. And maybe look, if he gave himself a scorecard, what would he look like so far?
jane fraser
Yeah. So let's go over a few things. First of all, I am very happy with the progress we have made. And I think again, on this topic, we strongly believe that we need to do this, we put forward a number of different strategy drivers. We have set a number of different goals, guidelines and the like. And this year we turned ourselves in against him.
And that is something, that discipline of what we say, what we do, we do. And this year we have. we've certainly done that in a number of different dimensions than what we said on Investor Day.
Breaking it down, I think we've developed a very clear strategy for the company based on five interconnected companies. And we deliberately crafted a strategy that would withstand any possible macroeconomic and geopolitical conditions, and it has. I'm happy to say that, and that's what we've seen in results so far this year as different companies provide diversification and connectivity. We feel great, we feel good about the strategy and how it's progressing.
If I look at some of the areas related to this progress, the transaction services and the security services that are really going full steam ahead. Both benefited from the interest rate environment, but the growth drivers there are particularly strong.
And they're ahead of schedule, which we've come to expect from commercial banks, and one more ahead of schedule. On the other hand, wealth and investment banking portfolios, particularly investment banking, lag further behind. So we've recouped some of the investment there, as you'd expect from us, but we're not actually investing very much. And we've seen it really pay off with client acquisition, new consultants, and the talent that we've brought to you. So you'd love a different macro environment there, but I'm glad you've made progress.
The market is doing a good job there in terms of capital allocation while also ensuring that we're still very focused on the core customer base that we serve and taking the customer perspective, how we think about returns, and not just the product lens, but very good progress in RWA revenue, which is kind of a metric that we use.
And COGS, as I said, it's good to see people borrow again, and actually some credit normalization is good for our business there. And a really cool innovation has happened that is driving the franchise forward. And we must continue with the disinvestments. Really, this one was head down doing those things and very happy there.
From a strategic standpoint, we're all pleased with the progress and how we're starting to see some early results in the data. But I think the most important thing is that we run this company very differently than we have in recent years. We are very aware that we need to address the issues that have held us back in the past while also making sure that our people have embraced not only the new strategy, but also a new way of working.
And that tone was set by me and the management team at the top. So I would say the difference is how we're doing it, it's very practical in terms of management approach. I mean he rolls up his sleeves and he's in the details to make sure things get executed.
We have a very, very rigorous and disciplined approach to how we look at how investments are being made, whether they're being made in the right places, whether they've done what they should, and if not, what are we doing. on them only with the transformation. Are we getting the results we expect from it? Are the resources in the right place? Do they deliver what it should be, if not, how are we different?
Several elements have been modified so that we can run really well or to clear crashes. The situation is similar with the other one: the day-to-day business of the bank. So it's the hands-on management team, it's company-wide. And that's another big difference.
They all enter the room together. So as we go through the data plans and what we're setting up there, you have the risk, you have the funding, you have the institutional business. You have the tech team. They have the data team there. They are all together in the rooms, working together, putting together horizontal plans and holding each other accountable. This silo braking is really different than what we did before, which was a lot more on single swim lanes.
So the bank's operating pace is rolled up, with the involvement of the management team. We're in the details and doing the micromanaging to drive changes to the way the place works. Third, culture is very important. Is it a culture of excellence and responsibility? And in terms of progress, we're, as I was talking to Mark earlier, our people's results this quarter for the last year are excellent, I mean, very, very strong.
And that's a reflection of a few different pieces. It tells us that our people are embracing the strategy. They are probably our harshest critics. Our investors are very harsh critics, but our harshest critics are our employees. If this place, this bank isn't easier, let us know now, if things move faster, let us know. And we can see that the organization is becoming more agile and agile in addressing the various issues and the simplification agenda is moving forward. And the talent that we have bought is simply spectacular. I mean I like shopping but we brought some really cool stuff too, no time for a day job, just saying I'm not contributing to GDP this year. But that: We have really strong talent and I've looked at all three layers under me, almost most of the people are new sign-ups. Many of them are new to the bank or other people we have transferred. The fluctuation is going down again. And I think that side of things, that culture of excellence, accountability, but also supporting performance for clients, serving regulators to control risk and delivering shareholder benefits. This acceptance of organizational dynamics is felt behind us.
So it's a long answer to a question because it's a very important question to us, we're absolutely committed to addressing the issues that have held us back in the past. We're passionate about strategy and we run the place very differently in the way that we execute it so we really deliver everything that we say we're going to do and that's what shakes us up every day is that For our clients, this is for safety – the bank and ultimately the shareholders, because we are all shareholders and we want this price-to-book relationship to be very different than it is today and we are committed to making sure that you believe in that and that you are also behind that.
ricardo ramsden
So let me ask you about two parts of the strategy. The first is divestment. You mentioned that and you've actually done quite a bit this year. So I think it beats a lot. So Australia, Philippines, Malaysia and Thailand. You are Bahrain, you retire.
jane fraser
Bahrain right now. Well, it's a little early and this week we completed the sale of the Hill [Ph] portfolio, which is the majority of the loans and also not Russia.
ricardo ramsden
So I think the question is specifically: has the macro uncertainty or just the volatility that we've been seeing in the markets affected your capacity?
jane fraser
Yeah, I'm glad we got to move on. That is sure. We have contributed approximately $3 billion of capital to divestitures this year. And then the sales continue, you never expect to say that the sales are going faster than the schedule in Korea, but they are going fast on the schedule in Korea. And I have to say that the team did a great job in Russia. It's going well and we're looking forward to next year. We also have big plans for next year, but we feel good about it.
ricardo ramsden
IT'S OKAY. And as far as risk control, I know it's hard to talk about some of this stuff because a lot of it is sensitive regulatory information, but maybe you can update us on the transformation part of the strategy and just talk about how you think. work progress?
jane fraser
And again, I think it's important that we think about transformation, not just a consent decree, but the comprehensive modernization of the bank. And if you look at where we've frankly invested enough in some operational areas and others in the past. So where are we? In the first phase of work that you carry out, we set the target date by which we want to achieve this for each of the different branches of the bank.
And that's one where we have our target state for technology. We have it for data as well as the different areas of risk and control, other areas of finance. Then you assemble the plan through the different phases of its multi-year existence, because what are the different speeds of work? And then this first phase required a lot of consultants. And then it was also a phase where you develop the ability to execute, so you bring in more minds.
a lot of it. Some 10,000 people have been focused on the transformation alone, in addition to the BAU teams working on it as well. Much of the staff is ops and take. It's about -- we probably had about 6,000 incremental technologies this year, for example. Then that's done and now as we work through the different stages of execution, we update the plans over time, we get input from the regulators over time, that we engage with and learn from.
And new technologies, new parts are coming. So it's a kind of life, it's a living transformation, rather than something stuck at a certain point in time. And the next phases of work will replace humans with technology. So if we automate processes as we automate controls, that replaces people playing the Verifier role, for example, things like that.
So we're at the beginning of this phase, this is a big wave of execution where you're literally going through different data sets in the bank, and we call it a wash-win-through-peak process where it's almost industrialized like this , we're digging into the data, accessing the new technology platforms, integrating multiple platforms into one, sometimes new, and simplifying the bank and it's just… it's several years old, but head down, go ahead. Here we are.
ricardo ramsden
So, in that context, let's talk about spending. I think you mentioned that you're targeting 7% to 8% expense growth this year, excluding divestments. Look, I think one of the biggest questions investors have is what is the long-term trajectory of the efficiency ratio for the company. What efficiency initiatives do you think you can carry out in the long term? And, but when does that really show up in numbers, especially in an environment where inflation is in the high single digits?
jane fraser
Yes. Again, we didn't think inflation would be where it was and we are hitting our cost target that we announced at the beginning of the year. Due to the different environment, we are very disciplined in this regard. Of course, we'll give an outlook in the fourth quarter of what we're targeting for next year in 2023. So I'm not going to comment on that.
But if you break down what happens to our expense base. As we say short term, that is why we set short and medium term, from 3 to 5 years and then longer term on Investor Day. In the short term, the spending base stagnates. And then it starts to curve downward, and that has some different dimensions.
Investment comes first. So you can imagine that if you invest in technology, you keep the old existing platforms running while you migrate to the new one, and then you start to shut down the old ones.
You invest in the technology equipment that automates the processes and then you can reduce expenses. So there's a natural arc in the investments that we're making that will reduce the cost base over the medium term.
And we will also see signs of it in the short term, there will be a plateau. Then there are also divestments. So we're making good progress. And those are the costs that you sell, then you have the TSA because some of the costs that they buy from us are paid in full as you go through the migration process. So that's the good news, it pays off.
And then you have some stranded costs. That can be in a country, that can be at a regional level, that can be at a global level. And these are the problems that we have microplans on how to eliminate. And as we start this year, it's about removing the costs nationally and regionally from the divestments that we're doing. But we will sell about 25% of our employee base. That's 10% of the bank's income. That means to us that this statement alone should show you the possibility of simplifying, right?
So no, if this bank is going to say, if I say that this bank is going to be simpler when it has done more divestments, then that is the case that we are going to focus more on organizational and operational simplification, which will also reduce the number of employees. Meanwhile, we take a disciplined, microscopic approach to ensuring money spent is put to sound use. And then, as you said, the coming downturns will also reasonably stimulate investment and we'll steer spending management in the right direction.
ricardo ramsden
So let's talk about some of their individual businesses, let's start with the service business because it's been a bright spot and it's obviously TTS's new security services business. They've invested a lot in this business, but it's also been a great environment for this business.
So maybe you can just look at how the strategy is progressing there? How much of the growth we've seen this year is market share gain on the environment alone? And how sustainable is this growth rate when we think about the next few years?
jane fraser
It's interesting that one of the areas, a lot of investors, I think, are trying to figure out what TTS is and why it has such a long-standing competitive advantage, because obviously we're looking at the interest rate advantage. But this is a really growing core driver of the talent and technology investments that have been made in recent years. It is about gaining market share against the competition. And we also achieve very good customer acquisition when we are a year ahead of a plan, for example with the commercial bank, which attracts many medium-sized companies.
If I can spare a minute, maybe let me use a customer example. So I'm thinking about the presence of a very large technology company in more than 60 countries. And that's, yeah, those kind of customers that we're going to get over $100 million in revenue from, just on TTS. He now has 1,000 accounts in 60 different countries around the world. We take care of all your payments and your demands. We do your liquidity management. We take care of your entire supply, purchasing and value chain. We do all the payroll in-house and we do the business cards there, so it's all about working capital and having the guts to really run the institutions.
So if we're not there, they don't open. And it's the breadth and depth [Ph] of that relationship and those capabilities in treasury suites and beyond in so many countries that the data that this platform provides and how this platform comes together to make her a treasurer, CFO and sometimes enable business development. to actually operate your institution.
This is incredibly sticky. And it takes more than five root canals to get that out of there. It is growing enormously because we have seen the numbers in terms of cross-border flows. What's happening with trade, all these parts, they're changing there, they're changing in different parts of the world, but we're everywhere.
So it's not like you lose it in one place, you build it in another place in the network. And you add 5,000 multinationals that are worth 4 trillion dollars every day. Every day we moved the German GDP, barely 4,000, 5,000 multinationals around the world.
And we are often in countries where no one else is. This is an asset that cannot be sold. And that's why fintechs like to work with us. So if we look at that, that grows, we tend to, we get a very high win rate. In such a global environment, you need someone who understands everything that's going on in all these different regions and who knows how to manage risk and help them through it.
So a lot of new client acquisition, a lot of portfolio deepening, and of course installment work helps us. So this thing, when I say -- this is the hidden gem of Citi, this thing is exceptional and kills the fringe strategy behind it. And then if I didn't mention that we had $1 trillion in new assets on top of costs and assets under management that we cut in security services this year. So this is another pretty extraordinary platform. So yeah, I'm excited about this one.
ricardo ramsden
Let me ask you a couple of questions about capital and even Citigroup's value proposition, because I think we've got a few minutes left. But in CET1, the requirement has obviously increased significantly over the year. I think you're targeting 13% now.
Maybe you can talk a little bit about how you feel about investment returns when you get to that level. Due to the uncertainty about the macroeconomic environment, there is also a lot of uncertainty about where the capital requirements could go. So when you get to that level, you'll think again and say, should we hold some of that capital just because the environmental claims are uncertain? So…
jane fraser
Look, I think as Mark said, we're going to, you take it, we have a very clear plan, direction and goal in terms of capital, but we'll take it quarter by quarter when it comes to buybacks. . I would like to point out that we have increased our capital by 90 basis points in two quarters. So when we say we're going to do something, we put our heads down and do it. We have a 13% target that includes 100 basis points of management buffer that we'll probably target in the second, late in the second quarter. I'll check with Mark for next year, I did good.
And we're very focused on making sure we get capital back into the hands of our shareholders. But we're not going to take shortcuts, are we? I think you see us. We're going to make the tough decisions, we're going to get things done, we're going to get things done, and we're going to keep making steady progress and moving forward. So our obligation is to make as much capital as possible available to our shareholders. But in the meantime, we're just... we're building. We have some divestments next year, one of which will involve some CTAs, and we're incorporating all of those things into the plan. But I have a very good feeling about the bank's profitability and everything else behind it. It really is only a matter of time.
ricardo ramsden
So let me ask you from your perspective, when you think about the path for Citigroup, when you think about valuation, I mean, what do you think the market is missing? I mean, talking to investors, what do you think is the most underrated part of the Citigroup story?
jane fraser
So I would misstate it from my perspective because I have the investor perspective that is relevant. So what do I hear from our investors when they look at us? I mean we have pretty open discussions, as you can imagine. The first thing I'm hearing is that I think people are happy with the strategy that we've laid out, but what we're hearing is that it makes sense, the five interconnected companies that will lead us to the best mix of returns address the business mix.
And the refocusing that we did on Investor Day in relation to this Citi is, I think, quite understandable. I would say that both parties there would emphasize that we just talked about TTS. I think investors don't fully appreciate that enduring competitive advantage there. And the growth potential and how difficult that is for our deposits, a bunch of other things and growth.
Second, I would say there's also a tendency to equate our global footprint with where we take credit risk, but that's not the case. We don't do that. We take our mix of credit. If you look at our corporate loan portfolio, over 80% of it is investment grade. It is strong in the 5,000 multinationals we are talking about.
And I think again I would point to $22 million actual credit losses in a dismal year, $18 million I apologize for actual credit losses in a 2 quarter period. In this rocky macroeconomic and geopolitical environment, with all the hellish news breaking out in different parts of the world, I think some reassurance is needed on the quality of this loan portfolio.
Then the other side, which I think I absolutely appreciate the evidence for, is going to be in the pudding for Citi with respect to our execution. The management team, we are fully aware of this. I am fully aware of this. We try to prove that Pudding delivers what we promise. We're taking urgent steps to simplify the bank, to implement the strategy, to run the bank differently than before the culture change and we're trying to make sure that over time you can see that while this is several years, well, this is not a linear journey. where you can tell this is a management team building credibility and execution around it.
So I think underestimation, I don't know if I'm going to call it underestimation, but I think we're very aware that we have to deliver and it's been a good year.
ricardo ramsden
So I guess we're running out of time, but just a very quick clarifying question that came up about trading in New York banks, which is year-over-year.
jane fraser
Year by year. As stated, we expect 10% in our market based on what we've seen in October and November, and on the investment banking side, Wallet Street is down 60% year over year. We assume that we will be more or less online.
ricardo ramsden
IT'S OKAY. Fantastic. Thank you for your time, very very helpful.
jane fraser
Thank you very much.