Citigroup Inc. (NYSE:C)
Q3 2014 Earnings Conference Call
October 14, 2014 11:30 am ET
Mike Corbat – Chief Executive Officer
John Gerspach – Chief Financial Officer
Susan Kendall – Head of Investor Relations
Jim Mitchell – Buckingham Research
John McDonald – Sanford Bernstein
Glenn Schorr – ISI
Brennan Hawken – UBS
Guy Moszkowski – Autonomous Research
Matt O’Connor – Deutsche Bank
Mike Mayo – CLSA
Betsy Graseck – Morgan Stanley
Gerard Cassidy – RBC Capital Markets
Steven Chubak – Nomura Securities
Erika Najarian – Bank of America
Ken Usdin – Jefferies & Company
Matt Burnell – Wells Fargo Securities
Chris Kotowski – Oppenheimer & Co.
[Brian Klein-Hansel] – KBW
Hello, and welcome to Citi’s Q3 2014 Earnings Review with Chief Executive Officer Mike Corbat and Chief Financial Officer John Gerspach. Today’s call will be hosted by Susan Kendall, Head of Citi Investor Relations. (Operator instructions.) Also this call is being recorded today. If you have any objections please disconnect at this time. Ms. Kendall, you may begin.
Thank you, Brett. Good morning and thank you all for joining us. On our call today our CEO Mike Corbat will speak first, then John Gerspach, our CFO, will take you through the earnings presentation which is available for download on our website, www.citigroup.com. Afterwards we’ll be happy to take questions.
Before we get started I would like to remind you that today’s presentation may contain forward-looking statements which are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results in capital and other financial condition may differ materially from these statements due to a variety of factors including the precautionary statements referenced in our discussion today and those included in our SEC filings, including without limitation the “Risk Factors” section of our 2013 Form 10(k).
With that said let me turn it over to Mike.
Thank you, Susan. Good morning, everyone. Earlier today we reported earnings of $3.4 billion for Q3 2014. Excluding the impact of CVA/DVA net income was $3.7 billion or $1.15 per share.
Before I address the quarter I’d like to discuss the actions we announced regarding Global Consumer Banking. As you know, we’re committed to simplifying our company and allocating our finite resources to the business where we can generate the best returns for our shareholders. Consistent with these priorities we intend to exit our consumer businesses in eleven markets – among them Japan, Egypt and Peru. We’ll continue to serve our institutional clients in these markets which remain important to our global network.
While these consumer franchise have real value we didn’t see a path for meaningful return. We believe our Consumer business will achieve stronger performance by focusing on the countries where our scale and network provide a competitive advantage. Sales processes are already underway in most of these markets and I expect these actions to be substantially completed by the end of 2015. At that point we’ll have reduced our Consumer footprint by 19 markets since 2012 and Global Consumer Banking will be serving 57 million clients across 24 markets.
I’d also like to address the announcement we issued earlier this morning regarding a legacy Banamex unit which provided personal security and protective services. While the fraud is not financially material, in light of the conduct we found in the interest of transparency we thought it was best to inform you. As you know we’ve been reviewing our franchise in Mexico and have already made meaningful changes to strengthen our processes and controls, and will continue to take whatever steps are necessary to make sure that every part of our global franchise lives up to the standards all of us rightfully expect.
Now turning to the quarter: we achieved solid performance across our Institutional businesses. Both Banking and Markets saw improved revenue from prior-year period assisted by a better trading environment and a strong M&A pipeline. Treasury and Trade Solution revenues increased slightly despite spread compression.
Global Consumer Banking had a strong quarter as well and saw loan growth throughout the regions. In North America we had revenue improvement in each of our businesses both quarter-on-quarter and year-on-year while we continued to optimize our branch network. Internationally we saw revenue improvements across every region compared to Q3 last year.
Overall these results show solid business performance which has helped increase Citigroup net income by 5% year-to-date over 2013. We also continue to be focused on reducing the drag on earnings caused by Citi Holdings and consuming DTA. These have been execution priorities and we again made progress on both fronts.
In Citi Holdings we closed the sales of our Consumer businesses in Greece and Spain which helped reduce assets during the quarter by 7% to $103 billion. Holdings assets now constitute only 5% of Citigroup’s balance sheet.
The Holdings profit of $272 million again helped drive DTA consumption. We utilized $700 million of DTA in the quarter, bringing the total to over $5 billion for the last seven quarters. This contributed to our generating nearly $4 billion of regulatory capital this quarter and growing our Tier One common ratio to 10.7%. Our tangible booked value also increased to $57.73.
While we’re pleased with our ability to generate capital we’re equally focused on our ability to return it to our shareholders. During the quarter we continued to make progress on our efforts to strengthen our capital planning process.
Most important our capital planning process is being fully embedded in the way we run the firm. This must impact everything, from increased business engagement and enhancements to our forecasting models and scenario design processes – all of which lead to an improved approach to risk and controls. This work will continue as we get closer to receiving the 2015 stress test scenario from The Fed at which point we’ll prepare a strong submission which reflects the work that has been done.
As we finish out 2014 we’re very mindful of the challenging macro environment. Geopolitical tensions, uneven growth and concerns over the timing of interest rate increases have increased volatility. While the economy in the US seems to be slowly gaining strength, the Eurozone is not yet in growth mode and emerging market growth has slowed.
While our expense reduction efforts have been productive we continue to face pressure related to legal costs and the need to invest in regulatory and compliance, as well as the critical need to protect our network from cybercrime. We’ll remain vigilant along each of these fronts to ensure the safety and soundness of our institution.
John will now go through the deck and then we’d be happy to take your questions. Thank you. John?
Okay, thank you, Mike, and good morning everyone. Let me briefly review the results of the quarter and then I’ll go into more detail on the strategic actions we announced earlier today.
To start, I’d like to highlight two items that affect the comparability of this quarter’s results to prior periods. First, CVA/DVA was a negative $371 million pre-tax, or $228 million after-tax this quarter including a $474 million one-time charge due to the implementation of funding valuation adjustments related to certain derivatives. Together these charges had a negative impact on EPS of $0.08 per share this quarter, similar to the CVA/DVA charge last year.
And secondly, last year we recorded a tax benefit of $176 million or $0.06 per share related to the resolution of certain tax audit items. Adjusting for these items, we earned $1.15 per share in the recent quarter compared to $1.02 per share in Q3 last year. Throughout today’s presentation I will be discussing our results excluding these items to provide comparability to prior periods.
On Slide 4 we show total Citigroup results. We earned $3.7 billion in Q3, a 13% increase from last year. Pre-tax earnings of $5.9 billion grew 28% driven by revenue growth and lower credit costs, partially offset by an increase in operating expenses mostly driven by higher legal and repositioning charges. However, our tax rate was higher this quarter at 36%, reflecting a higher level of non-tax deductible legal accruals versus last year as well as higher tax costs related to the sales of our Consumer operations in both Greece and Spain.
On a year-to-date basis, we generated positive operating leverage with modest revenue growth and flat expenses, and our return on assets improved to 83 basis points. In constant dollars, Citigroup end-of-period loans grew slightly year-over-year, to $654 billion, as 4% growth in Citicorp was partially offset by the continued decline in Citi Holdings. And deposits were flat at $943 billion.