Q2 2020 Citigroup Inc Earnings Call

Hello, and welcome to cities second quarter 2000 into <unk> earnings review, but the Chief Executive Officer, Mike were bad and Chief Financial Officer, Mark Me said today's call will be hosted by Elizabeth Blake.

<unk> head of Citi Investor Relations.

We.

She please follow on question until the completion of the former remarks.

Each time, you will be given instructions for the question and answer recession.

Also as a reminder, this conference is being recorded today. If you have any objections. Please disconnect at this time misled you may begin.

Thank you operator good morning.

Thank you all for joining us on our call today, our CEO, Mike will speak from Denmark Basin. Our CFO will take you through the earnings presentation, which is available for download on our website Citigroup dotcom.

After work he will be happy to take questions before we get started I'd like to remind you that todays presentation maker.

Forward looking statements, which are based on management's current expectations and are subject to uncertainty.

And changes in circumstances.

Actual results capital and other financial condition may differ materially from me statement due to a variety of factors, including the cautionary statements reference dennard.

Discussions today and there was included in our actually see filings, including without limitation the risk factor section of our 2019 form 10.

That said, let me turn it over to.

Yeah.

Thank you live and good morning, everyone. Today, we reported earnings for the second quarter up 20, Twond with net income of $1.3 billion earnings per share 50, such as the first quarter credit cost way down or net income. However, the overall business performance was strong which shows that we've been able to.

Navigate the cobot night gene pandemic reasonably well.

For.

Solid revenue growth of 5% strong expense management one person.

On a year on year basis or margin, which dropped 13%.

We grew loans and our deposits were up significantly a regulatory capital increase.

We continue to add to our substantial liquidity in our balance sheet has more than ample capacity to continue to serve our clients.

The institutional clients group had an exceptional quarter.

Fixed income was up 68%.

First investment banking quarter in recent history private bank revenues approach $1 billion.

Our treasury trade solutions continue to be impacted by the lower rate environment. We did see good client engagement and strong deposit growth can message.

Mobile consumer banking revenues were down in spending slowed significantly due to the pin down.

North America, despite the decline in purchase shale activity.

I didn't card revenue was up slightly due to a mix shift towards interest earning balances.

Sure John retail service you saw a significant decline.

Super spending with our partners.

Retail banking show higher mortgage revenue from refinancing activity due to the low rate environment.

In Asia, the slowdown in travel and consumer activity again reduced revenue.

And in Mexico revenues declined as the country is struggling from the effects of the El pen Jim.

Our capital position strengthened during the quarter was our common equity tier one ratio increasing to 11.5 person on into Dan space.

I was pleased with our results from the federal reserves related stress test, placing our stress capital buffer the two and a half for sure.

This leads us comfortably above or new regulatory minimum 10%.

Our tangible book value per share $71 in 15 cents was down only slightly from the first quarter, but still up 5% from a year ago, we plan to keep paying our quarterly dividend as long as macro economic and financial conditions permit.

During the quarter, we continued to support our clients colleagues and communities through this Brandon.

Well I'd like to see more of our people back in the office, we'd been clear that we won't do anything to jeopardize your helping shape.

Most recently, we pause plans to invite a limited number of colleagues back to sites located in areas, where the health data was going the wrong direction.

We've also remain committed to supporting communities through a variety of initiatives. He's now total over $100 million and contributions from our company and its foundation.

But what I'm most proud of is the $2 million, which my colleagues donated other girls pockets organizations, providing cobot really it's part of our matching program.

And we recently made our first distribution to the city foundation, representing $25 million net profits for the payroll protection program to support community development financial institutions.

We're also partnering with minority owned depository institutions to help them to extend credit businesses through PPP like purchasing their loans through a $50 million showing.

Shuckers, even more importantly, as we look at the economic disparity strawn along racial lines in our society.

And of course, we continue to serve our clients, whether it's providing consumer really we're helping companies access to capital markets to strengthen their balance sheets.

We entered the second half and the strong position to handle what comes our way.

We are in a completely unpredictable environment, which still bottles no cycles to point to.

The pin debit catch a grip on the economy and it doesn't seem likely to loose jewel vaccines are widely available we'll keep managing through this was a sharp emphasis on our risk management you continue to make investments should our infrastructure to enhance or shaky show condition controls to ensure that we haven't indisputable <unk>.

Along unstable institution.

With that.

Mark will go through our presentation and then we'd be happy to answer your questions.

Thank you, Mike and good morning, everyone. Starting on slide four Citigroup reported second quarter net income of $1.3 billion, which included $5.6 billion increase in credit reserves this quarter, primarily reflecting the deterioration in the economic outlook since the end of the first quarter under Cecil and.

Downgrades in the corporate loan portfolio.

The reserve build also includes an additional qualitative managed many adjustments to reflect the potential for higher level of stretch Android somewhat slow recovery.

Revenues of $90.8 billion grew by 5% from the prior year.

I really reflecting higher fixed income and investment banking revenue.

Expenses were down slightly year over year, resulting in positive operating leverage.

And a 13% improvement in operating margin.

Credit costs were $7.9 billion is for.

Our effective tax rate was 9% for the second quarter, reflecting a higher relative impact from tax advantage investments and other tax benefit items, given the lower level of either.

Looking at results for the first half a 0.1.

We delivered net income of $3.8 billion, even as we increased credit reserve by $10.5 billion under the Cecil framework given the current environment.

We grew revenue by 8% predominantly reflecting continued strength in our markets and investment banking businesses, while we held expenses flat year over year, allowing us to deliver positive operating leverage at 20% increase in operating margin.

In constant dollars end of period loans grew 1% year over year to $685 billion, reflecting growth in our institutional businesses, mostly offset by the impact of lower spending activity in our consumer business.

Deposits grew 20%, reflecting engagement with clients in a flight to quality so to speak across both institutional and consumer franchises, which served to strengthen our available liquidity.

We maintained a strong capital and liquidity position, which had been critical to our ability to support our clients as they manage through this prices.

As of June Thirtyth, RCC, one capital ratio was 11.5% 150 basis points above our regulatory minimum requirement.

We had close to $900 billion, an available liquidity and including get additional reserves taken to score credit reserves stand at roughly $28 billion. The reserve ratio of 3.89% of funded loan.

But the level of capital liquidity and the reserve the whole today plus significant pre provision earnings power seen through the first half of the year, we continue to operate from a position of strength.

And that we discussed last quarter, we're combining this financial strength with operational resiliency, which allows us to partner with and support our clients as we all managed through this price.

Turning now to each business.

Slide five shows the results for global consumer banking in constant dollars.

Revenues declined 7% as strong deposit growth with more than offset by lower loan volumes and lower interest rates across all regions.

And expenses decreased 8% at lower volume related expenses reduction in marketing and other discretionary spending and efficiency savings were partially offset by increases in covert 19 related expense.

Total credit costs of $3.9 billion were up significantly from last year, including your reserve build of approximately $2 billion driven by the deterioration in the economic outcome.

Slide six shows the results for North American consumer in more detail.

Second quarter revenues of $4.7 billion were down 5% from last year.

During the quarter, we continue to focus on providing assistance to help customers impacted by Cobiz 19.

Since the crisis began we have provided will lead to more than 2 million accounts, representing roughly 6% of our aggregate balances of false parts and mortgage.

Any hopeful sign many of those same customers I continue to make their regular payments during the second quarter, although we realize it's still early.

And today over half of our Hearts enrollees are rolled off the program with more than 80% of these customers remain current while reenrollment rates remain below expectations in about the mid teens.

Turning now to the businesses starting with cards, Randy cards revenues of $2.2 billion were up 1% year over year at lower purchase sales and lower average loans were offset by favorable mix you fourth interest, earning balances, which supported net interest revenue.

As seen across the industry purchase sales declined significantly down 21% in the second quarter.

However in recent weeks you have seen signs of improvement with purchase sales down from the low double digits year over year in June.

It's worth 30% decline in April.

Average loans declined 7%, reflecting lower sales activity.

We also took credit actions during the quarter, including a pausing proactive marketing and a reduction in credit line increases and alpine activity as examples.

We believe these risk actions are prudent given the current environment, but they are likely to result in more pressure on interest earning balances in the second half of the year.

Retail services revenues of $1.4 billion were down 13% year over year, reflecting lower average loans as well as higher apartment.

Net interest revenues were down 7% average loans declined by 6% on lower purchase sale activity.

Thank you sales were down 25% year over year on the second quarter, but similar to branded cards. We saw improvement in the month of June with the pace of sales declines flowing to the mid teens.

Higher partner payments drove the remainder of the revenue declined versus last year.

As we've discussed in the past retail services revenues are show net of payments related to income sharing arrangements with our retail partners, which can vary quarter to quarter based on the overall mix in profit outlook for our portfolio.

Retail banking revenues of $1.1 billion were down 3% year over year as the benefit of stronger deposit volume and an improvement in mortgage revenues were more than offset by lower deposit spreads.

Our deposit momentum continued to improve with average deposits up 14% driven by a combination of environmental factors, including the delay of tax payments.

Communists payments and a reduction in overall spending as well as our continued strategic efforts to drive organic growth.

Digital deposits sales accelerating even as we continue to adjust pricing given the current rate environment with digital deposits growing by $3 billion. This quarter to a total of nearly $12 billion.

We also saw strong engagement with existing clients robbing balanced growth across deposit products, including checking which grew 13% year over year.

Total expenses for North America, consumer, which were down 10% year over year as reductions in marketing and other discretionary expenses, along with efficiency savings and lower volume related costs more than offset incremental cobot 19 related expenses.

Turning to credit total credit cost of $3 billion increased significantly from last year as we've got roughly $1.5 billion in reserve this for reflecting the impact of changes in our economic outlook, partially all set by the impact of a change in accounting for third party selection.

On slide seven we show results for international consumer banking constant dollar in Asia revenues declined 15% year over year in the second core part revenues declined by 22%, reflecting lower activity levels, the purchase sales down 29% year over year.

We're seeing a disproportionate impact on Asia card revenues from lower travel spend in the region, given our fleet would find face and a greater proportion of fee revenues coming from travel related interchange in foreign transaction.

We also saw an impact one customer acquisition in products like insurance, which rely more heavily on face to face engagement.

However, average deposit growth remained strong at 10% this for albeit at lower deposit spreads, reflecting a flight to quality as well as continued client engagement across the franchise.

While investment revenues were down this quarter and still continued underlying growth in our wealth management drivers with 6% growth in city gold clients and 10% growth in net new money versus last year.

Today, we are seeing some early signs of a pickup in activity.

Purchase sales declines moderating and net new money and investment sales showing material improvement in June or firewall.

But the shape recovery remains fluid.

Turning to Latin America total consumer revenues declined 7% year Auvi Q.

Similar to other regions, we saw good growth into pockets in Mexico. This for with average balances up 9%.

However, revenues were impacted by lower purchase sales and loan volume as well as lower deposit spreads in the current environment.

In total operating expenses for our international business were down 4% in second quarter, reflecting efficiency savings and lower volume related expenses.

Cost of credit increased to $883 million.

Today provides additional detail on global consumer credit trends.

Credit loss rates generally trending upward this quarter as a result at the macro economic slowdown. Although this was much more a function of the lower loan balances as it is still too early to see a pronounced impact from Cobiz 19, when our net credit losses.

90, plus day delinquency rates improve in the U.S., despite the lower balances as reduced spending combined with the benefit of significant government stimulus and our own customer relief efforts has generated liquidity, which has been used to pay down debt even into later delinquency bucket.

Earlier stage delinquencies are also improving given the additional liquidity and the impact of relief efforts. Although it is still parolees and there's still significant uncertainty around the timing of the economic recovery and how customers will perform once these belief and stimulus programs start to roll off.

Delinquency rates were up slightly in Asia, although still at modest absolute levels.

And in Mexico, we saw a more significant impact as koby 19 is still peaking in that market and customers are not benefiting from the same level of government stimulus.

Turning now to the institutional clients through once like not.

Revenues of $12.1 billion increased 21 for second second quarter and were up 25% excluding a roughly.

Hundred 50 million dollar pretax gain for our investment in trade web in the prior year as strong performance in fixed income investment banking and the private bank was partially offset by lower revenues and GTS corporate lending and security services.

Quarter was also impacted by $431 billion mark to market losses on loan hedges as credit spreads tighten during the fourth.

During the quarter, we continue to see strong client engagement across all of our institutional businesses and we've been actively helping our clients navigate through this uncertain environment.

In Tcf, we continue to work with our clients to sustain their operations manage their supply chains and optimize the working capital and liquidity.

We're continuing to see momentum in our digital afterwards, as evidenced by strong growth in city direct users and digital account openings, which further deepen our relationships with our clients.

In markets, we saw record volumes as we supported our clients leveraging our city velocity platform and electronic execution capability.

And similar to the first quarter, we actively made markets for both our corporate and investor clients as we help them navigate through volatile macroeconomic conditions.

In investment banking clients remain focused on both sources and uses of short term and long term liquid.

We continue to provide new loans and facilitate additional draws for clients looking to bolster liquidity.

However, we also saw significant repayments, which led to the sequential decline in end of period loans in four preplanning.

And we continue to help our client access capital markets, which drove further share gain.

I would note that investment grade debt underwriting was up 131% year over year as we continued to help our clients source of liquidity and this evolving in bar.

Turning now to the result for the businesses starting with banking.

Total banking revenues of $5.7 billion increased 4%.

Three in trade solutions revenues of $2.3 billion were down 11% has been supported and 7% in constant dollars as strong client engagement and solid growth in deposits were more than offset by the impact of lower interest rates and lower commercial parts revenue.

Our average deposits were up 30% in constant dollars, we had strong growth in our instant payments and 80, I volumes and our cross border outflows were resilient despite the significant macro slowdown.

All of which give us confidence and the underlying health of the franchise.

Investment banking revenues of $1.8 billion were up 37% from last year outperforming the market wallet and delivering the highest revenue quarter since the financial crisis.

Results reflected strong growth in both debt and equity underwriting.

Partially offset by M&A.

I would think revenues of $956 million grew 10% driven by increased capital markets activity as well as higher lending and deposit volumes, partially offset by lower deposit spreads.

Corporate lending revenues of $646 million were down 11% as higher volumes were more than offset by lower spreads.

Total markets and security services revenues of $6.9 billion increased 48% year over year.

Fixed income revenues of $5.6 billion grew 68%, reflecting strong performance across rates and currencies spread products and commodities.

Equities revenues of $770 million were down 3% versus last year, a solid performance in cash equities was more than offset by lower revenues and derivatives and prime finance, reflecting a more challenging environment.

And finally in security services revenues were down 9% on a report bases and 5% in constant dollars at higher deposit volumes were more than offset by lower spreads.

Total operating expenses of $5.9 billion increased 7% year over year as efficiency savings were more than offset by higher compensation costs continued investment and volume driven growth.

Total credit costs of $3.9 billion were up significantly from last year.

We built roughly $3.5 billion in reserves this for.

The increase in reserves reflected the impact of changes in the economic outlook as well as downgrades in the corporate loan portfolio during the fourth.

As of quarter end, our overall wondered reserve ratio was 1.71%, including 4.9% on the non investment grade four.

We provide more detail on the corporate portfolio in the appendix of earnings presentation.

Total non accrual loans increased $1.5 billion sequentially this quarter, reflecting the current environment.

Roughly half of the increase coming from smaller sized spoke.

Overall, we remain vigilant and managing the portfolio and reserve levels relative to the stresses we see out there today.

Slide 10 shows the results for corporate items.

Revenues of $290 million declined significantly from last year, reflecting the wind down of legacy assets and the impact of lower rates, partially offset by a at best game as well as positive marks on legacy securities at spreads tighten during the fourth.

Expenses were down slightly in the wind down of legacy assets was partially offset by higher infrastructure costs as well as incremental costs associated with cobot 19.

In the pretax loss of $343 million this quarter, reflecting loan loss reserves, when our legacy portfolio as well as lower revenues, partially offset by lower expense.

11 shows our net interest revenue and margin frame.

In constant dollars total net interest revenue of $11.1 billion this quarter declined $580 million year over year, reflecting the impact of lower rates and lower loan balances, partially offset by higher trading related in IR and the improved mix in branded cards that I mentioned earlier.

On a sequential basis net interest revenue declined by roughly $250 million, mainly reflecting the lower rate environment, partially offset by higher trading related and IR and the absence of an episodic onetime item.

Net interest margin declined 31 basis points sequentially with lower net interest revenues driving roughly one third of the decline and the remainder representing balance sheet growth.

The increase in liquid assets driven by higher deposit as we accommodated the needs of our clients, while also strengthening our own liquidity in the current environment.

Turning to noninterest revenue in the second quarter, a strong performance in trading and investment banking drove a significant increase year over year.

As we look to the third quarter, we expect both net interest revenues and non interest revenues to decline year over year, reflecting the impact of lower rates and lower levels of activity related to covert 19, as well as a normalization in investment banking activity.

On slide 12.

We show our key capital metrics.

Our cc, one capital ratio improved to 11.5%, primarily reflecting the decline in risk weighted assets.

Oh supplementary leverage ratio improved to 6.7%, primarily reflecting the benefit of the temporary relief granted body FRB.

And our tangible book value per share declined slightly to $71 in 15 cents, reflecting the debt valuation adjustment VVA impact LCR.

City credit spreads tighten during the quarter.

During the quarter. We also received our stress test results, including our preliminary stress capital buffer FCB requirement of 2.5% incorporating this FCB and a GCIB surcharge of 3% results in a minimum regulatory requirement of 10%.

In summary, the environment remains challenging this quarter, but we continue to perform well.

We ended the period with a strong capital and liquidity position.

The underlying I'm business performance this quarter remain solid and we were able to absorb the significant reserve build with strong results in our markets and investment banking business.

Overall client engagement remains strong bolstered by increased digital acquisition and engagement.

And while our consumer business has been impacted by Cobiz 19 related lower levels of activity, we have seen a pick up through the core.

That said, we did see a significant headwind from a full quarter impact of the lower rate environment.

Looking to the third quarter and the rest of 2020, we expect the environment to continue to remain challenging and uncertain.

On the topline.

We expect to see continued pressure in consumer reflecting the impact of rates and lower levels of activity related to covert 19.

And we would also expect the low rate environment to continue to weigh on our pool businesses in ICICI.

Our markets and investment banking businesses should reflect broader industry trends that said, we would expect a normalization relative to the first half.

Based on our best estimate we would expect these headwinds in the back half of the year to result in full year revenues that are flat to down slightly with the decline in net interest revenue more or less offset by non interest revenues on a full year basis.

On the expense side, we remain focused on protecting our employees and supporting our customers.

And we continue to feel good about the investments, we are making particularly in our digital capabilities and infrastructure and control.

That said, we continue to explore all opportunities to operate more efficiently to fund these investments and offset headwinds created by corporate my team.

And overall, we still expect expenses to be flattish to down slightly for the full year.

Turning to credit, we do expect a higher level of losses going forward given our current outlook.

However, this should be offset by the release of existing reserves.

Of course, the overall level of reserves in the back half of the year remains dependent on the environment relative to our current out.

So to wrap up we're preparing for a range of outcomes and remain confident in our ability to maintain our overall strength and stability as well as continue to support our customers.

With that Mike and are happy to take any questions.

At this time it to ask a question you want me to press Star one on your telephone keypad again that is star then the number one.

Please limit your questions to one question and one follow up.

Please hold while we compiled acuity roster.

Your first question if on the line up of Glenn Schorr with Evercore.

Great sort of your line is open.

Got you may be on me I'm, sorry about that.

Good.

[laughter].

And you hear me now.

Yeah, we could have utilized unfair.

Oh.

Sorry about that I apologies.

Quick question on a quick question on cards and your comments, you mentioned doing less balance transfer and tighter.

Credit box impacting revenues could you dimensionalize, maybe what portion of the book of remind us what portion of the book as promotional whereas where this might take it to and how much pressure we're talking about on the parts I appreciate it.

Yeah. This is a this is mark good morning plan, you know look I'd say a couple of things you were seeing take place where only managing through through a crisis here and what we've seen as we've seen less purchased sale activity less loan volume take place and frankly less new card acquisitions.

Both on the branded side as well as the retail side.

And in light of that in light of the environment that were in we've dialed back.

The marketing spend Weve dial back you know Falcon and the like and what happens as you know is that as you dial back that level of spending.

You in the future you don't get.

Increasing average interest, earning balances loan balances that ultimately drive forward looking looking revenues and so.

The comment there is simply meant to suggest as we prudently manage through this crisis, we've needed to dial back we've decided to dial back that span and I think what is critically important is that we turned that back on added this crisis turns around and that's the way we're kinda planning so that we start to get.

As promotional balances picking back up as the economy turns as GDP turns as I employment falls and we can start growing those balances again, so that mix as you know is very important it'll be pressured as we manage through this but then we want to be very responsive to the economy has a chance.

Changes are which is slightly different from from away was handled in the past.

Apparel per month, Oh, I get it.

And apologies if I missed in the prepared remarks related to the reserve build.

I get that there's multiple scenarios water Latam variables, but can you talk about where we were at the end of the first quarter versus where at at the end of second quarter and they economic backdrop that you wrote reserves to.

Just so we can.

To the compare and contrast, thanks, let me, let me try and I mentioned that a little bit because I think it's you know it's important first to kind of understand how we approach. The c. So modeling and then I'll share with you. The variable is the key variables that we used in the in the second quarter here specifically.

So remember as we as we approach C. So we've got to take a view on the forward look of the economic environment.

And the way we've approached that is we've established models to in order to forecast Boes reserve levels and we use one scenario for that we use a base scenario for the modeling of that in addition to that base scenario, which drives the quantitative out.

In a way of the level of reserves, we have a quantitative approach that that drives a management adjustment and that management adjustment is designed to account for the economic uncertainty and the prospect of a more so be or stress for ace.

Slower recovery and so those two components become important to how we've established a reserve both in the first quarter and in the second quarter and the in the first quarter more screen turn into second quarter, two more specifically nastier.

The base economic forecast calls for an employment, peaking at roughly 15% or so in the second quarter.

And GDP falling.

Every 5% awesome quarter over quarter now what's important.

The shape and the pace of the recovery, including whether we see a significant second way.

The virus or what impact the crisis has on border employment et cetera, and our base scenario as GDP recovering sequentially in the third quarter and beyond.

And unemployment recovering quality under 10%.

By the end of the fourth quarter of 20, and then trending down from that through the fourth quarter of 21.

And these assumptions kind of assume a potential second wave, but one that is controlled.

It assumes you know appropriate fiscal response, if needed to maintain that pace of recovery, but there's a lot of uncertainty there and that that kind of drives the quantitative approach and then we consider the probability of an alternative downside scenario and we build additional reserves and.

Good to that and so if you think about our total reserves would show up on page 20, I think which stand at about 28.5 in terms of the A.C.L. reserves that includes roughly a 2.2 billion or so 2.3 billion or so.

Additional.

Management adjustment to account for the possibility of a more adverse outcome and and so that.

Hopefully that helps we've got a very specific based scenario. Then we are we look at a more stressed scenario severely more stressed scenario and we put a probability to that in order to establish what our management adjustments should be and that's what's in the or indeed in the into 28 and path that's itself.

Sits today.

Okay. Thanks, so much that mark.

Well.

Your next question respond to line up Matt O'connor with Deutsche Bank.

Good morning.

Good morning to talk a bit about the timing of when you think the charge off proximately start to go up.

Obviously, you know you alluded to the large reserve and that May or may not hit earnings entirely but just everything about the loss recognition have you can speak to when you think we might start saying that in and what peak levels and when and obviously it might vary by region. So any thoughts on that topic for very helpful.

Thank you.

I'm sure. So we are if you if you kind of look at the information that that we reported we aren't yet seeing significant you know and CLS as of yet we aren't you had seen there some increases, but we aren't you're seeing significant mcl we.

And yet seeing no meaningful increases in even the 30 to 89.

Buckets in fact, they are declining so if you look at kind of North America, but 30 to 89 delinquencies declined.

Sequentially.

You know a in branded cards in retail services they were relatively stable in Asia.

In Mexico, they declined as well all in our in our supplement and part of that is because as you know they are.

Permanent payroll protection programs, you know theres, they're stimulus checks there they're unemployment benefits there all of these things that are in place in many ways to kind of to kind of prop up the economy and so we aren't yet seeing.

You know the stress if you will kind of played through those those early buckets, what I would say is that as we get to.

Through the back half of the year in towards the back half of the year would likely to see.

NCL start to pick up.

And Ah, we're likely to see some of that at least when a consumer side starts to Pete towards the middle of next year.

But I think what you've got to keep in mind is that you know we're building reserves now around lifetime expected losses, and so to the extent that.

Forecast plays out as the scenario would suggest you will see those losses or pick up and all things being equal as it relates to balances. You'll also see the reserves are used to cover those to cover those losses.

And then just on a follow up I mean this is the first cycle that we've all been true with Stifel.

I always think about there's always reserve being felt that you're supposed to use.

As charge off ahead, but that kind of assumes that you know charge off aren't going to go up kind of beyond the level of reserve.

So like if the cargo for going up but the macro environment continues to get worse.

You don't really know consider using reserves or not so I guess im just wondering like it should be a little bit more coincident in terms of using reserves of charge off go up and maybe before fearful.

I would assume like.

Like the backup this year for example in charge off go up like you're not going to using reserve yet until you're confident that the macros not going to be worth.

The reserve for right.

Again, I think in every and every quarter, we're going to be taking a view on the forward economic outlook.

So a little bit to your point, if we get into the third quarter and we're seeing a charge offs increase but our outlook is consistent with what it was at the end of the second quarter.

And we're going to take a view additive balances all you know balances in terms of loans, all things being equal related to balances you know, we're going to take a view as to whether we think that economic environment is going to.

The as Weve scenario that out.

Get better or worse and act with the reserves Accordingly, I think the other thing that I'd point out to your question is that remember when I described how we established the reserves. We've also built.

You know this management adjustment this qualitative approach, which is meant to account for.

Some of that uncertainty and the prospects for a lot worse scenario.

Okay. Thank you.

Yep.

Your next question is on the line up Erika Najarian with Bank of America.

Hi, Good morning, good morning, I hate to ask yet another question on the reserve, but just wanted to.

Sure we got the right takeaways from everything that you just said Mark as you think about you know your current outlook for the economy are you done with significant reserve building and eat out in that case in terms of what you're alluding to no should we.

I assume that once the charge offs actually starts to manifest that's drawn against your reserves and you have a longer reasonable unsupportable period versus peers and I'm wondering as investors start validating banks on normalized earnings how we should think about the.

State reserve to loan ratio relative to that longer rns period.

Yeah.

You know I guess.

Here's the way I think about which is you know we obviously you know you've heard us say in terms of the uncertainty unprecedented crisis. You know we've taken a view on our forward look of the economy and how it plays out.

And that is in fact, you know the view that drives what we've established in a way of reserves now you know we're sitting at reserve levels of.

28.53, 0.9% or so of funded you know 7% against the global consumer bank in terms of against balances ICICI at 1.7, even within the ICICI non investment grade is immediately.

5%, 4.9% in terms of the reserves against the loan balances were sitting with reserves that we feel.

The love, we feel comfortable about the level of reserves that we have but but that is for all the reasons that I described tied to the scenario that I've described for you.

I'm, a scenario, where we see the meaningful drop in GDP this quarter, but we also see a recovery sequentially in the third quarter.

And unemployment start to.

Start to fall by the fourth quarter, and so to the extent that those things play out.

With a little bit a room, there I would say because I do have a management adjustment than I would expect at the first half would reflect by enlarge. The you know the majority of the reserves that we would would need to pay.

You know and so and as losses are starting to play out that we'd be utilizing that reserves in order to cover them.

So hopefully that that helps.

Yes that helps and yeah I'll follow up offline on a normalized reserves, but I wanted to get the second question and I'm. Your peer earlier today noted that we should essentially cut trading revenues and half for the second half of the year into.

Themselves normalization and should we be doing the same for city for the second half of the year and I suspect probably more applicable to the fix side than the equity side.

Yeah look we have seen very strong performance in our in our markets business and and tick in particular was up 68% good just for the.

Again that we had last years up as much as you know close to 90% little bit under 90%, So very strong performance there.

We have I did mentioned in my prepared remarks, bad we would expect to see you know our markets revenue our investment banking revenue normalize in the back half of the year and I think that I think that certainly hold in terms of but we're expecting and I also gave a little bit of guidance in terms of how to think about.

Full year performance and that should hopefully in form.

You know how to how to kind of model our performance Tonight I talked about total revenues for full year revenues that are flat to down slightly.

With a decline in net interest revenue, that's more or less offset by noninterest revenues on a full year basis and I think if you you can kind of model that out and it will I think reflect that normalization that I'm speaking to with regard to ER to markets, which.

Well show up in both but you'll see a good part of the normalization in the non in the non there.

Got it thank you.

Yeah.

Your next question respond to line up Mike Mayo with Wells Fargo Securities.

Hi, I have a few questions. So I'll ask a couple of then I'll re queue at the backend if that's okay, but I like the one line that they taught me was that we will be struggling until we get a vaccine.

Which which might be correct.

Nobody really knows now this is going to play out, but that's a little bit more.

Pessimistic than some of the guidance given by others and certainly the timeframe for a vaccine is it's uncertain too. So I'm just trying to reconcile the comment that in the reserves are fine. It sounds like the second quarter reserve build is a high watermark I'm, so that's reflecting everything on the other half.

And if we have to wait until we get a vaccine and also you didn't mention Mexico, not having the stimulus and we have had some data since the end of the quarter that looks a little bit worse. So I guess my question as you know Mike Yeah.

How confident are you that you've done enough reserves as of the second quarter in light of what you said about Mexico, the vaccine and whats taken place since quarter end.

Sure. Thank you Mike So let me let me just kind of touch on the comment in terms of the vaccine as we think of it is I think of this health pandemic and I'm not necessarily specific dates, but a broad based timeline effectively I think of this going through four stages containment stabilization.

Nation normalization and ultimately a return to growth I would describe that today the economy as we've seen the global economy. The global health pandemic isn't is not all in the same place. We didnt entered at the same time, we didnt have the same response, either from a health or from a fiscal and monetary perspective, and therefore, we're going to.

She exits and exit rates different and we're going to actually see.

The numbers in terms of resurgence of of covert in some areas.

In different ways I would describe right now that broadly in the world. We are somewhere between containment and stabilization like containment is that we can bend the curve in terms of the transmission of cases stabilization is that is we removed or start to take down some of the barriers.

Or actions that were put in place.

Working remotely.

Social distancing kinda all of those things that have been put there and there's no start to get lifted that you'd actually don't see cases come back and when you get to the third phase around normalization and simply put normalization to me is you know my my willing to get on the airline or am I willing to get in a subway and my willing to go into a crowded venue to.

Watcher sporting event or a concert or what it may be and I think realistically when we get to that third bucket I just don't see that.

Coming and I would say you know I would say many don't see that coming into we feel like theres of an anti virus.

Vaccine that's available for the mass population around that and so.

I think one of the things that people struggle with today is the disconnect in some ways between where the market is in some ways and actually where we are in terms of this health health pandemic can and does the number of questions that are out there. So I know I don't want to be pessimistic in there I want to be a realistic.

I, just think that in order to truly normalized that's what's necessary to do that.

The second part of your question.

We've seen different responses in different ways, we've seen different health responses, we have seen different economic responses and I think the approach specific to your question in terms of Mexico is that in.

In both cases, you know those responses.

Have been pretty straightforward right, we really haven't seen the extraordinary actions that we've seen from the U.S. or UK, where some of the governments around the world. It's been much more of a b. A you response than I think as part of that we're seeing that economy being hit fairly hard and it's it's it's.

Still relatively speaking in the earlier stages in by the way that's not just Mexico more of Latin American other parts of the world.

And I think as we forecast growth rates going forward I think our forecast right now is for a contraction of about 8% in.

In Mexico in terms of GDP as we look forward. So obviously the economy has been hit.

We'll continue to be hit.

That being said I think the actions that we've we've we've taken in terms of the risk approach. We've taken in terms of the ways that we have looked out and been mindful in terms of risk going into this I think should serve us well.

But again I think is it the effects of this are likely to be felt longer in Mexico.

And the last part of my question was since quarter end, you see that could cover cases increase in Florida.

Texas and see what's happening in California, or any change and assumptions in the last couple of weeks.

When you say functions Mike works do.

I just your assumption, sorry, Oh assumption assumptions I'm sure sure Yeah, well you know to me to me right. If we want to if we want to characterize what's happening in this in some cases as a resurgence where the second round of this one is I would say that we've seen both societal and behavior is changing right that.

You know I think what we've seen in these states where we've seen resurgence is is in some way should dichotomy of the population I think those that have reverted back to original protocols from the early stages of Covidien what needs to be done and I think those that are you know I think being much more for lack of better term free.

The spirited or kind of moving forward with their lives and I think you can see that in the into spend rates that while these cases have.

Had a resurgence we've seen spend to come back off and some of those.

Those places, but we haven't nietzschean that necessarily go back to the lower levels of the darkest days of early early Cove. It I think the second thing in there and it's in all of that the National Health reports is it the demographics of change here, we were actually seeing and part of it can be attributed maybe to testing or more mass test.

Thing, but we're actually seeing the the average age of the infected population coming down round. One it was in the 50 to 50 year plus range on average in the last numbers I Shaw coming out had the most recent cases in the stage actually in the mid Thirtys has an average and so we're actually seeing.

A different demographic in there and again I think that has some impact in terms of the way people respond and what spend and whether things are and it.

Remarks earlier point, Mike just finishing on this I think that.

What we're seeing is that the extraordinary actions of the fed into treasury.

Leave.

Not just ours, but industry model models kind of wanting for more insight, but we've never seen this type of action and whether it's to the checks people receive whether its payroll protection 500 plus billion dollars whether it's the.

The the holiday in terms of income tax payments, but we're actually seeing a consumer in the U.S. that actually kind of goes into this and and it's not all even but in pretty good shape savings rates are up obviously spending levels are down mark talked about some of the delinquencies and.

The positive things that we're seeing there in terms of the buckets and the roll rates. It's early.

But but again I think you know should we look at.

Potential spike back up in some areas obviously over the weekend stimulus round. Two came came on the table that seems to be bipartisan and so was likely we're going to get more from that and so again I think those things give us I won't say comfort, but but give.

I wish I think a good a view based on what we've been through in terms of the consumer in particular to be able to.

To withstand some of these variations in contagion rates as we go forward.

Sorry, 10 second summary.

28.5 billion of reserves as we stand here at July 14th reflect all that that the 8% contraction in Mexico, some spending come off some spike in cases.

And everything else that's out there now it's not like the first quarter, we had all this new information.

20.5 billion is your best estimate now fear future losses undersea so.

Yes, and the one correction there one correction I would I would make to that Mike is it's not again, we closed our views as of quarter end is as of June thirtyth, but again the models, you're very sensitive to unemployment their own insensitive to GDP and as we went through last quarter.

As we were doing different flashes those numbers moved around so again the models are sensitive to those inputs and my guess is as those inputs continue to change there will be variation, but absolutely as of quarter end, we are comfortable with where we where we set those and and the reserving around that.

Thank you.

Your next question based on the line of Gerard Cassidy with RBC.

Good morning, Mark ammonium nitrate Mona garage.

<unk>.

Mark can you give us good detailing the slides that you're putting the outcome the commercial portfolio the wholesale portfolio.

You showed as some of the migration trends from AAA to Triple B et cetera can you share with this what percentage of the corporate portfolio was reviewed and was downgraded and second.

And how often do you no need to review the portfolio for potential future either upgrades or downgrades in that portfolio.

Yeah. So look we are we are constantly reviewing.

The portfolio and we've we've ramped that up that timing up significantly as we've managed through this crisis. There obviously you know.

I'd start by saying kind of.

Paul companies all sectors have been impacted by this obviously, there's some are more significantly impacted than others. When I think about you know sectors that that drove a good portion of the reserve build that we've seen as you know I think about aviation I think about energy I think about autos commercial.

Real estate to some extent and and retails and retailing and you know that combination probably drove a third of the of the of the bills that we that we that we saw we did see.

Significant downgrades or through the quarter on you heard me referenced the non investment grade a reserve sitting at 4.9%.

The loan balances and so you know we are actively reviewing the portfolio as you would imagine we're looking at both the 80% investment grade you know the 20% Noninvestment grade of our balances and where we're adjusting that accordingly, and we'll continue to do that through the quarter and continue.

The work through the entire book there just to put in perspective, there were probably.

A couple of thousand names that you know that were that were involved in the in the.

In the the driving of the of the downgrades.

And so they're meaningful a meaningful names and meaningful reviewing assessment that we go through in the core.

Very good. Thank you and then as a follow up shifting over the consumer side in the slides once again you gave us.

You know there relief efforts that you're making some of your customers or for Barents, I guess, you could call it in credit cards mortgage et cetera.

It's a two part question is there anyway is you citigroup finding out what percentage of those customers are unemployed, but receiving enhanced.

Unemployment benefits so that in the delinquencies across your portfolio is really is your peers are quite low in part of the news and possibly due to the unemployment benefits being so beneficial to the people their own employed is there any way of carving out the higher risk.

Pulling some of these forbearance areas, where they could end up.

Turning into charge offs later in the early next year.

Yeah look we're constantly again reviewing the portfolio, but but in terms of you know specific unemployment information, that's that's something that we.

Have available to us as we as we work with our customers and review their their specific credit statistics. So we don't have that we do have as as you know I'm. The early signs of of both customers who were.

An advantage of the forbearance globally and the E.

And then still paying so we've got everything kabaddi globally, we have 40% to 60% of the customers that were at our enrolled in the consumer really programs continue to make payments and they are contractually obligated to do so almost 50% in branded cards and 40 in retail and.

And again high numbers around the globe. So that is a good sign that you know that people are benefiting from the program and I'm, taking those benefits and applying them too.

To their exposures and the other important stat that I think as a good indicator and probably gets a little bit closer to what you're trying to get a sense for is that.

The first time enrollment volumes have come down significantly.

While we're offering reenrollment re enrollment the rates are running below expectation. They are kinda in the mid teens, so to speak or right around there.

And more than half of the total enrollments that have rolled off.

To date and over 80% of those remain current.

And so we're seeing good signs of those rolling off and enrollment.

Continuing to remain current which we think assays as a positive indicator that said you know we've said in a couple of times on the call. Now you know, there's there's still some uncertainty fair amount of uncertainty out there in terms of how this thing continues to evolve, but the good leading indicators between purchase sales between re enrollment levels between.

I mean continued payment bolt on and off the programs.

Okay very good insights I appreciate that my sense is yep.

Your next question. Please open the line of John Mcdonald with Autonomous research.

Thank you Mark was hoping you could drill down a little bit on the outlook for consumer revenues you mentioned no. The outlook for continued pressure on the topline there just wondering what sounds like maybe you are seeing some improvement in Asia, you down 15% revenues in the quarter, but it sounds like maybe the little bit improvement there Latin America.

I wasn't sure so maybe just a little bit of dimensioning, what you're seeing the outlook for consumer revenues international and domestic.

Yes, sure. So look I mean, I think that.

We're going to continue to see.

Pressure on the consumer revenue law on then I think that you noise as you know if we think it could be just kind of taken in pieces very quickly.

In the U.S., our branded cards, our retail services a you know the unemployment stats are very important indicators for.

Those businesses you know with Doe stats are we've seen while we've seen improvement in purchase sales theres still down in the twenties year over year and so we do expect that we will see continued pressure on the loan the loan activity there and so and.

As a result continued top line.

Pressure on on the consumer business domestically. Similarly, when I look at Asia. For example, there we have a large card business.

We're focused on the wealth segment. There you know again purchase sales are still under under pressure there the nature of that have that activity in card skews towards travel and and Mike commented on the prospect of travel recovering and what that looks like in the future and so we'd expect to see can.

And you pressure in Asia. Similarly, this pressure in the insurance business. That's fair in light of the face to face interaction that's involved and in Mexico as well I'm just given the GDP deceleration. So I think I think consumer will continue to have some top line pressure I think the underlying indicators there are still strong.

For us.

In terms of the deposit growth in terms of the client engagement in terms of the digital.

You know accessing and use of our offering and so we've got good indicators, including investment in the lambs in Asia that show positive signs as we come out of this what as we are managing through it we're going to have we're gonna have topline.

Pressure there.

In Latin America is to finish it up.

Yes, so in in Latin America in Mexico, specifically, you know as Mike suggested a you know we're seeing.

You know continued pressure from a GDP point of view you know they are later in the cycle in terms of you know addressing or managing through this cobot 19 situation.

There is likely to be some continued pressure on unemployment there and so I think there's going to be topline pressure in Latin America consumer Mexico in particular.

As we go through this as well that said I feel good about where we're positioned we kind of started to dial back.

Back lending activity, a little bit and in some of the prior quarters I think we're well positioned from a reserve point of view and I think we're positioned for when Mexico recovers from this too.

Continue to kind of gain ground there given some of the investments we've made in the prior years.

Got it thank you yeah.

Your next question is on the line of Brian Kleinhanzl with KBW.

Great. Thanks.

Maybe just a quick question for my I know that the mountains in Hong Kong, So a big piece of your portfolio.

Them with the operations over there is there any change in how you're thinking about the business there and I think about that on a go forward basis to start.

Yeah, Brian I would say one is that Tim I think as we look at the region. You can't just look at Hong Kong I think you've got to take a bit of a broader view and.

The word I would use instead, it's it's complex right. We've got the the combination of.

Sidelined trade deal with China, you've got the interaction between China and Hong Kong.

You've got the recent.

Announcement or or.

Creation.

This new National Security law, which is I think fairly specific in terms of calling out financial support in terms of.

China against that sovereignty with significant penalties around that and so I think we've got to be mindful of all those you from our perspective, we've been in Hong Kong, a long time, it's an important place it's our it's our Asian hub.

We operate in a number of countries there and.

I would say a couple of port an important things as to that that you know one is we do obeyed local laws second is that our goal really is to be there to support our clients and that we're we're fairly used to operating and charged or complex environments and as part of that I think we've found both the Hong Kong government <unk>.

The HK Amelia and others very supportive of our business and our approach and at the same time you know we have.

I think received the same support from China and haven't in any way kind of receive restrictions who were or other things from them. So obviously, it's something we pay.

Tension to which it's important to us.

But but obviously we were committed to being there and obviously you're monitoring things closely.

In a separate question.

Mark you mentioned the in the retail services that there was some pressure from partner payments.

So are those higher partner payments fully in the run rate now should we expect both to kind of increase on a go forward basis basis, and what were those exactly thanks.

Sure. So as you know we've got a number of partners that that make up our retail smart services partner.

Business.

And many of these arrangements hall for the sharing of profitability, so contractual profitability I'm sharing between us and the partners and we will determine that based on our outlook in any given quarter for the balance of the year.

And so in we make an estimate for what we think profitability will look like and then we obviously.

Count for the share that goes to the partner.

In the in the revenue line that profitability estimate excludes Oh AC else. So the reserves that we've been building.

It does include any and see else that we realize and so important to note that again, when we're calculating that the lifetime reserves that we are building. Despite the fact that we'll share them when they become losses, that's excluded from the profitability estimate and so essentially what's happened in what's caused part of the drag and.

Retail services is bad we've seen the the exceeded the losses that we expect from retail services push out beyond kind of 2020 as I mentioned earlier, we see good signs in some of the of the the early buckets.

And as such our view as to when those losses will actually come through as end Seattles has been pushed out into into 2020 as a result, I'm 21 2021 as a result, the 2020 view on profitability.

For some of these partners has gone up and therefore, the amount of sharing has increased thus putting pressure on me on the topline to answer to that part of your question. So we believe at this stage based on our view for the balance of the year that weve accounted for the level of profit sharing that we would expect but as things evolve.

Looking to adjust accordingly.

Good thanks.

Yeah.

Your next question respond the line of Saul Martinez with DBS.

Hey, Hey, good morning, and facing for taking my question So mark.

I want to go back to see so we're in and get your perspective, it's on the sticking to see some reserves is charge offs start to happen and and I guess the willingness to release reserves that I think we've all been focused on reserve builds when do we see the peak in reserves and less focus on.

What happens in the cadence and piece of releasing reserves and declines in reserves as actual loss start to occur and I mean, as you know cecil's kind of work backwards you hear every given quarter you need to ask us doing when you're when you do your lifetime losses, our portfolio charge offs in kind of back into a plug with loan loss provisions.

So I'm curious given given all the uncertainty that we are we still haven't.

And will likely continue to see whether you know as you start to see charge offs start to materialize and whatever the fourth quarter or or the beginning part of next year in a more material way, whether there's sort of a bias to maybe maintain reserve levels at a fairly high levels and not necessarily relief.

These reserves because even if we're not you know even if reserve releases aren't happening or we're not building reserves is charge offs happened that could imply that provision credit costs remain pretty high for while so.

I'm curious, which you know whether you think there there will be sort of a hesitancy or or natural inclination to kind of wait it out and have a little bit more stickiness and the reserve levels until we get more clarity on all the things going on the board.

I think it I think it largely depends on our outlook at that point in time and that given quarter.

I mean, it [laughter], there's no there's no other way for me to kind of.

Explained it you know when when we get into the why we're in the third quarter now as we go through the third quarter and the fourth quarter. We will have a view a forward looking view and if that forward looking view is still meaningfully uncertain to worse than it was in the second quarter.

Then we will likely continue to have to adjust reserves. Accordingly, if that forward view is better. We can you know or the same for that matter. It will support the release activity you know that you're alluding to and that that's the way I think about and I I think thats, how its probably going to war.

Okay got it I guess maybe.

You know just getting more granular or even I guess, if there's if your baseline economic yield I know youre means once near your baseline hasn't change or even done you know maybe getting a little bit better, but you still have a high degree of uncertainty in potential in the range of outcome some of which were far worse I would assume that.

Your qualitative adjustments will will sector that in some way shape or form is that and that's been that's right.

That's right right. So I mean, if the way we think about the qualitative piece.

You know now is you know we cover kind of a 15% probability that's a recovery is worse.

Or slower right and that has on impacted or an implied higher unemployment et cetera, and so if we do things is getting better and we would it would toggle that probability so to speak.

To adjust the way, we think about the management adjustment that should be there.

Okay awesome. Thanks, so much yeah.

Your next question based on the line of cannot use then with the Jefferies.

Thanks. Good morning first question just on expenses Mark you've done a very nice job. This year keeping the level flat in that 10 for 10 five zone. It through the first half you've got 3 billion more revenue and flat expenses and I heard your point earlier that you expect in keeping flattish from here given that we'll see a likely decline in second half.

Revenues from here, though can you talk about just.

What Optionality you do have to adjust the cost base lower given your point about supporting employees investing in technology, and then the pushes and pulls of.

Compensation staff levels et cetera. Thanks.

Sure. Thank you.

So I guess a couple of things one is as I as I mentioned in my prepared remarks that.

I do expect that we will.

Maintain our full year expenses roughly roughly flattish.

And that's what we're kind of managing to and you know part of part of that against revenues that are that are flat to slightly down and if you think about what we're managing through you know in the midst of this crisis. We've got a lot of puts and takes so we've got.

We've got some some headwinds that that kind of called fall into a bunch of different categories, including.

You know the the things we do to support our employees, including a building out our collection capabilities, including enhancing our fraud detection capabilities.

You know all of which I think are important to ensuring that we're managing through this crisis you know in a in a in a thoughtful and responsible way sanitization of buildings.

Ensuring that people have remote access and the equipment to support that all of those things come with cost costs that we were not planning for in the year. They're obviously some tailwind. So we've got marketing expenses that that you heard me mention we dial back we've got TNT expenses, because people are doing more zoom than they are traveling.

To meet with clients.

And so you've got some some some tailwinds there that offset that but like but net net when you think about those expenses there there are headwinds for us.

We also have you know investments bad.

We we will continue to make.

Investments in technology investments and enhancing our digital capabilities, which have proven to be quite valuable as we've managed through this crisis investment in infrastructure and controls that you know ensure that we not only protect the franchise, but we're improving our efficiency in operation.

And.

And improving the quality of our data et cetera, et cetera, and then we've got productivity initiatives and the other levers that pull or that we do pull quite naturally with revenue. So the compensation expenses, obviously, we'll adjust accordingly.

The transaction expenses will adjust with with how we see volumes move and we'll continue to deliver on our productivity savings in a way of you know right placement and reducing our number of centers and and the like and so.

Yes, there levers, but they're also meaningful headwinds and and that's kind of how I get to that outlook of roughly flattish as we manage through this particular you.

Got it. Thank you my second question just on capital you know this year you've been bound.

On a bit more on C.T., one by the advanced approaches with advanced RW ways, a little bit higher than standardized it's only about 20 basis points, but as we get into the FCB construct can you do anything to.

Optimize the advanced RW ways vis-a-vis, the standardized approach and how much of a focus will that be.

Yeah look I mean were.

Part of a big part of kind of what's driving the advanced is the downgrades that are associated with.

The crisis that we're managing through and and so that is that as a factor that's that's likely to.

You know persists for a while and we're actively.

Managing and optimizing the balance sheet to to identify ways to to impact or reduce that had risk weighted assets for Ah and an eight in the and the calculation here of the CPT, one and but but but that is that is the headwind that we've got a managed now what I'd point out is that.

Matt.

You know the regulatory minimum for a CPT one in both.

Standardize and advances is running at about 10%. So you know we sit on an advance basis at a ratio as Mike and I've said at 11 and a half. So we're still a 150 basis points above that regulatory minimum.

Which we think gives us a room to manage through this period of uncertainty and a range of different outcomes. It also gives us room if you.

Think about and some of the additional stress analysis, that's in front of us in the industry. So.

Yes advance, yes, a byproduct of the prices were in yes, we're constantly looking to to manage it.

Effectively where that makes sense and where we can continue to serve our clients in a way that is quite for the franchise.

Yeah got it thanks for that color Mark appreciate it.

Your next question is front the line of Tim It Mitchell with Seaport Global.

Hey, good morning, Mark maybe just can you help us unpack a little bit the how we think about the trajectory of anti what how do you thought deposit flight to safety deposits have been stickier than I would've thought still seeing growth in deposits. What what are your assumptions I guess around balance sheet growth and then where do you see kind of NIM.

Bottoming out you know those kinds of things would be I think helpful and just understanding your assumptions.

First as ours.

Yeah. So look we we.

Kind of mentioned in my in my opening.

Remarks that we obviously saw NIM declined some 31 basis points.

Quarter over quarter, and that's a combination again of lower rates.

The loan mix shift that we've seen so lower nam cards and higher ICICI.

In terms of that mix.

And the balance sheet expansion, which is really a reflection of.

The strong growth in deposits in the solid liquidity position that we have.

And so when I when I think about that dynamic we are likely to.

Continue to see as I mentioned pressure on our on our cards lending activity.

Around the globe, we're we're likely to kind of.

Continue to see rates kind of impact some of our banking businesses businesses like T T S and the like.

And.

As a result, I think that we'll continue to see some pressure on the on the on the NIM line.

In the outer quarters.

But again I'd point, you back to the total revenue forecast that I've given because obviously there are other components here and that getting back to to flattish to slightly down.

No I mean, that's all fair I just was curious if you're assuming a flattish balance sheet or further growth. Obviously I've heard your comments on some of the pressures just try to figure out what your base case assumption is for the balance sheet.

Yeah, and then the balance sheet, we'll see they'll likely be some growth in the balance sheet, but that that will be driven by a you know the client demand that we see out there and our ability to to meet that but we will be we'll likely see some continued growth.

In the balance sheet from a GAAP asset point of view.

Okay, and just as a follow up on capital I mean, what is your Mike do you think you need to see.

Getting back to your earlier comments need to see a vaccine before but banks can sort of constantly returned to buybacks or do you think it just you just need to have a little more macros stable macro data how do you think about returning to buybacks given your capital position.

As you get doing in the third quarter, but beyond that.

Yeah, I think it's based on as we look in project forward, what we see from an economic perspective, and obviously, what's going on in the economy, both consumer and institutional and how we're projecting loss and loss rates going forward and.

Do we do we feel comfortable about the trajectory of the pandemic and using my timeline do we feel like we're somewhere in that stabilization moving to normalization right. So.

You know I think in here Theres, the fear that as we get into colder weather, maybe that's now been debunked with Florida, and Texas and others, but you know in the fall maybe we start to see a resurgence in some of these things spike up I think we'd like to see this roll over in Hampshire have some comfort that we've got the ability to keep it down and that again, we see.

You know a better sense I'm not sure and give you know I'm not sure what the new normal is but we see a better sense of normalcy whatever that is returning to the global economy.

All right that's fair thanks.

Ladies and gentlemen, as a reminder, please limit your questions to one question and one follow up. Your next question is on the line of Charles Peabody with her Dallas.

Yes. Good morning couple of questions regarding your capital your tax position and how it affects your capital first in the stress test.

I believe the cares act provided some capital relief around your tax position I was wondering if that was true and if you could size that.

Secondly, going forward if tax rates are raised.

As Biden suggests hum much would that enhance your C E T. One ratio and then finally.

I think Jimmy Diamond this morning imply that he would love to.

Restart buying back sometime in the fourth quarter. After the election I was curious if you saw buybacks as a regulatory issue or a political issue. Thank you.

Okay. You know in terms of Big Cares Act. There is a there is a benefit associated with a with that I don't think that it is significant.

You know in our case to the.

To the tier one ratio, but I don't have that specific number in front of me in terms of the tax rate and the prospect of rollback of taxes.

You know that will come with many many puts and takes including you know the impact to.

Okay and other things that we have.

Across the firm and so I apologize I don't I don't have.

The exact math on that we can we can certainly kind of but areas Miracle thing you would have to write up you're in a wells by billions of dollars is that correct.

I would add would have no.

We would have to make a number of adjustments such as that that would add to two capital.

Okay, I hope it there Mark I I yeah.

Go ahead side Mike.

I was going to say chose the other piece that you've seen in our tax rate is given the the breadth of our business. We haven't necessarily enjoyed the benefit that the more you fully U.S. centric institutions, who have had been so again ours would be the blend of U.S. versus international and in that.

Actually going up again, I don't think we would go back.

To a global taxation system, we would stay a territorial system.

Which again vis-a-vis some U.S. counterparties could you know on a relative basis would probably be b to our benefit and I think to you to your final point.

I view.

When the U.S. industry made the decision to go ahead and to stop buybacks. It was not political it was done we thought from.

Prudence perspective of the right thing not knowing what to expect going into this.

I don't use this today as being political I view.

View it is and as the fed has said it will ultimately be our choice to to come back in to reinstate buybacks at the right time and again as we said the previous questions will be monitoring that and when the time is right. We'll be we'll be back in their filing to to to be to re begin or to be to.

Given the buybacks.

Thank you.

Your next question or some of the line of Betsy Graseck with Morgan Stanley.

Hi, good morning.

Morning Betsy.

Two quick questions one on Mexico, I know a couple of years back you invested something around $2 billion and the infrastructure there and I'm wondering is that investment finished completed and is it now in the run rate or does that represent a.

Level of funding that could then come out and pay for other things as it inefficiency opportunity is basically the question.

So yeah, we did we did announce an investment a number of years ago, we are largely.

Through that I think we got to somewhere probably 80% or somewhere I'm through having deployed that investment what is left does serve as a as a lever for us that we consider as we take on these decisions and just keep in mind those investments were made and building out enhance.

During our or technology and branches and digital capabilities and the like him. So I think they have they've certainly been beneficial, but we are largely through that and what's left is available to us to.

To toggle as we as we need to here, Okay, and then as I flip to the U.S. could you give us an update on where you are with the efforts to drive deposit growth any U.S.I. I mean, I, obviously see that deposit growth was up.

Not only in the U.S., but in international in the quarter, but I'm really kind of honing in here on the consumer side and you know you had had the announcement around some partnerships with American Airlines and with Google and so I just like to understand where you are in the in that strategy and do you think that theres anything that you can do to.

Drive up the consumer deposit growth and you know the back half of this year and into next.

Yeah. So we've had.

Very good consumer very very good consumer deposit growth excuse me through the quarter I think that we benefited from the investments that we've made in our digital capabilities as you've seen the digital deposit sales grow meaningfully.

As high as $12 billion as we ended the quarter and and we continue to see those benefits play out.

Both in our market and outside of our markets, which as you though has been part of our strategy to.

Ensure that we're leveraging the breadth of our.

Of our customer base, you know in cards that has a broader presence in the U.S. than we do in terms of retail banking footprint and so we continue to see those benefits of the strategy play out some of that is fueled by some of the things that I've mentioned earlier in terms of a stimulus that's out there.

And the delay in terms of tax payments, but but nonetheless, we've been able to capture upside from both new and existing clients and we expect to continue to do that.

Through the through the balance of the year.

I.

I'd also highlight I know your question was around consumer specifically, but I would also highlight that.

We're also seeing very good continued traction on the institutional side.

In our TTS franchise.

And that growth.

In many ways is as we've seen and worked very closely with our corporate clients to shore up their liquidity positions, whether it was early on where they were drawing on lines or.

In the quarter, where we partnered with those same clients to access the capital markets.

You know weve been kind of that partner of choice that flight to quality on both the consumer side in the U.S. and internationally as well as the institutional side.

No I figured the institution was extremely strong was just wondering out of that you know that it doesn't like is there more room for the consumer to accelerate.

Moving forward from here, yeah, and on a consumer you've seen it in both the you know the U.S. you've seen it in Mexico, you seem to be in Asia, We've had strong consumer growth across all of the regions. But we are we are pleased with the growth that we're seeing here. Mike. We did you want to add something you know should the other piece, but she is that I think very consistent.

With what we've spoken about in the past of that 12 billion that Mark mentioned to search, which again is pretty stable number for us is coming from outside our branch footprint, which we obviously play we pay close attention to given our branch model.

To start that the growth in consumer is coming from outside of the branch footprint two thirds of the digital growth is coming from outside the branch footprint.

Got it that's great thank him.

Thank you thanks.

Your final question is on the line of Mike Mayo with Wells Fargo Securities.

Hi, Thanks for letting me have my follow up questions.

I just am so just to be clear. So you are not guiding for positive operating leverage this year Mark because earlier, you said expenses flat to down and then you said flat and it sounds like your guess and I know, there's a lot of koby costs that makes it difficult year, but so no positive operating leverage this year.

Yeah, I'd I'd repeat what I, what I said earlier, which as you know revenues you know kind of slightly down in expenses flattish right.

Okay.

I guess.

And as far as the equities business you guys didn't participate as much as others and help me with this logic I mean, you had the corporate.

Drawdowns in March that was replaced with the fixed income markets and now maybe we have a re equity vacation with more equity activities and at one of your competitors showed a lot of pick up in equities you talked about a normalization in capital markets. Do you do you expect equities to improve Derecognized underperformance is the attack.

I mean thing how do you think about that.

Sure I would say one is let's kind of break to break the business into a few different a few different buckets. So one I would say that our cash.

Trading performance was good it was strong and I would say that again, it's early to see but we did not do as well.

In either of prime or Delta, one front finance Delta one derivatives.

From a equivocation perspective, if you actually look into our capital markets numbers, you see a very strong number and you see him that or are you cm business was up 56% on a year over year basis. So in terms of the capital raising aspects of it we were quite active and you know in most of the of the headline.

On deals that were.

That were done and so again cash trading okay.

We'll see where things come out, but not as good performance and derivative sale to one prime finance and a strong performance in terms of Vichy.

And then just a summary question I'd say the course this call your stock price went down.

You are underperforming the BK access just one day I know stocks moved yeah don't read too much into that.

But there is a I think a feeling that I'm getting that either your.

Thing more maybe realistic pragmatic about the reality is the world out there and that goes back to you mentioned about the vaccine.

We're seeing something specific to your franchise that gives you more caution.

Or maybe you know me and others are just interpreting your comments to negative late and I, just say that because when you talk about the revenues. The NIM was down 31 basis points. It still goes lower you talked about the consumer being under pressure less partner payments retail services I see GE normalize the head TTS gets hurt.

Lower rates you wont have positive operating leverage and expenses. The loan losses, you know you have Mexico with co bid and we're only somewhere between containment stabilization and no buybacks for some time to comp. So those are all that's a summary of some of the negatives that you had some this call. So maybe that was I intend store maybe that was intentional.

This is kinda, but alas chance to.

You know either but some positives on the other side like with digital banking or deposit growth or things like that we're just say you know what I'm actually in the camp, where this is going to be a long road and maybe you differ from the rest of world.

Well I would start out my can say that it is not our intention to be negative I think we're all in this together and I would certainly say that the unknowns outweighs unknowns and if somebody has the crystal ball I would love to see it but I think what we are seeing and what weve.

Described coming through.

For very challenging months is the first half of 2020 with revenues up 8% expenses flat our ability to absorb a significant reserve builds under the new format of Cecil broad broad scale are wide ranging engagement from our clients I think you will come.

Can you just see in the numbers as they settle that we continue to take market share. We've continued to build capital. We've continued to build liquidity and feel very good about where we are in how we're going into the second half of the year.

The unknowns or the unknowns, we don't know and that in there we're seeing resurgence in places where cases had been down and if they've come back up in the U.S. is are uneven in the approaches in the rest of the world have been uneven and show again I would say we go in feeling very well positioned.

Shouldn't against this but we don't want people, leaving the call you know simply thinking that the world is a great place and it is a V shaped recovery. That's our view that we will see V.. We will see you we will see W and as an institution, we need to be prepared to deal with all of it and I think you've seen across our businesses while its.

Certain areas revenues have been under pressure that we've managed through this very well so far and I'm really proud of the team in terms of what they've done, but again I don't think anybody should leave any bank earnings call. This quarter simply feeling like the worst is absolutely behind us.

And it's it's a roce path ahead, so feel good about where we are the environments unknown I think the actions we've taken so far have been spot on and I think we're well positioned for what the future brings.

Yeah, alright, thank you.

This concludes today's second quarter 2020 earnings review. Thank you for your participation you may now disconnect.