Q3 2020 Citigroup Inc Earnings Call

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Hello, and welcome to cities third quarter 2020 earnings review with Chief Executive Officer, Mike Corbat, and Chief Financial Officer, Mark Mason today's call will be hosted by Elizabeth Bland head of Citi Investor Relations.

We ask that you. Please hold all questions until the completion of the formal remarks at which time you will be given instructions for the question and answer session.

Also as a reminder, this conference is being recorded today.

You have any objections. Please disconnect at this time.

Lynn you may begin.

Thank you operator, good morning, and thank you all for joining us.

On our call today, our CEO, Mike Corbat will speak first.

And Mark Mason, our CFO will take you through the earnings presentation, which is available for download on our website Citigroup dotcom afterwards, we'll be happy to take questions before we get started I'd 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 answer.

G and changes in circumstances actual.

Actual results capital and other financial condition may differ materially from these statements due to a variety of factors, including the cautionary statements referenced in our discussion today and those included in our SEC filings, including without limitation the risk factor section of our 2019 form 10, k. with that said.

Let me turn it over to Mike.

Thank you Linda and good morning, everyone. Today, we reported earnings for the third quarter of 2020, we had net income of $3.2 billion in earnings per share of $1.40.

We continue to navigate to COVID-19 pandemic extremely well credit costs have stabilized deposits continued to increase in revenues are up 3% year to date.

As you know last week, we entered into a consent orders with the federal reserve and the other she she and I will discuss how we're approaching those after I go through our business and financial performance.

Our institutional clients group continues to perform extremely well investment banking had another strong quarter accessing the capital markets for our clients and private bank revenues are now up 9% year to date.

Treasury and trade solutions, the backbone of our global network is down only 4% for the quarter and 5% for the year in constant dollars despite significantly lower interest rates.

<unk> performance was strong as well with fixed income and equity shelf 42, and 18% respectively year to date global consumer banking revenues remained under pressure due to the economic impact of the pandemic predominantly driven by the decline in credit card spending the same.

At the same time deposits continued to increase significantly credit costs decreased and we saw more investment activity from our wealth management clients on both.

On balance a global consumer banking franchise has shown resilience in light of the challenges we're facing.

Our capital position strengthened during the quarter with a common equity tier one ratio increasing to 11.8% well above our regulatory minimum of 10% our tangible book value per share increased to $71 or 95 cents up 4% from a year ago, and we remain committed to returning capital to our share.

Holders overtime.

Turning to the consent orders they focused on four areas that impact our risk and control environment risk management data governance controls and compliance.

Type C series together is the need to modernize our infrastructure governance and processors.

We've had remediation programs in place and while we've been making progress in these areas were simply not where we need to be while this is disappointing we're committed to thoroughly addressing the issues identified in the orders and modernizing our bank.

Many of you know, we've been making structural changes and accelerating investments, we've centralized program management and learn from unsparing root cause analysis from outside firms, we're laser focused on reducing manual touch points automating processes and ensuring accurate data can be accessed quickly when we're producing management and regular.

Troy reports more importantly, we're making strengthening our risk and control environment and achieving operational excellence a strategic priority for the firm going forward. This won't.

This won't be a quick or easy fix we need to conduct an in depth GAAP analysis to ensure our solutions are tailored to the issues, we face and get us to the necessary in state what we.

Well, we can't fully scope out the costs yet for a multiyear transformation I can tell you with certainty that were committing all the necessary resources, while continuing to serve our clients importantly, we're aligned with our regulators as far as timelines are concerned so it will not jeopardize the quality or completeness for speed.

Collectively these investments will not only further enhance are shaped and shown this they'll also create a digital infrastructure that will make us more efficient more competitive and significantly improve our ability to serve our clients and customers.

So these are investments we need to make in hindsight, we should have done them faster and prevented it from coming to this but our firm has made tremendous progress in recent years, whether it's de risking our balance sheet for improving our efficiency and business performance to close the gap in returns with our competitors.

Our foundation is shown stable and secure a performance. During this pandemic shows the progress we've made achieving extra lunch in our risk and control environment and our operations is necessary for city to take the next step forward.

Our franchise, which made up a committed and capable people who make us proud every day they've done everything asked of them and I know they'll continue to do show and the times ahead.

After the transition in February changes driving this transformation and the entire management team is committed to getting city to where it needs to be doing it the right way.

With that Mark will go through the presentation and then we'd be happy to take your questions.

Thank you, Mike and good morning, everyone. Starting on slide three Citigroup reported third quarter net income of $3.2 billion, which included a modest increase in credit reserves of roughly $300 million this quarter.

Reported results also include the $400 million civil money penalty in connection with the consent orders that Mike just mentioned, which negatively impacted EPS by 19 cents.

For the quarter revenues of $17.3 billion declined 7% from the prior year.

While trading and investment banking remains strong this was more than offset by the combined impact of lower interest rates and lower levels of activity in consumer.

Expenses were up 5% year over year as we continue to invest in infrastructure supporting our risk and control environment.

Credit cost of $2.3 billion were meaningfully lower relative to the first half of the year.

Our effective tax rate was 20% for the third quarter.

Looking at year to date results, we delivered net income of over $7 billion, even as we increase credit reserves by roughly $11 billion.

We grew revenues by 3% predominantly reflecting continued strength in our markets and investment banking businesses, while expenses increased 1% year over year, allowing us to deliver positive operating leverage and a 6% increase in operating margin.

In constant dollars end of period loans declined 4% year over year to $667 billion, reflecting a higher level of repayments across institutional and consumer as well as a slowdown in draws in our institutional businesses and lower spending activity in consumer.

Deposits grew 16% with consistent client engagement, reflecting the benefits of our global platform across both the institutional and consumer franchises, which also served to strengthen our available liquidity.

And three quarters of the way through the year, we continue to manage well through this crisis with significant capital and liquidity as well as a significant cushion in the form of credit reserves.

As of September Thirtyth, our CE, one capital ratio was 11.8% close to 200 basis points above our regulatory minimum requirement.

We have over $950 billion in available liquidity, we have.

We have more than doubled credit reserves since the end of last year.

Today, they stand at nearly $29 billion and including the modest increase taken this quarter. Our reserve ratio was roughly stable at 4% on funded loans and.

And as we discussed last quarter, we feel good about our ability to continue to support our clients as we all managed through this crisis on.

On slide four we provide additional detail on reserving action so far this year.

As a reminder, these reserves include our estimate of lifetime credit losses tied to a specific base scenario as well as a management adjustment for economic uncertainty, which provide some room in the event of a more adverse outcome.

In the first quarter, our base scenario reflected a short lived downturn followed by recovery in the back half of 2020 with unemployment falling to 7% by year end and full year GDP close to prior year levels by the end of the second quarter, our base case assumed a more severe and protracted downturn this year.

But with a sharper recovery into next year and now you can see we are expecting a somewhat more muted and slower recovery in both unemployment and GDP through 2022.

I would note however that our forward looking view on a rolling 13 quarter basis in unemployment as an example is continuing to improve as we move further beyond the peak of the crisis and our outlook for other variables like VIX and oil prices is also important and generally improved this quarter.

So on a net basis, we did not see a significant impact on reserves from the change in our base macro outlook this quarter.

But we did add to our management adjustment for economic uncertainty, which grew from $2.3 billion to $3.1 billion during the quarter, partially offset by lower loan volumes and other small items. Today, we are factoring in a downside scenario that is more adverse relative to our base case. For example, we are incorporating a.

More significant deterioration in U.S. GDP growth rates, which is now close to 9% lower than our base case in 2021 versus our second quarter outlook that was only 1% lower than the base case, so all else being equal if the management adjustment had not changed we would've seen a reserve release of roughly five.

Hundred million dollars in the quarter.

Looking at the level of reserves, we hold today, we believe that we are well prepared for expected credit losses, having reserve for something worse than our base case and given the lifetime nature of the see some methodology and the conservative nature of our management adjustment. It is now more likely than not that we will see reserve releases at our Hcl come down in two.

2021.

To offset future losses, as we continue to progress through the crisis, assuming our base case holds.

Although this may be offset somewhat as we would likely need to build additional reserves to cover future loan growth as the economy recovers and we support our clients needs.

Turning now to each business slide five shows the results for global consumer banking in constant dollars.

GCB delivered EBIT of $1.4 billion, while revenues remained under pressure credit costs were down considerably this quarter, reflecting a small they see all release and lower net credit losses in particular in the US where we're seeing a continued benefit from government stimulus and other relief.

Revenues declined 12% as continued strong deposit growth and momentum in Asia wealth management was more than offset by lower card volumes and lower interest rate across all regions and expire.

And expenses decreased 2% as lower volume related expenses reduction in marketing and other discretionary spending and efficiency savings were partially offset by increases in COVID-19 related expenses.

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

Total third quarter revenues of $4.5 billion were down 13% from last year branded cards revenues of $2.1 billion were down 12%, reflecting lower purchase sales and lower average loans.

As seen across the industry purchase sales have continued to recover during the third quarter up 16% sequentially, but still down 9% versus last year.

At the same time, we're seeing an increase in payment rates as consumers remain liquid and we have not yet seen stress in their overall ability to pay.

So while purchase activity has improved our clients are also paying down more quickly resulting in pressure on our loan balances. This is creating a revenue headwind, but it is also benefiting cost of credit as delinquencies and losses have outperformed our initial expectations for 2020.

Retail services revenues of $1.4 billion were down 21% year over year, reflecting lower average loans as well as higher partner payments.

Net interest revenues were down 16% as average loans declined by 10% on lower purchase sale activity and higher payment rates since.

Similar to branded card purchase sales recovered sequentially this quarter up 18%, but remained down 8% year over year.

Hi, a partner payments drove the remainder of the revenue decline versus last year, reflecting the impact of lower loss expectations in 2020, and therefore higher income Sherry.

During the quarter, we launched a new digital credit card program with Wayfair with this partnership we further diversified our portfolio with a leading E commerce retailer and now provide half of the top 10 US ecommerce companies in 2020 with consumer credit card programs retail banking revenues of $1.1 billion were down.

2% year over year as strong deposit growth and higher mortgage revenues were more than offset by lower deposit spreads.

Average deposits were up 19%, including 26% growth in checking we saw continued momentum in digital deposit sales with more than two thirds coming from customers outside of our branch footprint and we will continue to look for opportunities to deepen our relationships with these customers, including through our investments in digital well capabilities.

Total expenses for North America consumer were down 3% year over year, as we managed our marketing and other discretionary expenses, while recognizing efficiency savings and lower volume related costs, which more than offset incremental COVID-19 related expenses.

Total credit cost of $1.2 billion decreased 23% from last year, reflecting lower net credit losses, as well as a modest reserve release.

On slide seven we show results for international consumer banking in constant dollars and eight.

In Asia revenues declined 13% year over year in the third quarter.

Cards revenues declined by 23%, reflecting lower activity levels with purchase sale down 17% year over year.

We're continuing to see a disproportionate impact on Asia card revenues from the decline in travel spending, including lower travel related interchange and foreign transaction fees. However, our strength in wealth management continued we saw record investment revenues this quarter up 16%, reflecting continued strong client engage.

But with 7% growth in city gold clients and 13% growth in net new money versus last year.

An average deposit growth remained strong at 13% this quarter.

Turning to Latin America total consumer revenues declined 10% year over year. So.

Similar to other regions, we saw good growth in deposits in Mexico, This quarter with average balances up 13% how.

However, deposit spreads remained under pressure and lending revenues were impacted by branch closures and a continued decline in the macro environment.

In total operating expenses for our international consumer business were down 1% in the third quarter, reflecting efficiency savings and lower volume related expenses.

And cost of credit declined to $392 million with lower net credit losses, and a modest reserve release this quarter, reflecting a change in accounting for third party collection fees.

Slide eight provides additional detail on global consumer credit trends.

As I noted earlier credit trends remained broadly stable to improving this quarter given high levels of liquidity in the us.

Lower spending and the benefits of relief programs. However.

However, we do expect losses to begin to rise next year and likely peak towards the end of 2021 as government stimulus and other programs roll off and unemployment remained elevated.

Turning now to the institutional clients group on slide nine I CG delivered EBIT of $3.7 billion, this quarter and $10.8 billion year to date.

Revenues of $10.4 billion increased 5% in the third quarter as strong performance in fixed income and equity markets investment banking and the private bank was partially offset by lower revenues and TTS corporate lending and security services.

In the third quarter, we continued to see strong client engagement across all of our institutional businesses, given our highly differentiated global platform, our progress in creating new digital solutions for clients and our full service model, which allows us to capture natural linkages that exists across the franchise.

Turning now to the results for the businesses, starting with banking total banking revenues of $5.3 billion declined 2%.

Treasury and trade solution revenues of $2.4 billion were down 6% as reported and 4% 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 cards revenues our average.

Our average deposits were up 26% in constant dollars and we had solid growth in underlying drivers despite the significant macro slowdown.

One example is the continued client engagement that we have seen is an instant payments, where we are now live in 26 countries and have seen significant client demand for these capabilities.

Investment banking revenues of $1.4 billion were up 13% from last year, reflecting solid growth in capital markets and continued share gains.

Capital markets continued to be extremely strong equity underwriting in particular, which allowed us to continue to support our clients in raising liquidity through IPO shows convertibles and follow on offerings Prime.

Private bank revenues of $938 million grew 8% driven by strong client engagement, particularly in capital markets as well as improved managed investments revenues at higher lending costs.

Corporate lending revenues of $538 million were down 25% as higher volumes were more than offset by lower spreads and while we continue to provide new loans and facilitate additional draws we also saw significant repayments as we helped our investment grade client access capital markets, which led to the decline.

And in end of period loans.

Total markets and security services revenue of $5.2 billion increased 16% year over year and as we've seen over the prior two quarters. We continue to actively make markets for both our corporate and investor clients as we help them navigate through the continued uncertain environment.

Fixed income revenues of $3.8 billion grew 18% driven by strong performance across spread products and commodities.

Equities revenues of $875 million were up 15% versus last year as solid performance in cash equities and derivatives, reflecting strong client volumes and more favorable market conditions were partially offset by lower revenues in prime finance.

And finally in security services revenues were down 5% on a reported basis and 4% in constant dollars as higher deposit volumes were more than offset by lower spreads.

Total operating expenses of $5.8 billion increased 3% year over year, reflecting continued investments in infrastructure risk management and controls as well as higher compensation costs.

Total credit cost of $838 million were up meaningfully from last year, although down significantly on a sequential basis, we feel $529 million in reserves. This quarter. The increase is largely due to continued uncertainty in the economic environment going forward.

As of quarter end, our overall funded reserve ratio was 1.8%, including 5.7% on a non investment grade portion.

Total net credit losses were $326 million.

Finally, total non accrual loans declined roughly $400 million sequentially to breed point $6 billion, reflecting write offs and repayments across the portfolio.

Slide 10 shows the results for corporate other revenues declined significantly from last year, reflecting the wind down of legacy assets and the impact of lower rates as well as marks on securities.

Expenses were up as the wind down of legacy assets was more than offset by investments in infrastructure risk management and controls incremental costs associated with COVID-19, and the $400 million civil money penalty that I mentioned earlier.

Excluding the onetime impact of the penalty the pre tax loss for corporate other was $657 million this quarter.

And looking ahead to the fourth quarter, we would expect a similar quarterly pre tax loss.

Slide 11 shows our net interest revenue and margin trends.

In constant dollars total net interest revenue of $10.5 billion this quarter declined $930 million year over year, reflecting the impact of lower rates and lower loan balances, partially offset by higher trading related and IR.

On a sequential basis net interest revenue declined by roughly $670 million driven by lower loan balances as well as lower trading related and IR and.

And net interest margin declined 14 basis points, reflecting lower net interest revenues turning to non interest revenues in the third quarter non an IR declined 2% to $6.8 billion, given lower levels of consumer activity, partially offset by strong trading and investment banking revenues year.

Over a year.

As we look to the fourth quarter, we expect a continuation of these dynamics with both net interest revenues and noninterest revenues down year over year, reflecting the impact of lower rates and lower levels of activity related to cope with 19 as well as a normalization in trading and investment banking activity.

On Slide 12, we show our key capital metrics are see tier one capital ratio improved to 11.8% driven by net income our supplementary leverage ratio was 6.8% and.

And our tangible book value per share grew by 4% to $71.95 driven by net income.

Before I conclude.

Let me spend a few minutes on our outlook for the fourth quarter on.

On the top line, we expect to see continued pressure in consumer reflecting the impact of rates and lower levels of activity related to COVID-19, and we.

And we would also expect the low rate environment to continue to weigh on our accrual businesses in IC Jade.

Our markets and investment banking businesses should reflect broader industry trends.

In total we expect this to result in full year revenues that are roughly flat with the decline in net interest revenues more or less offset by non interest revenues on a full year basis consistent with prior guidance on the expense side, we remain focused on protecting our employees and supporting our customers, we're making targeted investments.

Estimates in the franchise, where we see the best opportunities for the future.

And we are accelerating investments to achieve excellence in our risk and control environment and enhance our operations for a fully digital world.

As a result, we could see expenses that are up a couple percent or so on a full year basis.

Turning to credit.

As I mentioned already if our macro outlook holds we wouldnt expect additional reserve builds but given the remaining uncertainty. We're also unlikely to see any material releases this quarter.

For the fourth quarter, we would expect the level of losses similar to those seen this quarter.

In summary, the environment remained challenging this quarter, but we continued to perform well.

Year to date, we have demonstrated the significant earnings power of the franchise, we ended the quarter with a strong capital and liquidity position overall.

Overall client engagement remains strong we.

We grew book value this quarter and we have remained focused on supporting employees customers clients and communities with.

With that Mike and are happy to take any questions.

To ask a question. Please press Star then the number one on your telephone keypad.

So as to our your question press the pound key.

Please limit your questions to one question and one follow up we will pause for just a moment to compile the acuity roster.

Your first question is from the line of John Mcdonald with Autonomous research.

Hi, good morning, Mike.

Mike just wanted to ask a question as in terms of lessons learned on the consent order and the need to invest here I guess the question is why warranties issues addressed earlier was was there a misread of regulatory expectations or was management attention and resources just needed elsewhere and you can get to it yet.

[music].

Hello.

Can you hear me and this is mark John This is Mark can you hear me.

Yes, sorry can you hear the question.

Yes, we did the question I think Mike Mike may be muted by pretty muted.

Oh.

Can you hear me now yes, we can hear you now I'm, sorry, sorry, sorry about that.

Sorry.

So I would say John that over the over the past decade, or so I think we've we've done a lot of work in term.

In terms of positioning the firm for both the financial and a strategic perspective, and I think we've made a number of investments across areas that we felt were critical.

And we're going to continue to make continue to make targeted investments at the Barclays Conference Mark spoke about our next phase of our of our transformation.

And I think as we kind of think about that.

We have always been focused in terms of how we operate but I would say, we haven't gone fast enough that.

That we.

We feel that again I think if you think when you look at Covidien. The way we've come through covert I feel quite proud about kind of what we've done and what we've been able to do obviously not over.

And Weve initiated a number of significant remediation projects along the way to strengthen our controls our infrastructure and our governments, but that being said, we didnt do it fast enough and we've got a we've got to move faster and that's certainly where we're going to be focused.

I think in terms of what the expectation should be in.

In terms of how we're going to approach that I think really for Fort Pitt.

Four pillars that we're going to be focused on one is the.

Organizational component and you've seen us already go at that in terms of the establishment and hiring of our chief administrative office in officer, Karen Peach coming in I think creating and putting a framework around the way we'll go with this.

I'd say, the strategic component, which is really.

Agreeing on what the end state vision for our processes and I think being critical and as I said in my opening you know we have brought people in to give us an external assessment of what needs to be done and where we fell short.

I think it's making sure that the work that we do comes together across the institution. So as opposed to simply addressing specific issue solving holistic problems I think theres an operational component behave.

Behind this in terms of making sure that around things like data and technology to make sure that we're driving the proper automation clearly.

The elimination of manual touch points and other things that we've spoken about and I think importantly, the fourth component is the cultural piece and making sure that all the businesses all the regions all the functions understand that it's everyone's responsibility to get this right. So I would say it hasn't John been from lack of effort.

And.

Commitment to it but I would say that we certainly could have and should have work smarter around around getting to the in the endpoint.

Okay. That's helpful and then a follow up for Mark Mark obviously with the consent orders and the work required additional expense and investment will be needed in the coming years do you still think you can make progress closing the profitability gap to peers, what will that still be a goal and also if you can't do cigna.

To begin M&A or our portfolio acquisitions are there opportunities potentially to slim down and simplify the company over time that could help profitability. Thanks.

Thanks, John So the answer the answer is yes, I mean, our intent is over time to continue to narrow the gap.

To continue to increase profitability improve returns over time, and so that that hasn't changed.

With every with every crisis in some ways comes a unique opportunity and that is a unique opportunity to take a hard look at your business model and you see corporations around the world having to think through that as they manage through this crisis and similarly.

We will with the with the benefit of a of a new incoming CEO and as well as managing through this crisis. We'll continue to look at our business model continue to look at our strategy and see what makes sense as we come out of this and how we can best capture opportunities to serve our clients.

Okay. Thanks, and one quick follow up is it clear to you what what's what will be deemed significant acquisitions or portfolio additions versus ordinary course or is that something that still be the pot still to be defined.

It's it's still to be defined but there are some things that are obvious in terms of beer you activity in terms of securitizations and other types of activities that we do within different parts of the franchise, but we still have to define what significant means and and and get regulatory agreement on that.

Okay. Thank you.

Your next question is from the line of Glenn Schorr with Evercore ISI.

Hi, there.

Hi, just maybe a quick follow up good morning, just quick follow up on the consent. Just are the expenses are going to be inside of corporate other and outside of the businesses.

And then related to that related to the question is is.

Is it clear to you that if and when the group comes off capital return suspension that you will be able to act as any of the other banks will act on on the capital return.

Yes sure in terms of the in terms of the first question.

As you heard me mention before we're spending more than a $1 billion in terms of incremental spend in 2020.

That is split between corporate as.

Corporate as well as some of the other businesses depending on the nature of this spend I would expect that as we go forward to be a similar dynamic again, depending on the nature of the spend would be booked in corporate <unk> other or in some of the respective or one of the respective businesses.

To give a quick example in you know in some of the consulting spend that we do that is meant to help scope out and stay vision for a key process. For example, we'd likely book that incorporate other it would serve to benefit the entire franchise and so that's just one one example in terms of capital actions going forward.

It bears.

There's there's nothing in the consent order that prevents us from making capital action decisions and taking capital action decisions going forward and so we would expect that we'd be able to to act. Similarly, similarly to our peers as we come out of this crisis.

I appreciate that one one quick one on cards, if I could youve got down double digits, well into the double digits in Asia, and Mexico, but just overall I wonder if you could.

Parse out.

How much you think thats the macro environment in some of the obvious that that you've already spoken on.

Because what we're trying to build back to is.

What takes us to the other side, where we have a bottoming out and building off off bottom and that includes how youre, how youre marketing, meaning our promo and teases on hold given the macro backdrop and how your marketing into the banking base. Thanks.

Yes. So look there are a couple of different dynamics that I think are important I think the key when you hit on which is we're still in the midst of a crisis and so we're very much still seeing.

Pressure on purchase sales, it's better than it was in the prior quarters, but there certainly is still pressure there we're seeing that across the franchise one of the big drags. This quarter you see as retail services you know that.

Thats in part tied to the partner and revenue sharing that we have with partners, where an improved forecasting in loss expectations ends up resulting in us sharing or more revenues with the partners, but the dynamic thats going thats important to watch as this plays through is how unemployment how GDP.

Evolves and what that means in the way of.

Purchase purchase activity starting to pick up.

And that that is going to be an important factor. We are keeping a close watch on that we have dialed back advertising marketing spend.

About cons et cetera, et cetera, and we want to be thoughtful about when we leg back in as we see signs of things turning and so we keep a close watch on that we don't want to be late to that and we'll.

And we'll be very proactive that getting after it where it makes sense and testing it where we think we are seeing good signals that that warrant us increasing some of that spend to drive some of the future volume activity that we see but but as of right now we're seeing the pressure on volumes, that's really a direct byproduct of of the crisis, we're managing through.

Thanks Mark.

Yes.

Your next question is from the line of Jim Mitchell with Seaport Global.

Hey, good morning.

Good morning, maybe just good morning, maybe just a question a follow up on it on expenses you guys have done a pretty good job over the last few years sort of.

Investing spending on investment and offsetting with efficiency saves, obviously that may not happen perfectly this year because of the incremental spend how do we think about that going forward is this ramp up start to stabilize next year and you can kind of get back on that path or how do we think about beyond for Q.

Yes, so look I think that.

As I mentioned, we've got an incremental spend of about a $1 billion. This year that has gone towards infrastructure risk and controls we saw.

We started.

That incremental spend path. If you will in 2019, so to some extent in our run rate is more spend towards those types of activities.

There will be an opportunity to look at that spend the $1 billion and and and and.

And recalibrated or pointed in a different direction or reprioritized. The spend there is some of it that that is a one year spend that will have an opportunity to spend again, so to speak as we get into 2021, and we will take advantage of that opportunity.

Order requires.

I think a very important step which is that we step back.

And come up with a target and state vision for some of these key processes and.

The risk management controls and compliance around them and I highlight that step because we need to we need to do that in order to appropriately dimension there.

The reprioritization of spend we already have in our expense base and what incremental spend is necessary.

That over the over that time period, that's been allotted to us.

Within the order it is an investor and.

And I highlight that because many of the things that Mike described in terms of.

Automation in terms of doing manual touch points in terms of a straight through processing many of those things will yield.

Will yield benefits.

In the way we run our organization.

The way, we not only improve our operations, but in the way we are able to go to market and compete and serve our clients and so I do expect benefits because I want to compromise on Don.

Best in order to make those if and when those customers.

Turning away from that we will continue to be responsible managers of the firm and that means ensuring that we look across the franchise and make sure to assure that we're spending wisely.

Okay. That's helpful and maybe just pivoting to.

And I.

Appreciate your guidance, but do where and when do you see it kind of stabilizing.

Given where the rates.

Right now.

Yes.

So look I mean, there's obviously a lot of factors that play through the quarter and 2020 the combination of.

Not only rates, but the.

The volumes that has played through.

Our all important important factors here, let alone the the amount of liquidity that since March.

The impact that has on on the balance sheet I'd expect for.

Near to stabilize and stay relatively flat.

As we go into the remainder of the year.

Assuming current trends kind of play out.

We project.

Some of your growth going up on the accrual because Mrs. As hopefully coated diminishes a little bit however, as I've said before the markets near can be somewhat volatile so.

A little bit hard to predict as you well know, but im looking we're looking at stabilization.

As we come through the end of the year here.

Okay. Thank you yep.

Yep.

Again, please limit your questions to one question and one follow up there now.

Your next question comes on the line of Mike Mayo with Wells Fargo.

Hi.

My question to Mike Mike.

Morning.

Mike We agreed a lot about cities improved resiliency.

Since you started city is simpler stronger and safer and you look at the CDF spreads.

Four times wider when you came in as CEO and that's.

Thats progress, but what we disagreed on is the pace the need for more restructuring and so the question is where is the sense of urgency.

Speaking on behalf of investors people I speak with their collective sense of extreme disappointment with.

With technology, the new regulatory order on tech there.

The root problems, we're not transparent to investors when execution you didn't go fast enough that this new tech that will take time on the business mix. Many questions continue on why you have this global consumer footprint, which has terribly efficiency and returns worst in class ROTC. This.

Quarter, 8%, even if we give you the 12% from last year, that's still below the 19% of JP Morgan this quarter alone so, whereas the sense of urgency so recognizing the improvement that you've had with the balance sheet, but still a long way to go with strategy why not step aside now and have the new CEO Jay.

Frazier takeover as a way to demonstrate the increased sense of urgency. Thank you.

Sure, Yes, so I would start out Mike by saying that I think it is important to the board it's important to the company.

We have a real transition you recall my transition was about five minutes and as part of this process I did commit to the board that I'd stay throughout the year and close out the three year plan, which we announced in 2017, we are starting the transition now and I think that allows jane to be very much.

Involved in terms of our financial plan and if you recall when I started I thought it was important kind of going into the budget and planning process that the CEO on that I think I was fortunate in terms of my timing of coming in of that being the case and I think with Jane coming in that will very much be the case and because she will be accountable for delay.

During next year and into the future.

I think it's also important that Jane has taken on the.

The transformation work and working on the GAAP analysis and other related things to the consent order.

As part of that.

By the way Jane continues to have a day job in terms of running consumer She's also overseeing our return to the office in terms of our North American business and I think the orderly transitions to the right thing to do.

I think in terms of the accomplishments I. Appreciate what you said in terms of some of the acknowledgment, but again kind of grounding, where we started net.

Net income increased from seven and a half billion to the end of last year North of 19 billion. Our return on assets went from 39 basis points to write about 100 basis points. Our return on tangible common equity, yes still behind our peers.

Went from 5% to 12%, but went a long way towards closing that gap. We went from returning hardly any capital in 2012 to returning nearly $80 billion over the last six years and returning our share count by about 30% and so I don't think you accomplish those things without a sense of commitment.

And a sense of urgency and I feel great about the team that's in place and their commitment to that and so I think we have made significant progress and I think James got a foundation to build on from that and I think she and the team will be focused on those things and again I think coming out of Covance as mark talked about here or as in.

When we come out of Covidien, the environment, I think theres theres things that they can could take advantage of and I think they will and I think they'll certainly act with a sense of urgency.

Well as my one follow what can city due to show more alignment with shareholders because.

Despite all those improvements the stock is still trading at about half a book value, where it was eight years ago since city was formed since 2000.

Comp is just shy of $400 million when you have worst in class stock price performance, so whether its pay in stock or.

I mean these problems didnt come out overnight that the regulators identified so its just youre a path and now all of sudden we find out that the engine underneath the company wasn't as strong as it as it should be and.

We just I think we are speaking with the investors I speak with doing so shareholders or a secondary consideration.

After all the other constituencies and what's symbolically can continue do if you're not going to step aside and have gained take the reins sooner what else can city due to show that shareholders actually matter instead of waiting for another maybe three or four year plan.

Well shareholders, absolutely do matter, Mike and if you look at.

Throughout the firm, whether it's the pace structure.

Employees and in particular more highly paid employees getting paid significantly.

In stock or stock related type of instruments of the different programs and scorecards being very linked to.

To how we perform and the things that hopefully overtime drive share performance.

And again I think Theres no one thing in particular, and so I think getting those metrics right is critical I know the board and the compensation Committee all work hard in terms of trying to create that alignment and again I think.

From a disclosure perspective, we've been kind of very public and transparent in terms of the metrics and the scorecard process that leadership and broader management is held to at the firm.

All right if I can squeeze in one more just for Mark I do I mean, obviously disappointed with execution strategy controls transparency, but just looking forward now with the with the financials.

As far as the expenses Mark you're already asked about this you already spending a billion dollar as you say some of this is a one year spend I guess you have to do a reviews you don't really know.

The exact spending to fix these problems, but should we think of the billions. We think of 2 billion as a bigger than a bread box again, when we hear it's not a quick fix are not easy fix is going to take a while people's imaginations run wild is this $10 billion and $5 billion in somehow.

Somehow frame. This the best that you can again that given that you are at the early stages of a more full review.

Yeah, Mike you know what I would say is.

Look at the if you look back we have been I think quite responsible at managing our investments over the past number of years.

And what people should expect is that we will continue to be responsible around that.

The second thing I'd say is that these are investments as I said earlier I think they are they are necessary investments to improve the way, we operate and our ability to compete.

And these are investments that we are going to make right. It's hard to pinpoint a number as you've said I would expect as I mentioned earlier to an earlier question that we would we will continue to increase our profitability. We will continue to improve our returns, but I cant dimension, but number four.

For you next year or the year after except to say we are still running the firm. We have performed I think quite well through this crisis. There is still a crisis for us to manage through and we will continue to do that with a focus on our clients and responsible management of our overall financials.

When we get more clarity on on the actual spend and as we get through the budget. That's here and the response to the order I'm sure I'll be able to give you more color on that.

Your next question is from the line of Matt O'connor with Deutsche Bank.

Good morning first off thanks for taking all the questions.

I guess it doesn't sound like Jane is on the call.

Hi, this is not surprising, but when should we expect to hear from her and her.

In terms of the transition and then kind of her thoughts on the regulatory issues and process forward.

Yeah, I think we should let her kind of get your feet.

Under her and go through some of these processes and get educated and start to former opinions that I described and so we're.

Probably start to introduce are in on the January call in terms of maybe having more view towards a forward look and then obviously the quarter after that she'll she'll of the rooms.

That makes sense and then.

Understanding that there could be.

[laughter] anymore [laughter] views in a room so to speak but.

For now the farmer on addressing the regulatory issues that.

Now a matter of spending money and fixing the processing they kind of like a routine there could be some strategic changes.

So is this.

Is this a business model that you think.

For the group will have going forward or more structural signs of.

Thanks for your comments.

To address the regulatory issues and better position the company, Yes, Yeah, Let me let me let me.

Let me, perhaps try and try and clarify the earlier comments so to be clear.

We have as Mike described consent order that we.

We need to address and I think importantly, when you look at that consent order.

It is it is an opportunity for us to take a step back and look at these key processes and the infrastructure controls compliance is compliance activity that support them on so that's kind of.

So that's kind of that's kind of one important step that as you know as responsible managers of the franchise, we intend to to execute against and some of that we've begun already in that that was referenced in the in the consent orders separate and away from that what I was alluding to was just simply put the idea that we are.

In a crisis and as you go through a crisis you learn things about your business and as I mentioned, we talk to clients. All the time. They are 30 things about their business as they manage through this crisis, we're learning things about and identifying opportunities about our business. For example, the investments that we've made in digital have turned out to be very wise in.

Vestments as we manage through this crisis, what are the opportunities to accelerate that type of spend as we go forward given the acceptance of Digitization has probably been accelerated by a couple of years now the importance.

The importance of revenue mix in growing our fee based revenue or the traction that our wealth management business is getting in this type of environment presents opportunities for us to look at how we can expand that aspect of our of our business and business model. So the crisis will create and has created an opportunity for us to take another look.

On top of that with any new CEO I think you would you would expect an opportunity for that person to take a step back and take a look at the the business that we have take a look at the environment that we're playing into and to make an assessment as to what the right path forward is in light of where we think the growth trajectory is and where we think the return.

Current opportunities are and so that is the other leg that with Jane coming in in February I'm sure. She will want to take that opportunity.

And see what comes of that so hopefully that clarifies the point.

Oh, yes. It does thanks for the color Yep.

Again, ladies and gentlemen, please limit your questions to one question and one follow up. Your next question is from the line of Erika Najarian with Bank of America.

Hi, good I'm. Good morning, good morning, Mark I apologize I'm going to have to re ask the question that Youve been asked many times and I'm wondering if this can be a successful attempt, but as we think about productivity savings versus investments in risk management for 2021 is 11.9 billion.

Right right I can point $9 billion a good starting point in terms of how we should think about quarterly expenses as we think about the next several quarters.

Well the expenses that we have in the quarter that you referenced include obviously a.

$400 million civil money penalty, that's part of that that's booked in operating expenses.

And in terms of 2021, we're in the midst of constructing our plan right now and so.

Hard for me to give you an exact number or run rate number for you to forecast in 2021, so sorry to disappoint, but I don't have much beyond the way I've answered that question already.

Okay and I guess my second question is can like and I think it's all.

It's always hard to call out competitors by name, but no decline going back to Mike May have a set of questions. The questions that we as analysts dot ever since that journal article came out and why isn't sitting group the new Wells Fargo in terms of regulatory issues and many investors pointed out that when the linear.

Consent order came out last week that the asset cap and business activity limitation for wells actually came out two years after the consent order.

And you know without listing the things that you've already accomplished one perhaps just looking forward. How can you reassure in current investors and prospective investors that youre not going down the same laborious regulatory remediation route as one of your peers on no which could clearly.

Impactful in terms of business activity restrictions.

Sure. So I would say one very important part of that.

That is what we spoke about in terms of no widespread customer harm the company did not profit from.

From the activities and you can kind of go on with that I think the second piece is that around.

Around customer Harman around some of those things there were not just wells Fargo, but we're kind of widespread industry deep dives into sales practices and other pieces in here I think in this you've seen and we've talked about the four areas of focus and where we're going to be spending our time and we've been.

Asked to do the GAAP analysis Weve, obviously been at this for a while and we will obviously do it do extensive GAAP analysis, but I think we've got to kind of reasonable idea and again, we're open to the findings that come from that in terms of the things that need to be done and I think that as importantly.

In there is.

That kind of the understanding of the process failures that got us here.

Again, no fraud, no customer harm no no benefit.

Around that.

And if I could just go back and touch on the question that you asked Mark I think an important way to think about it is historically, you've heard us kind of speak to the way that weve gone at the.

On the expense side of things is really working hard to offset the costs that we've been putting out there in terms of some of this transformation work I think the way you're going to hear us talk about it in the way you should think about as those are separate streams. The remediation work will cost what it will cost, but don't think as a result of that.

There's still not significant work that we recognize that we can do from a business improvement process.

And so we're not linking the two is those necessarily being offsetting but we will continue to work on those things too to better today.

To better to bed.

To better the efficiencies of the company away from this.

I think the second piece is that while we're not speaking to it we've referenced it I think that this work will we'll have this transformation will have an ROI in terms of what this allows us to do and do differently, we talked about from the from the client customer perspective, the business process in terms of the way.

We aggregate data the way.

The way that we kind of move.

Risk and controls do through the firm in a more automated way, we think gives us the ability not just to improve the process, but we do think that over time, we'll have a return in terms of the benefits and costs that are associated with those both directly and indirectly.

Your next question is on the line of Steven Chubak with Wolfe Research.

Hi, good morning.

Well.

Maybe a question for Mark pertaining to capital one of the things that.

What's happened recently is that the advanced C has now become your binding constraint.

And one of the key questions that weve been getting are and there's an expectation that we would see a significant uptick in R.W. is relating to operational risk and it looks like that generally speaking there hasn't been much movement in terms of RW, a divergence and was hoping you could speak to whether the impact from recent events is fully.

Reflected in that number or whether we could see further upward pressure in the fourth quarter.

Sure yes the.

You are speaking to the civil money penalty that the answer is yes, we have reflected our asked.

Our estimates of the impact in the in the R.W. way for operational risk associated with that and just given how it falls in terms of the you know the level of the magnitude of the impact relative to to other operational risk there was not a material change in the in the R.W. way as a result of it.

Got it Okay, and then just one follow up Mark really into discussion about profitability targets and the Meetic and the desire to close the gap with peers and that's still your intent now this year you plan to do an investor day at all or is that.

Delayed due to coated then the consent order and as CEO transition as a management team intend to provide refresh targets in the coming months and are there any plans actually holding investor day. So you can provide a more fulsome update I know, it's challenging to answer it now Jane on the call, but was hoping to get some perspective as to how we should think about the time.

Timing for when we can get at least some updated targets to hold the management team accountable to.

Yes, again Thats a as you said that's a tough question to answer I would like to give you an obviously jane the opportunity to get in the seat and to work through some of the things that Mike as reference that I've referenced earlier obviously.

In the fourth quarter at least historically in the fourth quarter. We've tried to give some context not only for full year performance.

But in terms of what we're seeing in the market going forward, we'll see how this fourth quarter plays out and then obviously on the on the fourth quarter earnings call. We'll give an updated perspective on what we think performance might look like in 2021, and and also the timing for which we can give you a more comprehensive view.

On on how we think about things, how we think about things going forward.

Your next question is from the line of Saul Martinez with you yes.

Hey, guys. Good morning, so so so.

I'm, sorry, I'm going to beat a dead horse season, even more here with the consent.

The consent order and it's in potential implications on cost but.

I know, it's hard to know what's the time horizon is around this and in terms of having more color and thats clear you're you're taking so you want to take a serious and you're not going to scam, but.

Yeah. The these processes can be expensive and as you know you do have to.

Prove.

Outcomes in the short term and then as expenses, but build is more centered more systematic solutions to the operational risk efficiencies, which require longer term investments and whatnot. So with all of that how do you. When do you think you will know.

What you're up against and what I see what you're up against I mean, meaning the not only the the incremental expenses and I'm not just talking about you don't want to just in absolute terms, how much you're going to have to spend six these issues and the time horizon to fix these issues. When do you think you'll have better handle on on them.

Multitude of different dimensions to this.

Yes, So let me let me try and go at this site.

So at this rate again.

So look we have we spend you know call.

Call it $40 billion to $43 billion a year in terms of total expenses, you've heard me reference about $9 billion of that is associated with the technology and maybe get a half or whatever is associated with kind of compensation, but ill highlight that to say that we obviously have a a large expense base one that we've been managing very.

Very diligently over the past number of years.

And with that expense base. There are a couple of different areas that I think.

Are useful to point out as we think about the incremental need. So one is the billion plus an incremental spend that we've made and as I mentioned earlier the opportunity to re spend those dollars to reprioritize. Those dollars Theres also spend that we make on the current operations.

And infrastructure.

That that you know that we make every.

We make every year and that too I think we will give us an opportunity to re look at that spend that base and reprioritize. That's been right. So there are multiple categories, where we can re point if you will to a better approach. If you will of addressing what's been highlight.

Got it in the order and its not until we kind of work through the ink.

The incremental that's already in there the base that rolls off and gives us an opportunity to re spend that we then are faced with okay. What more is required.

Is required around around the investment now a couple of percentage points of an increase is pretty significant in the way of absolute dollars that can be put to work on these types of on these types of initiatives in terms of the though when well let me have one of the end of the second thing I'd highlight is as Mike pointed out.

Separate and away from the required spend to address the.

The opportunity or the investment in infrastructure risk and controls. There also remains opportunities for us to to us for us to look at our data centers for us to to look at where we have to do ensure the right placement of people around the organization so our footprint for us.

To for us to to to to look at.

You know some of the roll off from some of the cobot spend that we've had to make this year. So there are other opportunities for us to look at dollars that we have let alone capacity adjustments that may be warranted coming out of this COVID-19, and so what I'm trying to highlight is that there are many puts and takes through the budget price.

Process that we're constructing now and the process that we will use to die mentioned the spend associated with this order in terms of timing the order actually points out that we've got.

Some 120 days or so to identify the gap a gap between our current state and an end state target and then some 90 days or so to develop and have a plan approved after which we can.

Move towards towards executing or continuing to execute against and so that gives you some sense for how we're thinking about the timing and the dimensioning of this but.

But again I think we.

I think we've got a track record now as much as it's been pointed out of being very thoughtful and responsible around investment dollars and our total expense base and and you and others and shareholders should expect that we will continue to be disciplined and responsible as it relates to that.

And again as I mentioned earlier, we're looking to improve profitability and.

And returns as we do this.

Right.

Okay No thats helpful.

Hopefully you will be able to to succeed on that latter point.

Just a quick follow up a little bit more of a mundane question.

I think just more of a correction or a clarification I think you mentioned.

Mark.

The fourth quarter that corporate and other pre tax losses should be similar to two this quarter, Dave did I get that right.

The civil seeing that.

Yes, hi quarter. So yeah, you got it.

Sure so ex the $400 million. So I said, roughly the 657 that we see Ics.

Excluding the $400 million civil many CIVETS civil money penalty is is likely to be the levels that we see in the fourth quarter.

Your next question is from the line of Ken Usdin with Jefferies.

Thanks, Good morning, Mark if I could go to a different topic. You mentioned that you don't really expect ensco's to start peaking until the end of next year. I was just wondering if that's just a time shift different centers can you just kind of walk us through how you're expecting the loss curve generally too.

Here over the next year or so thanks.

Yes, sure. So again its you know when you look across the portfolio.

We're seeing payment rates coming in higher than then.

Then we expected and the a bit and consumers are proving to be quite resilient when you thing.

When you think about the stimulus and the forbearance programs that have been in place and so as we look at loss curves and delinquency buckets and what they are suggesting over the next number of quarters. It look.

It looks as though the aggregate level, we're likely to see.

We're likely to see.

Losses towards the fourth quarter or back end of 2021, obviously assumptions around GDP.

Assumptions around unemployment all those factors come.

Come into play but.

But that is a that is in fact, what we're what we're seeing thats going to vary by region and so you know in in Asia and that Tam, we may see that earlier, but I would I.

What I was referencing in the back end was kind of when you look at the aggregate portfolio.

Got it okay, and if I could follow up on a question on just taxes, obviously when taxes went down you guys had to write down the DTA and just in terms of the outlook at least from what we know about a potential rise to 28% depending on the outcome of the election and the eventual plans any ideas of what type of impact to a day.

Directional change might have to the others to the positive in terms of either tax rate and being able to write back up the DTA.

Sure so hard.

Hard to know exactly what happens, but in the event that.

We did see or we do see a tax rate increased to 20.

28% or so and it went into effect.

The latter part of 2021.

It would likely result in our DTA.

Increasing by about.

By about $4 billion.

So a onetime increase in our detail about $4 billion. It obviously would have you know the impact of.

Our rate being close to that level, our tax rate being close to that level and and as a result of that.

Less less income given the higher tax rate less income contributing to the CPT one ratio and.

And then in terms of the disallowed DTA.

With a higher corporate tax rate, we would expect to.

Return to our usage levels of roughly a billion dollars per year.

So those that gives you a little bit of a sense of a couple of the moving pieces should that happen.

Mark I think an important nuance there is.

What comes out between.

Remaining territorial or a reversion to global taxation I think what people were talking about today is it would likely remain territorial which again with the average global tax rate of about 25% that would certainly benefit us in some of the jurisdictions that we operate in.

That's a good point.

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

Great. Thanks.

One quick question first on the and I heard you, saying that.

Going to be stabilizing after the fourth quarter as you look out. The 20.1, you haven't just outlined some of the factors that are leading to the stability of and what gives you confidence that as expertly stable off that level did you think about the potential for stimulus maybe further consumer de leveraging if we get stimulus in that statement.

Yes. So look again that is that is based on kind of current trends that we're seeing in terms of roughly in flu improving.

Unemployment and improving GDP, obviously, there is talk of another stimulus in terms of its impact.

We've assumed that kind of a bit later in terms of in in.

In the first quarter of of 2021 it does.

It does assume that we continue to see.

You know the purchase sales activity in.

Improved quarter over quarter, we've seen some of that sort.

Certainly in Q3.

We continue to see that as we look even in the early days of October and so that playing out would would be another important important factor and a and then obviously.

So what happens in terms of the you know the overall liquidity thats in the market is a is a factor that.

Influences influences as mix influences mix and the NIM as well.

The move into separate question on the NIM I mean, if you think about the yields on the earning assets.

Are you getting closer to the trough yields as you think about the repricing cycle than we are.

And where rates are the stabilized at a low level FFO or you're kind of expecting earning asset yields to be closer to a bottom as well. Thanks.

Yes, so look in terms of the in terms of the NIM, we've seen some of the.

Obviously, the pressure from from rates, we've seen the pressure in terms of the market in terms of the mix of assets that we have but also a pressure in terms of.

On the deposit levels coming coming in quite high.

With a frankly, a lack of loan demand to put that to work and so subject to how that liquidity.

Thats in the market evolves and what happens with with ultimate acid pricing is going to have a an important fact.

Factor on that the NIM is really an output of how.

How those new your revenues play out and how the balance sheet evolves and so.

A bit of a a bit of continued on.

Continued uncertainty a little bit in terms of of how some of those market factors play out, but we see that as well stabilizing towards the end towards the end of the year.

Your next question is from the line of Jeff Harte with Piper Sandler.

Good afternoon, guys. So unfortunately, I have one more OCC consent order kind of related question do you have a feel for regulators views on the adequacy of existing remediation projects that have been underway versus just not having move fast enough.

Sure So I would say.

I would say that.

Not have moved fast enough and not have been holistic enough Jeff to use my words and.

And so again I think this gap analysis will.

Who will give us a better sense of that but again is it should we brought others in to help us look at and think about these things and so again, we'll see what the final analysis yields, but I think we've got a sense of the the right approach in direction.

Not necessarily a starting over.

I don't broadly defined know there may be some some more refined areas, where it may make sense to do that but not not broadly and again I think if you look at kind of how is an example, we kind of manage through this this crisis, which I think is a good real life life test.

Again, I think we've been able to.

To get the data we've been able to make the right decisions, we've been able to act in a timely manner, but again I think this pandemic is shown as the accelerated move to digital and the ability to continue to work remotely or more remotely over time and the ability to make faster and better decisions. This is critical and in particular as.

I think appropriately our regulators continue to raise the bar on the larger institutions in terms of their expectations.

Okay, and just kind of flip something fundamental Mexico is is a relatively large exposure for citigroup added geography upon which the the market has some macroeconomic concerns can you talk a bit about the credit related trends, you're specifically seeing down into the business in Mexico and kind of maybe what your expectations are.

How much things like deferrals that helped on there.

Yes, sure. So I mean look Mexico, you know similar to.

Other parts.

Parts of the World also had.

Forbearance.

As part of the program, although unlike the us the in Mexico.

Customers needed to be less than 30 days past due as of the end of February to be eligible and so what we.

What we what we saw is that when you look at our loss rates for the quarter you see a tick up in Latin America, largely driven by now.

By Mexico, and the impact of.

Those customers kind of playing through.

The delinquency buckets and into into losses.

That said, Mexico also comes with a higher NIM in the way of in the way of overall performance and we would expect for losses there too.

Two certainly come to a peak of sooner than the end of 2021 in terms of more broadly.

Our exposure.

In Mexico is about $57 billion in terms of total country exposure and thats down a little bit since the since the second quarter.

At the end of the third quarter about $30 billion of loans between GCB in ICICI.

In Mexico.

13, or consumer loans about 16, our corporate loans.

And about half of that 13 little bit more than half is in credit card and and personal loans and remember we tend to target a higher quality customer segment then.

In most of our peers, there and we price the risk accordingly, and so we would expect for that to play out in a in a relatively favorable way.

And then there's another 81% of our payroll loans in the portfolio are concentrated in sectors that have a lower risk of lay offs like government employees and pensioners and so that too.

Should be helpful. As we think about the quality of our of our book and then there is the portion that bets in mortgages is it weighted towards Ltvs of.

50% less than 50% and so that too should speaks to the quality of our book So overall.

Overall, we feel as though were appropriately reserved.

And are managing reasonable levels of outperformance there.

Your next question is from the line of Charles Peabody with Portales.

Yeah, I just had some follow up questions on net interest revenue guidance.

Kept using the word stabilization as we enter 2021. So my first question is does that imply for the weakness.

In the fourth quarter before it stabilizes and.

And then related.

Related question on page 11, you show the mix of net interest revenue between the core Bank and then the markets related you saw a big drop in the markets related net interest revenue and I was wondering if you can talk.

I was wondering if you can talk about what drove that and is which of those pieces do you expect to stabilize first.

Yeah, and so just to be to be clear the.

The stabilization that I was referring to is kind of as we go into the fourth quarter and so I'd expect.

Net interest revenue.

To stabilize in the in the fourth quarter.

For total city.

And for for many of the factors that I mentioned already but the markets revenue as you heard me mentioned before it's really important to look at total revenue.

You know the total revenue there in part because the nature of how trends.

Transactions are structured with clients impact.

Impacts whether that revenues coming in the form of near and non near and so.

I think it's very important to as I mentioned look at total revenue there and our total revenue in the quarter. As you mentioned as I mentioned earlier is up in terms of in total total markets revenue in light of the strong fixed income.

And the strong equities performance that we saw there and so.

That that part is lower than the prior quarter as we see some of that normalization in markets take place, but still very strong in light of the environment that we're managing through and candidly as we go into a fourth quarter with an election and in the case of Europe Brexit and.

Speculation around the stimulus and uncertainty around vaccines.

Hard to predict exactly how customers clients decide to reposition their books as some of those things become clear.

Become clearer and so total revenue in the way of markets revenues the way, we think about it.

And a fourth quarter that I think will show near revenue stabilizing but keep in mind Mark.

Market's performance, we'll have we'll likely have puts and takes.

And my follow up question, let me just ask that same question about mix between markets related Eni and core bank.

Would you expect the core bank Eni to actually grow in the fourth quarter.

Sequentially.

Now.

I would expect well again I would expect that our fourth quarter will show.

Net interest net interest revenues and non net interest revenues kind of down year over year, but the aggregate of the two realm.

Relatively relatively stable.

Your next question is from the line of Civic Tunisia with JP Morgan.

Okay.

Thanks for taking my questions. Good luck.

Good morning.

Morning.

Mike on the.

On the whole regulatory issue.

[noise] quite disappointing to re.

Read in the consent orders at the incentive comp.

Did not account for risk management and the comments about the practices. The regulator has made.

Given that what changes should we expect and senior management incentive comp and and can you talk about why didn't prioritize risk management, because such a low.

Cornerstone since the last crisis and what changes should we expect in the board as well as other senior executives has left.

So the notion of accountability and I think what they're speaking to goes my.

More broad than just the executive management team, but obviously, you've got a number of work streams here, you've got a fair number of people involved in those processes and it's kind of taking it down and kind of making sure that the people who are responsible for each of those processes have the appropriate waiting and I think.

The challenge comes that in many of the instances where in many of the work streams you actually have people that it isn't it isn't their sole job. They are practicing expert or practicing practitioner in terms of the markets business or in consumer or in different functions and.

We have to contact them as part of their job into doing this regulatory work because there there is the expert there the area through which.

Number of these things would flow and the question is how do you create the proper balance and proper accountability around that so I don't look at it and say that it's the executives just the executive team I think it's striking the right balance and so as an example should.

Someone in risk be responsible for delivering on financials of the firm profitability expenses or other pieces that are in there and so I think it's kind of creating the right balance to drive the right behaviors get the right outcomes and Incent in people with both.

Corrections properly.

So again I think that it's it's the way it's written niche my interpretation is actually broader than.

The way you've described it.

Okay, and so does that mean you'll be.

Adding more people you think as a result to be able to.

Wholesome people fully responsible for this or how are you thinking as you look forward.

Well, we have in risk and controls we've been we've added thousands of people since the.

Since the beginning of the year and we were adding people last year to these projects so without a doubt we've been bringing those those resources and go.

And getting that expertise and we've tried to bring in subject matter experts from other firms from other industries to help us as we think about these things and I think we've made a number of very key strong external hires I think we've made some very strong internal moves in terms of people and I think we've.

I'll show move strongly in terms of what I would say single having people I am making this remediation not just their primary but in many cases there their sole responsibility in terms of delivering on so so again, yes, we're absolutely committed to having the right resources the right expertise.

He is the right talent and then having the right accountability around delivering against this.

Mike You May have mentioned, but Karen Peetz, obviously brought in as the CIO and.

To help kind of to help kind of lead in this transformation across the organization. So as you say, we're bringing in the people that we need and getting after it.

Your next question is from the line of Betsy Graseck with Morgan Stanley.

Hi, good morning, good morning.

Yes. So like you just mentioned Karen was brought in in June and Mike I know you became CEO of the Citibank USA like legal aid back in June timeframe. So I guess I'm kind of looking at all this thinking you must have expected you you've been working on this for a while and I was I was thinking you probably expect it so.

Kind of a.

Requirement from the regulators you know that you are already partially executing on is that fair like is this consent order it might be a surprise to you.

Yeah, The street, but is it really a surprise to you.

Well around these around these work streams as we've acknowledged we have been working on them for a while so it's not like all of a sudden we woke up one day and said Gee, we're going to we're going to go at it some of these things as de novo or new projects. So we've been working on them for a while and I would say.

That again, what we've been focused on is really bringing these projects together I would say a historic approach that we've taken as Weve gone at these in some way serially or individually and I don't think that has yielded the outcomes that either I either city or regulators necessarily would want and show.

So as we went down this path it became apparent to me and I think the board and others that we needed to really join these processes and create a body to be able to go at it and I think we're very fortunate to have Karen with us who has.

Been through some of this and have this expertise to be able to I think bring these work streams together because when you think about data is an example data feeds through a risk data feeds through compliance data feeds through lots of your controls and making sure that we're taking a holistic approach to the way that we go out and modernize our day.

Data approach is critical so that we do at once we do it right. We do it we do it Holistically and show again I don't think the work for some of the work streams are new I think the the broader more encompassing holistic approach.

In some areas is newer.

And Mike just to that point in terms of US having started this already again the incremental billion. We're spending we're not we started spending that at the beginning of the year right and we spent incremental dollars in 2019, as well and by the way that billion dollars wasn't something that.

That I kept it was it was what do we think is required to make as much traction as we can in the year and where we're spending that incremental billion dollars and still managing our total expenses responsibly all right.

Yeah, It's interesting point, because you know when I look at the stock Im looking at a stock thats priced for effectively a 5% ROI, Okay, and if you say hey that is a right because the expenses are going to go up that much to drive a 5% R&D that's like a 5 billion increase in expenses.

And Mark to your point earlier, you were mentioning that you're planning on X. They are hoping you know to execute this improving profitability, which is obviously above 5% today. So could you help us understand what kinds of profit improvements you think you can oh.

Focus on over the course of the next couple of years, I mean, I'm I'm wondering what some big threat.

Threads are is it is it better deposit.

Core deposits that can bring down your cost of funds is it you know.

Greater execution with your current customer base is it incremental customers and help us understand what you're thinking about there yes men look there.

They're going to have multiple components to it right. There there are additional linkages that we try to capture across our franchises, whether its you know doing more with.

More with our TTS clients I mentioned earlier that we are seeing a lot of traction as it relates to instant payment capabilities, whether its due.

Doing more between our capital markets business in spread products, and a and trade lending that we do with corporate life clients in terms of unique structuring opportunities there and so they are linkage opportunities across the franchise that we will continue to capture that I think will help in the.

They have topline performance there are opportunities to grow in the wealth management space.

What weve seen 16% growth and investments in Asia. This quarter, we think there's more we think there's more upside we think theres more wealth growth upside.

In the us as well, but they're also operational benefits from again when when we say manual activity. When you replace manual activity with an improved technology on automation or straight through processing you remove the manual removing the manual improves the quality.

We have the output in a more timely fashion, but it also over time is less costly when you don't have those manual steps and so I say improved profitability as we go into 2021 and 2022 and beyond you know in part B in getting both topline.

Ultimately getting expense better.

Benefits from a host of activities, including capacity adjustments that we may decide to take as we come out of this crisis.

And then the other the other items play through as well, including cost of credit and so on and so forth.

Your next question is from the line of Gerard Cassidy with RBC.

Thank you good morning, Mark Good morning, Rod Good morning Winter.

Mark you've given us some good detail on the consumer portfolios.

Can you share with us on the commercial side. When you look at your ratings that you give us in terms of investment grade to double B single B Triple C. They really haven't moved very much since the fourth quarter of 2019. So can you share with US what you are seeing in these portfolios.

Yes.

Well the energy portfolios in the leisure and hospitality travel portfolio still the ones. They give you. The most restore you see the most risk in terms of credit losses over the next 12 months or so.

Yes, yes, sure dry let me let me start by.

By saying as you know we have coming out of the last crisis, we have.

Really adjusted our risk framework, our risk appetite we have.

Re thought.

Our client focus to ensure that.

That we're focused on clients that.

Can take best advantage of the breadth of our offering but but also on the.

Multinational investment grade type clients and so we have maintained.

A skew in terms of ratings towards you know, 80% or so of our portfolio being in those investment grade names.

We've got a long history of of operating in all of these sectors that you that you see on page two.

Page 23, and Weve got deep experience through cycles and.

Expertise in each of these industries and that includes.

Client selection and.

And in many instances we are banking many of the leaders in their respective industries.

And it's important to note that because I think that speaks to not only the quality of the name, but what we can expect when you go through downturns and it speaks to why we were so committed to.

To staying alongside our clients and helping them manage through the uncertainty when I think about some of the.

Sectors that we point to in this crisis, we we've been thoughtful about the way we have dealt with these clients over time. So you look at the aviation space and our exposures there tend to be secured.

They tend to we have extensive experience with with structuring to to mitigate risk there, whether that's secured or guaranteed by.

Export credit agencies.

We've got extensive experience with valuation of collateral there you look at autos and in many cases.

The lending there is in securitization vehicles. So the risk of bankruptcy is is is remote and.

With underlying consumer Obligors in that case, you look at energy and a lot of that is reserve based lending would borrow base borrowing borrowing bases that go through a periodic redetermination and that helps in terms of reducing exposure when oil when oil prices fall and so you look at these you look at our AG.

Tivity with these clients in these sectors, our deep experience and we think that it positions us well to manage through this with them.

And certainly feel good about the the reserves that we have them we have taken.

We've we've aggressively.

Downgraded names that are in impacting sectors early in the crisis and put enhanced monitoring it in place, but as I mentioned, we feel we feel good about the.

The portfolio, we have we feel good about the reserves that we have and we feel good about our ability to manage through this with with these clients.

I would now turn the call back over for any closing remarks.

Thank you all for joining today, please feel free to reach out to Investor Relations. If you have any additional questions. Thank you again and have a nice day.

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