Q2 2021 Citigroup Inc Earnings Call
Hello, and welcome to the city's second quarter 'twenty 'twenty, 1 hurting interviews with Chief Executive Officer, James Frazer and Chief Financial Officer, Mark Mason today's call will be hosted by Elizabeth Lynn.
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. If you have any objections. Please disconnect at this time Ms. Lynn you may begin.
Thank you operator, good morning, and thank you all for joining us I'd like to remind you that today's presentation, which is available for download on our website Citigroup dot com may contain 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 conditions may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our SEC filings, including without limitation the risk factors section of our 'twenty 'twenty form 10-K.
Before we get started I'd also like to welcome our incoming head of IR, Jennifer Landis, who will be joining city next month and hosting this call beginning in October.
I lead the seat to assume a new role within city I'd like to thank you all for your partnership and support over the past few years with that said, let me turn it over to James.
Thank you Liz and good morning to everyone I'm delighted to join you again today and first of all I'm going to discuss the results of my first full quarter as CEO and then update you on the progress against our strategic priorities.
For the quarter, we reported $6.2 billion of net income or $2.85 per share we continue to benefit from an improving macro environment as evidenced by another significant release about allowances for credit losses.
Indeed, the pace of the macro recovery is exceeding their expectations across the globe.
With it comes growing consumer and corporate confidence and this also came through loud and clear in my conversations with clients over the course of the week I just spent in London.
Now clearly we have to remain mindful of the unevenness in that global recovery due to continued contagion and challenges in vaccine distribution in several parts of the world.
But we are optimistic about the momentum of hedge and as a result, we deliberately accelerated some of our investments.
In our institutional businesses, we saw the expected normalization of fixed income trading compared to the striking volatility of Q2 last year.
And our equities franchise had a particularly strong quarter.
Looking forward, we do expect the water to market to be higher than pre COVID-19 level.
Performance in our investment banking franchise remained healthy with good momentum in M&A and a very solid pipeline ahead for the rest of day yeah.
We saw very good progress in our strategies to increase fee revenues with double digit growth and all I see G fee revenues and specifically over 20% year over year fee growth in Treasury and trade solutions and security services and in the private bank.
P. T. S is the backbone of a unique global network, we deliver for our clients and while the business continues to be impacted by low rates, we particularly like how we are positioned here from a market share perspective as opposed to pandemic recovery takes shape.
In consumer banking loan book in revenues were impacted by the elevated payment rates and card spending is well above pre COVID-19 levels now with a 38% increase in global purchase sales year over year.
We expect this to translate into loan growth in the second half of the year and we continue to have good momentum in both deposit growth and <unk> across all consumer franchises.
In the U S. As we've discussed we're investing in all her market as demonstrated by the well received launch about innovative custom cash card in June internationally. The picture for our consumer business is to budget. So while there is still the softness in the Mexican economy in Asia low.
Growth returned and that's despite you COVID-19 outbreaks.
Turning to capital for the first 2 quarters of 2021, we returned close to $7 billion to all shareholders, which was the maximum amount permitted under the federal reserve rules.
Going forward, we are committed to returning any excess capital over and above the amount necessary to invest in our franchise.
So while our stress capital buffer increased 3% as a result of the fed's recent stress tests that won't impact the common equity tier 1 target we'd be managing to our book.
Slightly 11.5 per cent.
We ended the quarter at 11, 9% on a standardized basis and have excess capital to return to our shareholders through a healthy dividend and ongoing stock repurchase program.
Lastly, our tangible book value per share increased to 77 Bucks 87 up over 9% from a year ago.
Now, let's turn to 3 of our strategic priorities strategy transformation and talent.
I'm very pleased with the progress we've made on our strategy refresh we have moved swiftly to begin the sales process for the 13 can see my market, we plan to exit in Asia and EMEA. The first round of bids, what's very encouraging uncompetitive, which isn't a surprise because fees are terrific businesses for the REIT.
1 is.
In those regions, we're off to a running start and our wealth strategy, we're making significant strategic investments in product capabilities technology and talent and I've already seen this increased client acquisition.
We continue to do thorough and rigorous work to refresh our strategy across all consumer and institutional businesses.
By the full principles I outlined to you earlier in the year in clinical Inc. Focused in ensuring both connectivity and simplification.
Overarching goal is to increase the returns we generate and close the gap with our peers by investing in the franchise is that will drive some nice growth there.
The 3 most notable of which are T. T S wealth and commercial banking and I'm very confident in the growth and return prospects. These connected franchises will afford us as.
As we have done so far we will share all decisions with you as we make them on the strategy and we're also looking forward to presenting our plans to you more comprehensively during an investor day, which we intend to hold in the first quarter of next year.
Gonna put our entire vision for the from in front of you. So you can that and hold us accountable for executing against it.
As we discussed in the call last quarter. We're also working very hard and diligently on our transformation. This is a significant it's also an exciting body of work and we're working closely with all regulators to meet their expectations and we intend to submit all patents to them this quarter.
Now while addressing the consent orders isn't intense but because of the transformation work here goes well beyond the oldest themselves we've set out to modernize our bank.
We want to achieve nothing less than excellence and this means investing in our risk and control environment, but also in the infrastructure, we need to serve our clients in an increasingly digital world.
So let me give you an example in T T S. Ethan.
These investments will improve the scalability of our platform automation will drive efficiency and client experience.
And investments in data will enhance revenues.
And the investments, we're making will help position us to retain our leading position as the preeminent global corporate bank.
And that beats me finally to talent, where we have made material progress over the last few months.
I'm delighted with the caliber of talent, we have been attracting to the fun to grow our businesses and support our transformation, we've enhanced our existing ranks with best in market hires and data risk strategy and controls as well as in the front lines up well with commercial bank.
B CMA in particular.
We continue to invest in a culture of excellence and our own people, providing them with new leadership and growth opportunities and it's this combination of new perspectives and our existing high caliber talent pool that will enable us to take the from Ford with excellence urgency.
And accountability.
Now before I turn it over to Mark I would like to thank Ms. Lynn for her great work, leading our Investor relations efforts over the past several years and as you know and as she mentioned she is going to be all finance sleep a P. C. M. A well we all know that she is going to do a wonderful job.
With that Mark will go through our presentation, and then well both be happy to take your questions.
Thank you Jane and good morning, everyone. Starting on slide 3 Citigroup reported second quarter net income of $6.2 billion.
As of $2.85.
15, 2% of our OTC.
Revenues declined 12% from the prior year, reflecting a normalization in fixed income markets, along with lower card loans in consumer as well as the impact of lower interest rates.
Expenses were up 7% year over year in constant dollars expenses were up 4%, reflecting a normalization relative to the low print last year, along with continued investments in our transformation as well as other strategic investments, partially offset by productivity savings.
Credit performance remains strong with net credit losses of $1.3 billion more than offset by an ACL release of $2.4 billion, reflecting portfolio improvements as well as the continued improvement in our macroeconomic outlook.
In constant dollars end of period loans declined 3% year over year, reflecting higher repayment rates across institutional and consumer.
Although I would note that we are starting to see some pockets of loan growth emerge and for the first time in over a year loans were up sequentially.
Deposits grew modestly up 4% year over year, reflecting continued engagement with our consumer and corporate clients.
Looking at the first half of 2021 total revenues declined 9% year over year and 10% in constant dollars, mainly driven by the normalization in fixed income markets and lower card balances in consumer although we did see strong fee revenue growth across consumer and an ICD excluding fixed.
Income markets.
<unk> expenses were up 6% on a reported basis and 3% in constant dollars midway through the year.
I'll talk more about our outlook for the remainder of the year in a moment.
Cost of credit was a benefit of roughly $3 billion as we released over $6 billion in reserves.
And we delivered roughly $14 billion in net income and an ROE TCE of 17, 6%.
Finally, as Jay noted earlier, we returned roughly $7 billion in capital so far this year and we remain.
<unk> committed to continuing to invest in our franchise as well as returning any excess capital to shareholders given the flexibility provided by the STB framework.
Turning now to each business.
Slide 4 shows the results for the institutional clients group for.
For the quarter ICD delivered EBIT of $4.9 billion up significantly from last year.
Revenues decreased 14% driven mainly by the decline in fixed income markets.
Expenses increased 4% and were up 2% in constant dollars as investments in transformation along with other strategic investments were mostly offset by lower incentive compensation and efficiency savings.
Credit costs were down considerably given a roughly $900 million ACO release, as well as lower net credit losses, and ICD deliberate a 16, 4% return on allocated capital.
Slide 5 shows revenues for the institutional clients group in more detail.
Product revenues were down 17% in the second quarter, primarily reflecting a comparison to a strong prior year period, particularly in fixed income markets.
However, we are continuing to see robust client engagement and strong underlying growth in our fee businesses across the franchise, including TTS investment banking security services commercial banking and the private bank.
And excluding the markets related component noninterest revenues were up 24% this quarter and we are confident in our outlook for continued strong fee growth in the back half of the year.
Looking at the results in greater detail on the banking side revenues decreased 1%.
Treasury and trade solutions significant growth in fee revenues are roughly 25%, reflecting solid client engagement as well as growth in trade were more than offset by the impact of lower interest rates with revenues down 1%.
We're continuing to see momentum across our payments business with 13% growth in cross border flows and 10% growth in clearing volumes over the past year.
As well as the early days of a recovery in commercial cards.
And as of the end of the quarter TTS loans grew roughly 5%, reflecting increasing client demand and improving macroeconomic conditions.
Investment banking revenues were up 1% as higher M&A and equity underwriting revenues were largely offset by a decline in debt underwriting.
While the overall D C M. While it was up in the second quarter all of the growth was in non investment grade, which did not benefit our results given our skew to investment grade.
But looking at results versus a more normal year revenues were up 38% versus the second quarter of 2019 with strong growth across all products.
Private bank revenues grew 4% driven by higher fees and lending volumes, reflecting momentum with both new and existing clients, partially offset by the impact of lower interest rates.
Corporate lending revenues were down 15%, primarily driven by lower volumes.
Total markets and security services revenues decreased 30% from last year.
Fixed income revenues decreased 43%, reflecting a comparison to a strong prior year period in both rates and spread products.
However, we remained engaged with our clients with steady growth in both corporate and investor client revenues relative to the historical average.
Equities revenues were up 37% versus last year, primarily driven by good performance in both derivatives and prime finance, reflecting robust client activity and favorable market conditions.
In security services revenues were up 9% on a reported basis and 5% in constant dollars.
Here, we saw strong growth in fee revenues with both new and existing clients driven by growth in assets under custody and settlement volumes, partially offset by lower spreads.
Finally, looking at first half results in ICD, we've seen a strong contribution from investment banking as well as good results in the private bank and security services, which helped to offset the expected normalization in fixed income markets.
I would also note that equity markets revenues are up over 30%.
Turning now to the results for global consumer banking in constant dollars on slide 6.
For the quarter GCB delivered EBIT of $2.4 billion up significantly from last year.
Revenues declined 10% as continued strong deposit growth, albeit with lower spreads and momentum in investment management were more than offset by lower card balances across all 3 regions.
In cards, while we are encouraged by the continued improvement in consumer spending with purchase sales up close to 40% versus last year and almost 20% versus last quarter. We are still seeing the impact of high payment rates on revenues.
Expenses increased 7%, reflecting continued investments in our transformation as well as other strategic investments along with an acceleration in marketing and higher volume related costs from a low point a year ago, partially offset by efficiency savings.
Credit remains healthy and credit cost decreased significantly driven by the $1.4 billion ACL reserve release, and lower net credit losses.
And GCB delivered a 28% return on allocated capital.
Finally, looking at results for the first half of the year, we've seen steady improvement in our drivers, which gives us confidence in our outlook as we move into the back half of the year.
Slide 7 shows the results for North America consumer in more detail.
Second quarter revenues were down 11% from last year, primarily driven by lower cards revenues, but better than the 15% decline last quarter on a year over year basis.
Revenues declined in both branded cards and retail services by 12, and 14%, respectively, reflecting continued headwinds from higher payment rates as consumers have continued to use liquidity from stimulus and other relief programs to pay down debt driving lower loans and a shift in mix towards.
Trans actor balances this.
This is creating pressure on our net interest revenues, but it's also benefiting our delinquency and loss trends.
However, we are continuing to see a recovery in sales activity with purchase sales now above pre pandemic levels led by discretionary spend including travel and dining.
In branded cards total purchase sales were up 40% versus last year, and importantly up 11% versus the second quarter of 2019.
And in retail services purchase sales also grew versus both second quarter 2019 and 2020.
So the good news is that we're continuing to see the recovery in spend and we're also returning to pre Covid acquisition levels.
Looking ahead, we expect the growth in purchase sales to translate into loan growth by the end of the year as stimulus moderates and consumers return to more normal payment patterns.
Turning to retail banking revenues were down 7% year over year, reflecting pressure from lower deposit spreads and lower mortgage revenues.
That said, we're continuing to see good momentum as we grow and deepen our retail bank relationships as well as improve the quality and stickiness of these relationships.
Average deposits were up 18%, including 24% growth in checking.
And the number of Citigroup households, increased by 16% contributing to a 23% increase in AUM.
On slide 8 we show results for international consumer banking in constant dollars.
Revenues declined 6% year over year in the second quarter with an 11% decline in Latin America, and a 3% decline in Asia.
Looking at international consumer overall, we're seeing good momentum in investment management with 15% growth in assets under management, primarily driven by Asia.
And the numbers are meaningfully higher if you look specifically at the 4 international well pumps.
Average deposit growth remained strong at 8%.
Albeit at lower deposit spreads.
And similar to the U S. We saw a 26% increase in purchase sales year over year with card loan growth remained a challenge this quarter.
With average card loans down 8% due to elevated payment rates.
Slide 9 provides additional detail on global consumer credit trends.
In the U S. Both NCL and delinquency rates remain favorable driven by the significant amount of customer liquidity due to stimulus and other relief programs.
Given the delinquency trends, we're seeing today, we do not expect credit deterioration in the U S portfolio in 2021.
And the ultimate timing and level of losses as we look into next year will depend on whether or not the stimulus results in a permanent benefit.
And as expected credit losses, and delinquency rates trended downward in both Mexico and Asia. Following a peak in the first quarter of 2021.
So overall, we're seeing a rebound in activity along with a consumer who is in a very healthy financial position.
Suggesting good momentum as we move into the back half of the year.
Slide 10 shows the results for corporate other.
Revenues were down slightly in dollar terms as episodic gains this quarter were more than offset by previously disclosed 1 time items in the prior year.
Expenses were up slightly in dollar terms, mainly reflecting the impact of FX and similar to last quarter. We are further allocated cost to the businesses related to investments in infrastructure risk and controls.
As we mentioned previously this change had no impact to EBIT at the city level. However, we have recast prior periods to enable better comparability of results.
Credit cost declined year over year, driven by a release this quarter compared to a build in the prior year.
Finally, EBIT was breakeven this quarter.
Looking ahead, we would expect a quarterly pretax loss in the range of $200 million to $300 million for the remainder of 2021.
Slide 11 shows our net interest revenue and margin trends as well as noninterest revenues on a reported basis.
We've also provided net interest revenues in constant dollars on slide 19 in the appendix for comparison to prior periods.
In the second quarter net interest revenue of $10.2 billion declined $880 million year over year, reflecting lower loan balances and the impact of lower rates.
Sequentially net interest revenue continued to stabilize as the extra day in the quarter was offset by lower card revenues.
And net interest margin declined 3 basis points, driven by lower card NAR and modest growth in the balance sheet due to deposits, partially offset by the increase in markets and I are in the quarter.
Turning to noninterest revenues on the bottom of the slide and.
In the second quarter, non NAR declined $1.4 billion, driven by normalization and fixed income markets.
However outside of markets, we did see strong broad based fee growth of over $600 million across GCB and ICD.
And for the past 2 quarters, we've seen these fee revenues return to pre pandemic levels of roughly $4.4 billion per quarter, pointing to a somewhat faster than expected recovery.
Looking at these results midway through the year, we are comfortable with our prior outlook.
And continue to expect total city revenues to be down in the mid single digit range on a full year basis.
Although the composition is likely to be somewhat different which I will talk more about in a moment.
On Slide 12, we show our key capital metrics, which remained strong and stable again, this quarter, allowing us to support clients and return capital to shareholders.
Our CET 1 capital ratio increased to 11, 9% as net income was mostly offset by buybacks and dividends.
During the quarter City returned a total of $4.1 billion to common shareholders in the form of $1.1 billion in dividends and share repurchases of $3 billion.
Our supplementary leverage ratio was 5.9%.
A decline from the prior quarter, largely driven by the expiration of the temporary SLR relief.
And our tangible book value per share grew by 9% to $77.87.
Driven by net income.
Before we move on to Q&A, let me spend a few minutes on our outlook for 2021.
On the topline for total Citigroup, we still expect revenues to be down mid single digits on a reported basis.
As I mentioned, the composition is likely to be somewhat different than we originally anticipated.
Year to date, we've seen stronger than expected growth in noninterest revenues and we do expect the strength in fee growth to continue in the back half of the year driven primarily by ICT.
Meanwhile, for net interest revenues, we expect continued stabilization in the back half.
And we should start to see some loan growth by the end of the year.
So while net interest revenues are down roughly $2.2 billion year to date, just outside our original outlook for the full year.
Assuming this base case holds we do not expect a significant further decline in net interest revenues from here on a full year basis.
So again in.
In aggregate for total Citigroup, we still expect revenues to be down mid single digits.
On the expense side.
Based on our latest work on the strategic refresh.
We've made the decision to further accelerate certain strategic investments.
In part in reaction to what is shaping up to be a faster than expected recovery.
As a result, we now expect total citigroup expenses to be up mid single digits.
These are strategic investments that we're making to strengthen our franchise and drive long term growth.
For example, we've accelerated investments, where we believe there are significant opportunities for growth, including holistically across well and the commercial bank we've.
We have also doubled down on our existing strength in businesses like TTS security services and the investment banking business.
Finally, given the faster recovery, we're seeing today, we're accelerating investments in areas like cards marketing to capture this upside.
All of these investments will have significant benefits over time.
Meanwhile, expenses related directly to the transformation.
We had expected to drive the 2% to 3% increase in total city expenses. This year are coming in largely as expected.
These investments include the work around the consent order as well as the broader work to modernize the bank.
Which will improve our risk and control environment as well as allow us to better meet the needs of our customers and clients through an improved operating environment.
Leading to faster decision, making better efficiency and improved client experience.
And I would point out that the mix of the spend.
Is 30% technology.
And 70% non tech related investments.
Finally, this outlook includes the realization of productivity savings as a byproduct of the investments we've been making over the past few years.
And to be clear, we will continue as we have done in the past to look for ways to operate as efficiently as possible during this investment period.
And 1 additional note we.
We could also see some episodic impacts this year related to the market exits we are pursuing.
And as I've mentioned previously we will be very transparent about the impact of these actions on our financials.
So in summary, we feel good about the investments that we're making and firmly believe these investments will position us well to closeout return gap to peers overtime.
Before we get started with questions also want to take a moment to thank Liz Lynn for her time as the head of Citi Investor Relations.
This has been with the city IR team since 2013 and has led the group since 2019.
I know that she has built strong relationships with all of you and it's been a key part of my team since I was named CFO, a little over 2 years ago.
He will be moving on to be the chief financial officer for our investment banking business.
And as Liz mentioned Gen Landis, who will be joining us in August as our new head of Investor Relations.
Hope you will all join me in congratulating Liz on her new role and welcoming Jen to city at our next earnings call.
With that Jamie and I would be happy to take your questions.
We will now begin the question and answer session to ask a question. During the session you will need to press star 1 on your telephone to withdraw your question press. The pound key please limit your questions to 1 question and 1 follow up question again that is 1 question and 1 follow up question. Your first question will.
Come from John Mcdonald with Autonomous Research. Please go ahead with your question.
Hi, Good morning, Mark Thanks for the comments at the end there about the expense outlook and the revised the revision to your outlook for this year I was wondering if you could just unpack that a little bit more youre not the only bank that's been kind of raising expense guidance. So I was wondering how much of this might be inflationary.
2 the cost of doing business as a big bank here and how much of the city specific.
And does the run rate that you're expecting to be at on expenses in the back half of this year feel like that's the run rate you would go into next year with or are there things that are elevated this year. Thank you yeah. Good morning, John Thanks for thanks for the question.
Look I'll start by saying and.
And repeating a little bit of what I said in my in my remarks, which is that we are taking a very deliberate decision on how we manage the franchise right and so what I spoke to was.
Jane and I, along with the leadership team are going through a very thoughtful strategy refresh and as we go through that we are identifying particularly given the pace of the recovery some real strategic opportunities to invest in the franchise and we don't want to we're not going to Miss this window of opportunity you've heard me mentioned that before and it's in parts of the <unk>.
Franchise that will undoubtedly grow and our high returning so when we talk about TTS, we talk about the commercial banking business. We talk about weight wealth. Those are businesses that have strong growth prospects and have returns that are north of 20% in all in a normal environment and so like I said we are.
Jumping out that on the transformation side.
I've been very clear and consistent that we expected that to drive the 3%, 2% to 3% increase year over year, that's coming in largely as expected.
And again, the right thing to do and important thing to do to modernize this bank inflation of course is going to be a factor, particularly as we look at labor and the competition for talent.
But again, that's we deal with that on a regular basis and we continue to look for productivity and efficiency savings.
That largely tend to offset that.
In terms of 2022, I'm not going to give any any guidance on that but again. This isn't a I think an important period of time as we come out of this to ensure we're putting money to work in a smart fashion that prepares the firm for the future.
Your next question will come from Jim Mitchell with Seaport research.
Sorry, I was on mute there for a second good morning, maybe first question Hey, good morning.
Maybe first question on on on branded cards in North America.
Average balances were pretty flat, but there's a little pressure on spread can you just maybe cleared that up is that just sort of greater teaser rate activity or does that bounce back how do we think about the revenue trajectory there and the spread compression. We saw this quarter yeah. So again the dynamic on on cards revenue.
<unk> branded cards in particular in North America, which were down 12% is largely driven by what we're seeing in the way of in the way of loan balances and if you look at average interest, earning balances our average interest earning balances for branded cards are down about 11%.
Now the good news is as we've said purchase sale activity is up meaningfully year over year and relative to the prior quarter, but it's really those payment rates are remaining quite high quite elevated.
Good news is that plays through in the form of a benefit as it relates to cost of credit lower losses than expected and now lower reserves as we see releases, but it's really that dynamic of payment rates high lower loan volumes average interest, earning in particular that is putting pressure on that on the topline.
Alright, that's helpful for the clarification.
On the <unk> balances and then maybe just more broadly on the wealth business.
You guys put out a press release, saying you've made some significant investments and new hires in Asia wealth with a pretty substantial an aggressive target to grow head count where do you stand on that build out and are you, making similar investments in other markets.
Yeah.
Yes.
I think as we said, where we're we're pretty excited about the wealth opportunity for us because we have all the different pieces to be successful. He had the brand the client relationships the platform the commercial banking franchise and we're already a sizable player. We're number 3 in Asia for example.
A lot of the growth is coming from the opportunity for us is pulling all of the pieces together into a single integrated offering across the full spectrum of clients and so we've been investing in.
That platform the technology and have seen the announcements yesterday.
In the U S about a sales direct to digital offering that.
We've been expanding.
Expanding and growing talent in the frontline as well.
And very.
Very pleased as well with the investment product revenue growth switches were from a mix point of view, we see the greatest upside for us So early days.
In the execution of this.
And to this single integrated offering invest behind it and Youll see the benefits in terms of growth as well as offer see return and revenue mix going forward for the bank.
Jane only thing I'd add to that we are already seeing good performance in the quarter right. So private bank revenues up 4%.
Continued strong growth in client assets of 26% and including.
<unk> that were up 29% and deposit strength et cetera, and as James mentioned, even as we invest in strengthening the platform. We just announced yesterday that we were launching the self directed investment digital offering.
Which again is targeted towards U S consumer and wealth management clients and so good progress, while we invest and position ourselves to capture further opportunity here.
Your next question will come from Betsy <unk> with Morgan Stanley.
Hello, Betsy Your line is open. Please proceed with your question.
And we will move to the next question in queue. Your next question comes from Ken <unk> with Jefferies. Please proceed.
Thanks, Good morning, John and Mark wanted.
Wanted to ask you a little bit just on capital when we got the FCB results you had indicated.
A dividend of at least 51, an implied that you'd be buying back stock, but just wondering if you could help us just flush that out a little bit more in terms of how we should be thinking about the type of capital return or any increases that you might consider on the dividend from here and how to put that into context with.
With prospective changes in the FCB in your your minimums.
Sure look the first thing I'd say is that as you can tell through the second quarter, we bought back as much as the regulatory rules would allow for.
And in the way of in the way of the average 4 quarters of net income and so we continue to be very excited about the prospect of continued capital return.
As it relates to the SCB and the recent results.
As you know we have a target of approximately 11, 5% from our CET 1 ratio point of view.
The target includes an estimate for the stress capital buffer that somewhere between 2.5% and 3% up until this recent set of results. The prior couple had been at the 2.5%.
The 3% will go into effect at the end of the at the end of the third quarter.
And more importantly.
We will actively manage the the drivers that impact that stress capital buffer that is to say P. PNR.
As well as the balance sheet risk weighted assets and we intend to do so with an eye towards how we bring that stress capital buffer back down as we think about capital actions as you know with the SCB in place we have the flexibility to take those decisions in a given quarter in line with R. R.
The Reg minimums, and we intend to do that given where the stock trades. It makes a lot of sense for us to be buying back shares and so we will continue to skew towards that and as of right now our dividend is going to remain at the 51%, but as I mentioned, we will continue to look at that quarter to quarter, given the flexibility from the FCB.
And the other piece I'd add is as we are doing this work on the strategy and the plans going forward.
Both Mark and I have a high degree of confidence around the capital generating capability of the franchise.
And.
Look forward to returning excess capital to you over and above what we'll be doing to invest in our clothes that return gap with our peers.
Your next question will come from Matt O'connor with Deutsche Bank.
Good morning, I, just wanted to follow up on the dividend commentary.
Understand a preference to buy back stock.
We're very explicit about.
I wanted to do that below tangible book, so that makes sense, but I guess, just kind of signaling to the market keeping a stable dividend.
Is there like a message there about the underlying earnings power or limited ability to increase the dividend because I would think you'd want to at least top it up by a couple of pennies just to kind of signal a positive trend.
It doesn't take that much capital to do that so maybe you can elaborate a little bit on the dividend.
Again, specifically on should we read into implied underlying earnings power are there any limits on interest from data. Thank you.
Yeah, Let me, let me be very clear there is no underlying message there at all right. It's as I stated in terms of where the stock is trading and I'm, making sense to do buybacks our dividend yield is quite comparable to that appears that close to 3% and so and there is no constraint on our ability to take capital actions and we don't have any concern.
<unk> about the earning power of the franchise.
And in fact, many of the areas as I mentioned earlier and as James mentioned.
We know are going to contribute to continued strength in our earnings earnings power, So well capitalized we feel good about our earnings power.
And no concerns or no underlying message to the capital actions and direction of them that we spoke to and again, we have the flexibility.
Given the stress capital buffer as we go quarter to quarter to adjust as we see fit in the best interest of our investors.
As Robert reminder, please limit your questions to 1 question and 1 follow up question. Your next question will come from Steven Chu book with Wolfe Research.
Hello, Steven Your line is open.
Oh, sorry, I was mute.
And it is well my apologies.
Mark I was hoping to unpack some of the NII guidance I think there was just a little bit of confusion and how it should be interpreted so it sounds like Mike were down $2.2 billion year to date.
And that the full year, we shouldnt see any incremental declines from there so that would imply about $10.5 billion dollar NII run rate in the back half I just wanted to make sure that that's the right way to interpret the remarks, yes.
So look again, we do see kind of the NAR stabilizing and Youll see some of that particularly ex markets, but also in total on the page.
Again, the guidance for total revenues unchanged at down 5% mid down mid single digits excuse me.
Youre right as of the as of the half were at down 2.2 as it relates to net interest revenues.
Look the markets component of that.
Often be hard to predict.
But what im suggesting is that any offset or any further pressure there will be offset likely in the fee momentum that we expect to see given the strength coming through this quarter.
Your next question will come from Betsy <unk> with Morgan Stanley.
Hi can you hear me now yeah say.
Hey, Betsy morning, Okay. Thanks, Okay.
It didn't have a question for Jan and you Mark the question has to do with how you're thinking about the importance of scale in the business.
Refresh I guess I could call it that youre doing.
And James really.
Maybe you could help us understand how important scale is in what you are looking to execute here.
I ask because.
Many times they get questions from investors around.
What is what do you see doing on the pieces of business that don't have as much scale as you know the standout areas like global fish or treasury services or Mexico.
Yes first of all at scale is clearly very very important here.
In a more digital low.
As you point out.
Betsy TTS for example has.
We're moving 4 trillion dollars of volume a day.
In around the world.
And we've got a number of franchises that have material scale.
<unk> them to be.
To be growing and this is where the transformation program will be very helpful.
And ensuring the scalability of our platforms.
He made the decision on Asia Pac and EMEA to exit the 13 markets, where we didn't believe that we would be able to achieve the scale needed to compete in those very local part of the business. So that we can focus our fire power.
Those areas where either.
Ensuring we retain a leading market position or in other areas, where we want to be investing to attain the scale that we think is going to be needed going forward U S consumer.
Is an obvious example of that.
So I think as we you'll hear from us going forward more and more focus around what are our plans for those businesses for retaining the leading positions in niche.
Aided by the transformation program or in the areas, where we'll be investing to attain greater scale and as I say U S. Consumers fifth 1 there are pockets in commercial bank very excited by.
Security surfaces, 1 why we think it is very very readily attainable, particularly given a pre and post.
Trade capabilities and part of that scale finally will come from the linkages between our businesses as we create more connectivity that will also provide a scale. So collectively the different franchises, we have will be competitively advantaged.
Individually strong.
Your next question will come from Ebrahim <unk> with Bank of America. Please proceed.
Good morning.
Jean Marc just 1 follow up.
I understand you are being deliberate in terms of strategy.
Adding up to I guess at the Investor Day, You mentioned next first quarter next year, but as we think about just the investment spend and the expense outlook handicapped Mark if you could the risk that we could see a little bit of an expense creep as you dig further deeper into this.
Both in terms of your guidance from mid single digit expense growth. This year and as we think about just the duration of debt investment cycle over the next few years.
Yeah look again. This is this is something that we control right. So again I want to reiterate that we are making very deliberate decisions around the opportunities that we see across the franchise and it's the right thing to do right and so we're going to continue to do that in terms of kind of.
Risk to it I don't think there are any surprises here right. So if revenues come in.
Meaningfully different there's a certain component of our expense base.
Tied to revenues and so that would obviously move around but aside from those volume related expenses transaction compensation et cetera.
You should expect.
What I've guided towards in terms of the very deliberate decisions to put the money to work in this fashion and we're going to continue to do that if we see more investment opportunities in 'twenty, 1 or 2022, we're going to go after them because again, we know that we can deliver on the benefits and the returns that are associated with putting that money to work.
Your next question will come from Gerard Cassidy with RBC.
Thank you good morning, Mark Good morning, James Good morning, Good morning.
Mark you said something interesting about the investment banking business revenues I think you said that.
They were <unk>.
39% or 38% higher than 2019 are lower I don't and we're going to check all higher I'm just checking my notes here. So your business is still nicely above the 2019 levels and we came through a period up until the pandemic debt, you're well aware of but it was somewhat challenging.
The growth in this in this in banking and trading businesses. As you look forward when you talk to your people in investment banking and global markets.
Do they see this because this seems to be an elevated amount of business due to what we just came through in the last 18 months do they think it's sustainable or do we get back to 2019, 1 of those guys telling you about the next 12 months to 24 months in those businesses.
Yes.
Start by by saying, we continue to have very very good dialogue with our clients across the franchise and specifically in investment banking and if you think about it.
Many businesses many companies across industries are really having to take a look at their business model and think about how they want to transform their businesses coming out of this pandemic.
Everything from how to think about Digitization, how to think about going direct to consumers what the pandemic means for supply chains, how people work remotely how they manage their liquidity levels.
To do with that excess liquidity should they be should they be buying or what.
So we're part of that that dialogue, which which is incredibly.
Representative I think it represents strongly the franchise that we have.
The general view from art.
From our clients is optimistic in terms of the go forward environment. Yes, there are some things to kind of manage too, but there is a general level of optimism and so what I represented relative to 19 is while we are seeing normalization.
We're normalizing at a higher level than where we ended in 2019 and we'd expect continued momentum and we'd expect to take continue to take share over time.
John anything you want to add to that Michael.
Michael I think you covered it very well.
There's a high level of client engagement with us at the moment.
Around the world.
A lot of demand we're seeing in addition to the investment banking side the shift to e-commerce with clients needing our TTS services across board of flow.
Seeing this translating into.
Demand in trade starting to tick up nicely.
Commercial banking side is another area that we're seeing a lot of new demand coming through from clients both from strategic.
<unk> with our investment bank.
As well as their own expansion globally.
Supporting them to Treasury services and the like so I think there's a general sense of optimism we.
We have we have a fabulous pipeline never once these things.
We really have a fabulous pipeline heading into the second half a day yeah.
Around the world and it does give you a good sense of confidence.
1 of continued momentum.
Your next question will come from Mike Mayo with Wells Fargo Securities.
Hi.
I'm going to ask my question here and then re queue.
The real question is just on capital I mean, you are not blind to the fact that you.
Our tangible book value was $78 in your stock price of $68. So you should probably be selling the.
In a year.
Your desk chairs in your silverware and anything you can to buyback your stock I would think so along those lines.
The first question is when you're looking at the sales of assets.
13 consumer markets do you expect to have a gain on those or a loss on those relative to where they are marked currently.
Yes, so look I mean, I think I would tell you Mike that we.
As Jay mentioned, we have seen strong interest from buyers as it relates to those assets.
And there is no surprise just given we think those are good businesses just not of scale as Jane mentioned for US we've got to run that process through and see what that results in and I'll continue to be transparent with you as to where gains and losses or how it flows through our financials, but I'm not going to sit here and.
Tell you, whether it's gains or losses or what it means specifically for those 13 markets. What I will tell you is that as capital is freed up.
From those transactions will continue to make very deliberate decisions around what to do with debt capital first looking at growth opportunities that can deliver returns above our cost of capital and then looking towards how we can return as much of it to shareholders as it makes sense.
In the form of buybacks dividends et cetera, and we've been disciplined about that today and we're going to continue to be disciplined about that.
So to clarify if I can.
Got to throw your CET 1 ratio is 11.9 in Europe, you'll return capital above 11, 5 so if you were to quantify the dollar amount of that.
How much would that mean in potential buybacks at this point and then I assume that would not include any capital freed up from any sales. So you could have the potential to buy back a lot of stock.
If you are willing enable is that correct.
There's a little bit over $4 billion of excess capital between the <unk> 11, and a half and the and the 11.9.
So that's what that equates to.
Your next and final question will come from Vivek <unk> with Jpmorgan. Please proceed.
Hi.
Thanks for taking my questions a couple.
Morning, Mike.
Any comments on promotional trends that youre seeing in card pricing given.
Everybody is back.
Focusing on the business you mentioned marketing spend but can you talk a little bit about.
What youre seeing in promotional pricing.
Yes, I guess, what I'd say is simply that.
As expenses would suggest and as we stated we are lagging back into bringing on new.
New card customers and so and what we're seeing is that our acquisitions are largely at pre COVID-19 pre crisis or pre pandemic.
Levels and frankly, we're seeing normal behaviors as those card customers come on and as has always been the case is going to be a mix in terms of the acquisition strategy, but thus far we're seeing we're seeing.
Normal behaviors, if you will and look the new new account acquisition skew towards branded cards.
And they are in products that are less reliant on the zero percent offers and.
And products like flex pay and flex loan, which will generate interest immediately as those balances growth.
We do have 1 more question in queue from Mike Mayo with Wells Fargo Securities.
Hi, and unrelated question just.
Jane as you think about the technology approach.
Doing it yourself through Citigroup and pairing up with partners.
Whats the status of the relationship with Google and Google Plex, and your desire to use third parties together.
New customers at a lower initial cost, but maybe not as much lifetime value. If you think of that trade off.
What's your current thinking of day, and we haven't heard much about the Google relationship Despite Tom.
Initial headlines thanks.
Yeah, I hate that Mike excellent question.
The partnership with Big Tech is an important part of art disruptive strategy in the U S. As we're looking at how do we enhance value propositions to customers the customer base itself.
Then these new ecosystems that are at the whole thing.
And I think there's no question that Covid has accelerated the embedded finance model in the U S. Just think of the travel ecosystem.
Improvement ecosystems.
The benefit we've got is that for us it's not it's not a new space to us we've been very much engaged with partners in Asia.
Pay T M and we bank.
As well as our traditional partners.
What we find with these partnerships.
We learned that low because it is still early days in the development of the.
These newly ecosystems, we learned a lot about marketing about user experiences around the tech stacks.
It enables us to tap into next generation customer bases, but also importantly, it goes beyond consumer.
And so if we look on the on the corporate side, our partnership with stripe.
What we're doing in TTS with project spring of enabling payments around is a core piece, particularly as.
Wholesale and retail kind of collapses some of these payment changes into 1.
So with the with our Google Plex and several other tech partnerships that we have in the states and elsewhere in the world, we're very deliberately going about creating a broad suite of Apis and partner integration capabilities. So that we're able to integrate other other.
Partners into our offerings.
More innovative solutions without necessarily having to build it or buy it all ourselves.
And so the Eplex with Google is an.
An example of that.
We are actively testing features with our own employees at the moment, we'll be finalizing dates will share with that we will share that with you when available.
It's 1 of many different partnerships that we have.
And an important partner for us, but far from the only 1 here in the states to help us disrupt and growth going forward.
We do have a follow up question from Vivek <unk> with Jpmorgan.
Hi, sorry, if I had a second question.
And that's from capital given that you're headed towards a higher G SIB bucket.
Jane what Youre thinking.
In terms of that in terms of not just capital targets.
You can do about debt because I know, that's a year or a little over a year away from going into effect, but obviously, you're thinking about target capital will have to keep in mind, what's coming down the pipe for you.
Sure and look as you as you know with all of the liquidity in the market.
Many of us have seen pressure on our G. SIB score that certainly has been the case for us in.
It wouldn't go into effect, a higher G. SIB score of 3.5% until the beginning of 2023.
And we look at the entire capital stack Holistically, the 11.5% target in our case, which is well above Reg minimums, but certainly does consider that consider that in it and there are elements of that as I mentioned earlier.
That we can influence and control so the stress capital buffer as part of that.
And I talked earlier about our ability to influence those levers without.
Without having full understanding of the the fed models. We know we can influence PNR. We know we can influence the balance sheet and how it gets allocated and ultimately what stress losses.
Come out of it and so we will continue to manage that we will still have a a buffer obviously, even with a higher G. SIB score and as you know regulators.
<unk> to talk about capital as being at about the right levels in the system and they'll continue to look at it.
Drivers that influence the stack as well, including G SIB and balance sheet size et cetera, and we will see how that evolves, but again.
We feel good about where we are we're well capitalized.
We have a good sense for the drivers going forward that will create capital capacity for us and.
And we intend to again invest that where it makes sense and return that otherwise to our shareholders.
I would now like to turn the call back over to Elizabeth Flynn for closing remarks.
Thank you all for joining today's call. Please feel free to reach out to us and IR with any follow up questions and thank you again and have a nice day.
This concludes with city second quarter 'twenty 'twenty 1 earnings review. Thank you for participating you may now disconnect.
[music].
John.
[music].
Okay.
[music].
John.
[music].