Q1 2022 Citigroup Inc Earnings Call
Hello, and welcome to see these first quarter 2022 earnings with you with T. SEC exited officer, Jane Fraser and Chief Financial Officer, Mark Mason today's call will be hosted by John Mendez Head O C. D Investor Relations. We ask that you. Please hold all questions until the completion.
After formal remarks.
Each 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.
And as you may begin.
Thank you operator, good morning, and thank you all for joining us.
I like to remind you that today's presentation, which is available for download on our website Citigroup dotcom.
May contain forward looking statements, which are based on management's current expectations and are subject to uncertainty and changes in circumstances.
Actual results may differ materially from these statements due to a variety of factors, including those described in our SEC filings.
With that I'll turn it over to Jane.
Thank you Jen.
And I'd like to start by reiterating my appreciation to those of you who participated in our Investor day last month.
We greatly value the opportunity to walk you through our refresh strategy and our plans for the next few years.
Given how much time, we spent on a strategy that day to day, we'll be focusing on the quota. Nonetheless, as we committed we will keep you updated on our progress and you can see the latest report card on slide two.
<unk> is also the first time, we were putting cookie results under our new segmentation, which will help you track our efforts.
I've got to say it feels like an understatement say, but a lot has happened since the investor day, So I'm going to talk about the macro environment first and then after I talk about the quota I'll discuss how we're handling Russia amongst those they're going to go through it in more detail.
We've been on the front foot since the potential for war first emerged and we intend to remain so.
The Russian invasion of Ukraine, and the sanctions that triggered unleashing enormous supply shock on the well further fueling inflation I'm, placing playbook growth under considerable pressure.
Back recently from same clients in Europe , and the Middle East It is security yeah.
Energy food defense cyber operational resilience that has risen to the top of that strategic dialogue.
The macro outlook for the rest of year can only be described as complex and uncertain and while my job is to prepare for all outcomes.
Have you is that strong nominal income growth and continuing momentum in the labor market will help support near term growth in the U S economy in the face of inflationary pressures, but we expect material regional differences and the impact with economic growth in the individual consumer in bits and states and.
Europe hit hardest.
With central banks responding to inflation, we're entering a period of higher rates and a flatter yield curve.
Energy and commodities are at the center of the storm globally, but we don't believe we're at the start of a new long Super cycle, and we do expect prices to fall to more normal levels.
So with that as a backdrop I think the sun performed reasonably well this quarter.
Earlier today, we reported net income of $4 $3 billion EPS of $2.02, and then alright, TCE of 10, 5% each.
These numbers include impacts related to the divestitures.
Underlying business performance was stronger to the tune of about 150 basis points of Alright T C E.
Now, let's turn to the performance of our five main reporting unit.
Well given our emphasis on surfaces I'm, particularly pleased with our performance in Treasury and trade solutions.
Fee growth trade loans, and cross border transactions buoyed by higher rates led to year over year revenue growth of 18%.
Security services also performed well despite the impact of markets with revenues up 6%.
In our markets business outrageous navigated a volatile environment quite well aided by I'll make with notable performance amongst corporate clients and strong gains in FX and commodities.
This led to revenues almost equal to the very active first quarter of 2021 .
As you might expect.
Banking is a different story.
While our performance on the advisory side with respect to boy I think we can perform a bit better in equity and debt capital market going forward, even if the wall. It remained smaller our pipelines are healthy and loan demand is on the rise having said that we don't expect robust activity in the capital markets.
To resume in the industry until the geopolitical situation and client sentiment improve.
In U S personal banking, we continue to see signs of how healthy and resilient. The consumer is through our cost of credit and that payment rates.
We see good engagement through key drivers such as card loans and spend volume grows so we like where this business is headed.
Geopolitics dampened performance in global wealth management this quarter.
Revenues improved in the U S a.
And Asia pulled back on new investments and something we saw in our markets franchise as well.
As you know, we're hiring bankers and enhancing our client offerings, such as city Alliance, which we launched last month as a unique platform to support independent devices.
As a result of these efforts we continue to add clients in both the private bank and in city gold.
Turning to capital, we returned $4 billion to our shareholders through stock buybacks and dividends during the first quarter.
We now have about 6% fewer common shares outstanding than we did a year ago.
At the same time, a sharp increase in interest rates negatively impacted our capital through OCI and largely caused our common equity tier one capital ratio to come in at 11, 4% this quarter.
I want to be upfront with you about the fact that the macro and geopolitical environment, which I spoke about combined with the impacts of all divestitures create both a headwind and tailwind for all capital ratios this year.
Now whilst this will impact the level of our stock buybacks. This year, we have a path to our year end target of 12% and Mark is going to walk you through these details and let me be clear we remain committed to continuing to return excess capital to our shareholders.
As you heard at your Investor Day, we're focused on our transformation and we're making the investments in our infrastructure risk and controls and also in our talent and our culture to modernize our bank and to make city of winning for them.
I recognize that these investments impact our expenses and our returns in the short run, but I firmly believe that success here will not only lead to satisfying our regulatory obligations, but also to improving our competitiveness and our returns in the medium term.
So far this year, we've announced new agreements to sell a further seven consumer businesses in Asia and EMEA at the most recent of which were India embark rain.
We are beginning the sales process in Mexico, and there is significant interest in this iconic franchise.
As you've heard me say this it's not an uncomplicated transaction, given we will be separating our operations in order to retain our institutional presence.
We will take the time necessary to do this the right way and decide which transaction is in the best interest of all shareholders.
And we will keep you posted on any developments concerning the three remaining markets, China, Poland and of course, Russia.
We started to carefully reduce our operations and our exposure to Russia in January and we benefited from being on the front foot here.
We'd be managing down our financial exposures, both the level and composition and there it's a reasonable level, especially given the additional reserves we took during the quarter.
We've also increased reserves for the second and third the road impact off the wall beyond Russia, and Ukraine, and our intention to sell significant portions of our local business in Russia remains we are in continuous communication with the U S government and we continue to do our part to it.
Fourth the sanctions regime.
But I.
I've run out of words to describe the tragic consequences of the war in Ukraine.
I remain incredibly proud of how our people have risen to the occasion from every corner of off.
People in Ukraine have kept her bank operating in the country.
They can help Ngos deliberate age on the ground and helps society function as best as possible and many of our colleagues have opened their homes to refugees and we will continue to help in any way we can.
So.
With all of it is going on in the World. We remain laser focused on the execution of our strategy and our transformation.
I expect macro environment to remain unpredictable to say, the least and the backdrop of a wall, which is equally tragic and unnecessary and a persistent pandemic.
And I can speak to the last one personally having just recovered from a brief encounter with COVID-19 and much as I would like to I can't blame Packer for it now.
Now I'd like to turn it over to Mark and then we would be delighted to take your questions.
Thank you Jane and good morning, everyone I'm going to start with the firm wide financial results focusing on year over year comparisons for the first quarter unless I indicate otherwise it's.
It's been a little more time on expenses and Russia and end with the results of each segment.
On slide four we show financial results for the full firm as Jane mentioned earlier in the first quarter, we reported net income of $4 $3 billion and an EPS of $2 <unk> with in our TCE up 10, 5% on $19 $2 billion of revenue.
Embedded in these results for Asia consumer divestiture related impacts that are detailed in the appendix of the presentation.
In the quarter total revenues decreased 2% as strength in net interest income driven by services and PWM was more than offset by lower noninterest revenue across businesses.
We continue to see strong performance in the key business drivers, we shared on Investor day, which I will walk you through in detail shortly.
Total expenses of $13 $2 billion increased 15% or 10%, excluding the Asia divestiture related impacts I just mentioned.
Cost of credit was $755 million as net credit losses of $872 million were partially offset by a net ACL release.
Embedded in the net ACL release is a Russia related build of approximately $1 $9 billion.
This includes $1 billion related to exposure to Russia, and about $900 million to account for the broader impact on the macro environment.
This was more than offset by a release related to a COVID-19 uncertainty reserve.
Primarily in U S personal banking given the continued resilience of the underlying portfolio specifically in the U S.
As of today, we have about $17 $9 billion in total reserves with a reserve to funded loan ratio of 2.35%.
On slide five we show an expense walk for the first quarter with the key underlying drivers as I mentioned earlier, we incurred some divestiture related costs. This quarter. These costs largely related to a goodwill write down that we incurred in legacy franchise as part of our re segmentation and divestitures.
It is important to note the goodwill impact as capital neutral.
Excluding the divestiture related costs expenses increased by approximately 10%.
3% of the increase was driven by transformation investments with about two thirds related to the risk controls data and finance programs and approximately 30% of that is related to technology investments about 2% of the increase was driven by business led investments as we continue to hire commercial.
<unk> investment bankers as well as client advisors. In addition, we are investing in technology across services, well and cards.
1% was due to higher revenue and volume related expenses marginally in markets in cards.
And approximately 4% was driven by inflation and other risk and control investments, partially offset by productivity savings.
Across all of these buckets, we continued to invest in technology, which was up 12% for the quarter.
On slide six we provide an update on our exposure to Russia.
As Jane mentioned as of the end of the quarter, our remaining exposure to Russia stood at about $7 $8 billion down from $9 $8 billion at year end.
And importantly, the mix of the remaining exposure is change and shifted in a positive way.
We have reduced our direct Russia country risk exposure from $5 $4 billion to about $3 $7 billion, which.
Just of loans.
Derivatives and off balance sheet exposure.
The remaining exposure, which previously totaled $4 $4 billion now totaled $4 $1 billion and consist of deposits in cash with the central Bank reverse repos and cross border exposure.
Additionally, our net investment in our Russian entity is now approximately $700 million.
Down from about $1 billion at year end.
And the currency translation adjustments or Cta related to our net investment.
<unk> at $1 billion.
And as I mentioned previously we took credit reserves of about $1 9 billion with about $1 billion for direct exposure to Russia, and another approximately $900 million for broader impacts given the macro environment.
So we feel we have reserve prudently at this point.
In the normal course of our planning and risk management, we run a range of stress scenarios and we've taken the same approach with our exposure to Russia.
And as a result of the actions that we've taken to reduce our risk. We now believe that under a range of severe stress scenarios our potential risk of loss is now estimated at approximately two and a half to $3 billion down meaningfully from what I described at our Investor day.
On slide seven we show net interest income loans and deposits in the first quarter net interest income increased by approximately $50 million on a sequential basis as interest income from loans as well as higher deposit spreads were partially offset by day count <unk>.
<unk> day count net interest income increased by approximately $290 million sequentially.
Sequentially net interest margin increased by seven basis points as lower average deposits in services and higher interest income from loans were partially offset by balance sheet growth and markets.
On a year over year basis, net interest income increased by approximately $370 million driven by cards deposits volumes and spreads as well as income from the investment portfolio, partially offset by lower net interest income in markets.
And we grew average loans by approximately 3% in both ICD and PWM.
On slide eight.
We saw our summary balance sheet and T capital and liquidity metrics, we maintained a very strong balance sheet.
Of our two four trillion dollar balance sheet about 23% or $551 billion or high quality liquid assets or HQ, all day, and we maintained total liquidity resources of approximately $960 billion.
From a capital perspective, we ended the quarter with a CET one capital ratio of approximately 11, 4%.
Under both standardized and advanced approaches with standardized remaining the binding ratio down from 12, 2% at year end.
During the quarter, we adopted soccer and absorbed a significant impact from the sharp move in interest rates.
We'll go into more detail shortly on the drivers of capital in the quarter. However, it is important to note that despite these impacts we continue to expect to manage to our CET one ratio of 12% by the end of the year due to the expected G. SIB surcharge increase to 3.5% at the beginning of 2020.
Three.
We expect the combination of net income generation DTE.
DTA utilization and capital generated by the closing of several of the consumer exits in Asia to be sufficient to reach the 12% CET one ratio by the end of the year.
As we said at Investor Day, we're committed to returning excess capital to our shareholders and as we see a pull to par in the investment portfolio reversing that $4 billion interest rate driven impact, we would expect to be able to deploy that capital over time.
And as you know under the SCB framework and given the uncertain macro environment.
We assess on a quarter by quarter basis, the right level of buybacks and we will continue to do so throughout the year.
For the second quarter, we expect only a modest amount of buybacks and we will evaluate that level throughout the quarter taking into account market conditions.
On slide nine we show a sequential CET, one capital ratio wall to provide more detail on the drivers this quarter.
As I just mentioned our CET one capital ratio ended the year at 12, 2% as we build capital to absorb the impact of soccer on our R. W. S.
Post soccer adoption a ratio stood at 11, 8% as of January one 2022.
Given the sizable impact of some of the drivers I wanted to spend a minute to walk through the puts and takes this quarter and how we ended the quarter with a CET one ratio of about 11, 4%.
First we generated net income, which added 35 basis points second over $4 billion of dividends and buybacks drove a reduction of about 36 basis points.
Third the interest rate impact on a OCR through our investment portfolio drove a 35 basis point reduction.
Fourth the.
The increase in disallowed DTA largely driven by the reduction in CET, one due to the interest rate impact I just mentioned drove another 15 basis point reduction.
Finally, the remainder was driven by a combination of other factors, including a reduction in <unk>.
With all of that said as I just mentioned, we have a path to a 12% CET one capital ratio by year end and remain committed to returning excess capital to shareholders.
On slide 10, we show the results for our institutional clients group.
Revenues decreased 2% largely driven by investment banking, partially offset by an increase in services revenue.
And markets declined slightly against a strong quarter last year.
Expenses increased 13% driven by transformation investments business led investments and volume related expenses, partially offset by productivity savings.
Cost of credit was nearly $1 billion, largely driven by $1 $5 billion build related.
Related to our exposures in Russia, as well as the broader impact on the macro environment.
And outside of Russia, We continued to see strong credit performance across our portfolio as client's balance sheets remain healthy.
This resulted in net income of $2 $6 billion down.
Down approximately 51% largely driven by the higher expenses and an ACL build versus a release in the prior year.
We grew average loans by 3% largely driven by trade finance.
Average deposits grew 2% as we continue to see good momentum and deepening of existing client relationships and new client acquisitions.
And ICT deliberate in our OTC E of 11, 2%.
On Slide 11, we show revenue performance by business and the key drivers we laid out in Investor day, which we will continue to show you each quarter.
In services, we continue to see a very strong new client pipeline and a deepening with our existing clients and we expect that momentum to continue.
And Treasury and trade solutions revenues were up 18% driven by growth in net interest income as well as strong fee growth with both commercial and large corporate clients and.
And we continue to see strong underlying drivers and TTS that indicate continued strong client activity.
With U S dollar clearing volumes up 2% cross border flows up 17% and commercial card volumes up 54%.
Again, these metrics are indicators of client activity and fees and on a combined basis driver approximately 50% of total TTS fee revenue.
Security services revenues grew 6% as net interest income grew 17% driven by higher interest rates across currencies and fee revenues grew 2% due to higher assets under custody.
Overall markets revenues were down 2% versus a strong quarter last year in.
In the quarter activity levels benefited from client repositioning and strong risk management in light of fed actions and overall geopolitical uncertainty.
Fixed income markets revenues were down 1%.
Strong client engagement, particularly with our corporate clients and FX and commodities with our rates business also benefiting from higher volatility.
Spread products were negatively impacted by less client activity.
Equity markets revenues were down 4% compared to a very strong prior year period.
In the quarter, we saw strong equity derivatives performance and grew prime finance balances.
Banking revenues, excluding gains or losses on loan hedges were down 32% as heightened geopolitical uncertainty and the overall macro backdrop impacted activity in debt and equity capital markets.
Investment banking revenues were down 43% driven by the contraction in capital markets activity, partially offset by growth in M&A.
Corporate lending revenues were down 6% largely driven by lower average loans.
Now turning to slide 12, we show the results for our personal banking and wealth management business revenues declined 1% as net interest income was more than offset by lower noninterest revenue.
Expenses were up 14% driven by transformation investments business led investments and higher volume driven expenses, partially offset by productivity savings.
Cost of credit was at $376 million benefit as an ACL release more than offset net credit losses.
We had a net release of over $1 billion of ACL related to COVID-19 uncertainty reserves.
I would note that even after this release, we maintained over nine $8 billion in credit reserves against our U S card portfolios.
Approximately seven 6% of total loans.
This resulted in a net income decline of 23% and Anoro TCE of just over 23%.
<unk> for the ACL release, our OTC would've been approximately 13%.
On slide 13, we show PWM revenues by product as well as key business drivers and metrics.
Randy cards revenues declined 1% on higher average payment rates and higher acquisition and rewards costs as we continue to see attractive investment opportunities and strong customer engagement.
We are seeing encouraging underlying drivers with new accounts up 24%.
Card spend volumes also up 24% and average loans up 7%.
Retail services revenues were flat as higher net interest income was offset by higher partner payments driven by improved credit performance and.
And we are seeing positive underlying drivers with spend up 14% and average loans up 1%.
While payment rates remain elevated we believe we have finally begun to see some normalization.
As a result interest earning balances in branded cards, we're relatively flat on a sequential basis, while retail services grew interest, earning balances by 3% sequentially, despite seasonally lower card spending volumes.
Retail banking revenues declined 6% largely driven by lower mortgage originations wealth.
Wealth revenues declined 1% driven by less client activity and investments, partially offset by higher deposits investment revenues declined as geopolitical tensions impacted the capital markets, which resulted in clients pulling back their trading activity, particularly in Asia.
However, underlying drivers remain strong with average deposits up 14% average loans up 5% client assets up 4% and client advisors up 6%.
On Slide 14, we show results for the legacy franchise revenues declined 14% driven by lower revenue across the exit markets largely driven by the Korea wind down as well as the muted investment activity in Asia.
Expenses were up 31% largely driven by the goodwill impairment I mentioned earlier, but again this is neutral to capital.
Cost of credit was $160 million in the quarter driven by net credit losses, and as a result net income declined significantly.
On Slide 15, we show results for corporate other.
Revenues increased significantly largely driven by higher net revenue from the investment portfolio expenses were down largely on lower compensation expenses.
And to briefly touch on our full year 2022 outlook at this point, we still expect to see low single digit revenue growth and mid single digit expense growth, both excluding divestiture related impacts this year.
And with that Dana I would be happy to take your questions.
Thank you and to ask a question you will need to press star one on your telephone and to withdraw the question press the pound or hash key we ask that you. Please limit your questions to one and please get back into queue by pressing star one again.
First question is from Glenn Schorr with Evercore. Your line is open.
Hi, there how are you.
Okay. So when I first looked at the reserve release.
Even including the $1 9 million Russian reserve, where like wait what economic scenario.
Writing too because everybody else and provisions, but now that you've given us some of the color start to understand it. So it feels to me and correct me if I'm wrong, you just were slower to release, the Covid reserves and it sounds like you still have a lot in.
In the coffers with that seven 6% that you mentioned so I just wanted to see if you can give a little more color between what you took reserves score what you've released reserves for.
And if you've tweaked your economic scenarios at all.
To get to the current reserve if that's not too much task.
Glenn why don't I kick off and I'll pass it to Mark. So you are absolutely right. We had taken a rather conservative approach to releasing all COVID-19 related reserves in the U S personal banking business last year compared to some.
We are comfortable that this quarter that was the appropriate thing to do.
Given the state of Covid.
And the U S economy.
And with it as you can see from the numbers with a $2 three 5% ACL coverage ratio on and with the the ratio that we have been caught seven 6% in particular.
Very comfortable that we have a a prudent and appropriate reserve level, but let me hand, it over to mark for the down in the Dirty Yes. Good morning, Glenn I think you've captured it right in the sense, we obviously did a build a meaningful build.
Related to Russia. The majority of the release was in fact tied to the COVID-19 management adjustment that Jane referenced as we thought about these scenarios as you know we run a base scenario, we did tweak that a bit and bringing the GDP assumptions down.
From what they would've been in the fourth quarter and that obviously also impacted.
You know kind of the outer years in our assumption.
And.
The other pieces when we look at the downside scenario, so our sort of our analysis for seasonal is a combination of a base scenario and a downside scenario under the downside scenario, we did increase the severity of the downside to account for again.
Bit of the current environment that we're all managing through so those puts and takes kind of netted out to what you see that we've reported which is a net release, but largely driven by those two drivers and I'd just add David as you know it's not talked about in his prepared remarks, we took an additional reserve of 900 million.
For the second and third order impacts of the wall and the impacts on supply chains and other pieces that are as we look forward. We were concerned about the global economy. It's a huge source of uncertainty as to what that will be that's part of the part of the S. Part of the 1 billion nine obviously I would point out.
When you look through at the underlying performance of the portfolio, they're still holding up quite nicely. When you look at the performance of our consumer customers. Whether you are looking at the NCL rate and where that's trending where you look at the 90 day delinquency and where that's trending still very strong even when you look on the corporate.
Side, if you adjust for the Russia related build and those drove a bit of the nal increase but still very strong performance there too.
Your next question comes from Erika Najarian with UBS. Your line is open.
Hi, good morning.
Good morning.
A question.
Shannon Mark on CET, one and wanted to make sure we got your investors taking lessons.
So you know from.
From the 11.4, you saw what net income capital release from divestitures and DTA utilization are going to be the drivers to build to 12% CET one.
By year end 2021, obviously, a OCI is a wildcard is unpredictable.
Give us a sense of.
We then think about the buyback is just a fallout in terms of that equation right is the first question number two.
What is the desire to increase the dividend even nominally.
In this stress test year and third how does the DTA impact.
That was negative.
And in the first quarter turned to a positive impact.
Mark nice job on the <unk> I think that everybody was scared if that was going to be a big negative number this quarter.
Thank you you've got a lot there because we've got to unpack so I'll try to capture it all in and you'll you'll point to whatever I may Miss but let's let's start with the beginning of your question just kind of the 12% and how we build back up to the 12%. So we ended the quarter at an estimated 11 four to get to the 12%.
That would be somewhere between seven and $8 billion of capital that will be required Jane mentioned I mentioned there are a number of puts and takes that play through that you pointed out a few of them. So you all have estimates for net income between the second and fourth quarter. So you can forecast that what that would be there's probably another $1 billion six or so of a benefit.
<unk>.
The DTA so what do I mean by that is the $800 million that I referenced in the past of utilization of the DTA and the balance would be the elimination of the amount that we tripped above the threshold.
This quarter. So so there are two components that carryforwards that impact.
The DTA and then there is the timing difference, which is equated to about 10% of our capital. So this quarter, we actually trip that timing difference.
Portion of the deep the disallowed DTA impart because of how the OCI reduction play through so as that bleeds back in over time, we would expect to have capital buildup, which increases that threshold and therefore be able to back off the <unk>.
Increase that we saw in the quarter related to the DTA.
The third component would be the capital from exits. So you didn't mention that one as you know there are a number of exits that were looking to close at the end of the year by the end of the year, they will contribute about $4 billion of capital to that equation.
And then there's the bleeding back in of the of the OCI impact, which will give or take give us another $1 billion. So those are the pluses those are the things that kind of play in on the on the capital generation side and then on the offsets you've got preferred dividends, you've got common dividends whatever growth, we play out or put to work from an <unk> point of view.
And that leaves the balance for share repurchases as I mentioned in my prepared remarks, we would expect in the second quarter, a modest level of buybacks in light of all of those puts and takes the good news is that the headwinds that we've talked about all things being equal so assuming no further.
No further rate changes many of those headwinds bleed back in over time, allowing for us to do what we've committed to which is returning capital to shareholders over time in terms of dividends. We always look at that as part of the CCAR submission and part of our broader capital planning.
But all we will see how the results come out from CCAR, what I would lean in on a point we've had to make a number of times now which is given where we're trading it makes a lot of sense to be doing buybacks.
And so we will likely continue to lean back way as opposed to doing a lot to change the dividend, but stay tuned as the capital planning continues to evolve.
And your next question comes from Mike Mayo with Wells Fargo. Your line is open.
Hi, could you talk some about treasury and trade solutions both.
The first quarter level, I guess security services the better.
What youre seeing just combination of rates and more corporate.
Demand in the complexity around the the global situation and then just more generally.
The joint calling efforts you guys are doing with with lending and payments so specific to the general.
Well, maybe I'll kick off with a couple of pieces and then hand, it over to Tim Mark.
What we've seen frankly across the board this quarter has been the value of our global network that we talked about be it in markets. We had a lot of strong.
Corporate activity in FX on net we saw tremendous activity for TTS.
Greg with all commercial banking clients.
And we saw a lot of linkages across and obviously it was a strong quarter for us in trade because again with the global network the ability to provide clients with end to end solutions in this interesting world that we're living in.
It's something they really rely upon us. So you saw where we now trade loans up 16% you saw really many of the drivers that we laid out for you in Investor day, and performing particularly strongly but not quite and I pass to you.
A couple of comments, so one I would point out that again, we had a strong quarter in TTS the revenues were up 18%.
Versus the prior quarter that was year over year versus the prior quarter up 8% and yes. Some of that was due to rates playing through so net interest income was up 18% would look at the noninterest revenue that was up 19%. So to your point and we're seeing good fee revenue growth play through as well security services had a good quarters was up.
66% revenue year over year end.
And part of that was through fee revenue growth as well. So as you said good strong engagement with clients.
And helping them think through some of the uncertainty that's out here, particularly as it relates to supply chains, helping them work through that with their partners through the trade lending growth that we're seeing.
We're making good headway with the commercial client offering as well so I would say a very good quarter very strong quarter for TTS, and we expect that momentum to continue and.
To your question about Sip joint calling effort.
Making sure that we're friends that keep managing.
On the synergies that we talked about cross calling efforts and.
I think <unk> and <unk>.
This case with the with how those are.
Going in this quarter was an example of that.
And your next question comes from Matt O'connor with Deutsche Bank. Your line is open.
Hi, I was hoping to follow up on the Russian acquired here update on Russia, because I guess the first question.
Why did it take us a bigger kind of stab at reserving for maybe the severe stress scenario I'm not really the expert on what's going on but from what I read it feels kind of like.
Broadly speaking kind of other corporations banks, but if corporations are taking kind of more material losses versus 1 billion on an pattern.
And then just a related question if you could elaborate on what the broader impacts us I guess I'm a little surprised that the reserve for that was as big as the dirt.
Correct.
Russian reserve or roughly the same.
Sure why don't why don't why don't I take that so the first thing I'd say is that we're.
We're not attempt right. So so we ended the year last year 2021 at $9 $8 billion. We ended the quarter at $7 $8 billion of exposure. So we brought the exposure down by $2 billion inside of the last three months.
Also point out that a number of things we are important components of that so if you look at slide six you'll see that the loans and these are both ICD and and consumer loans, largely ICD largely corporate loans have come down by $600 million and that's really been a reduction in.
Our risk exposure right, so borrowers paying down.
US limiting the extension of new credit.
Et cetera, the <unk> securities have come down $600 million and that is really a reduction mostly driven by sales. So we've gotten out of those securities. Yes. There are some mark to market losses, but they're not material that flows through OCI and not material.
You can see that the off balance sheet.
Unfunded commitments have trended down as well deposits and cash equivalents have gone up because we've actually seen the repayment of those loans come back and we've been we've had to put that cash with the central bank.
Given some of the restrictions that are there we've been actively working down the reverse repo assets, which are really secured with sovereign bond exposure and we've been bringing down the third party cross border exposure. So a lot of hard work has gone into bringing that exposure down to 7.8, and if you think about the $1 billion.
That I referenced is kind of a net of $6 eight right. So the second part of your question was how do we think about reserves and what are those different components.
Well, we look at the reserves in terms of the actual named specific loan exposure, we have how we're rating those entities in this environment and then we actually run that through our models and we come up with.
The appropriate reserve tied to that ratings, so that $1 billion is related to the direct exposure that we have.
Two these Russian clients and entities the broader impact.
It takes into consideration the spillover effect that might impact other names or other industries outside of Russia due to things like commodity pricing and what have you and then there's a third component that is tied to the global uncertainty that gets created from a dynamic like this so we built the reserves.
Considering those multiple components the last point I'd make is that when you look at some of the names. There are significant number of names that are large multinational names that have this exposure in the country and they provide parental support for some of the exposure that's here as well. So we've really tried to take a a.
Detailed comprehensive look at this and build the reserves in a way that we think are prudent recognizing that there are other scenarios that could play out that we want to be prepared for and have a view on as well.
And our next question. Thank you. Our next question comes from Gerald Cassidy with RBC capital markets.
Hi, Jane Homer.
Hey, good morning, Hey.
Mark.
You did a good job in describing the CET one ratio of work for us.
What's new and none of us have experienced yet on an ongoing basis.
Sarkar 49 basis points.
<unk> reduced your CET one ratio can you share with us how does that work on an ongoing basis is that a number that's going to stay constant or does that change every quarter based upon.
Increase or lower risk in this area.
It's an increase in our risk weighted assets, that's really tied largely to the derivative exposures that we have.
What I'd say is obviously, how one manages their exposures in.
And balance sheet and engagement with clients will impact that but importantly, it's a market dynamic that needs to play out as well so as more RW way in capital is required for these types of positions.
There has to be it's going to impact returns and it ultimately will impact pricing.
As a as the market starts to to incorporate this now higher requirement and so it will continue to evolve the thing I'd point you to is that.
As we think about managing our businesses and in particular markets you would've heard us mentioned at Investor day that we're looking continually looking for opportunities to optimize the balance sheet and optimize our wm right and so we talked about.
Getting a revenue to <unk> for our markets business and we're actively working at that now.
That's going to be important as we continue to manage not only the balance sheet requirements that we have but our intent to try and return more capital to shareholders and improve our returns.
Your next question comes from Ebrahim <unk> with Bank of America.
Good morning, Jean Marc.
Good morning, Hey, but I'm somewhat.
Just sticking with capital.
Two part question one.
It's continued to move higher Mark is there anything you can do to hedge the OCI and secondly, if you can walk us through our own banner mix. If you do strike a deal at some point this year what are the implications on capital at deal announcement versus deal close would appreciate that.
Sure. So look I mean, what we've built in what we've got built into the forecast and the walk back to 12%.
Is the forward curve as of the end of the quarter. So that's what we've we've built in.
As we think about that that was a pretty sudden move through the quarter.
160 basis points on the two year in the quarter. That's now in the expectation we have built in an assumption around.
More rate moves that could happen just just as a bit of cushion as I think about the outlook and as I think about the work.
We do have hedges in place as it relates to.
Some of the positions that we have and as it relates to OCI and will continue to manage that to ensure we reduce the risk from rate increases, which by the way we've been actively doing over the past couple of years. If you look at kind of how the balance sheet has evolved we've been moving from out of <unk> and into held to maturity.
Over the past couple of years, reducing that risk of a negative impact to OCI and if you look at the <unk> one we've cut that down from as high as $60 million to about $30 million or so so we've been actively managing.
With an eye towards how do we how do we reduce that sensitivity.
If you will.
Why don't I, let Jane kind of touch on the Mexico piece.
So.
As I said, it's quite a complex separation and transaction as we're going to be separating our market, leading and sizeable ICD franchise in Mexico from the consumer and the E <unk>.
<unk> business.
Business that we got with that we'll be selling eight will take a bit of time as we work through this.
It's a fantastic.
It's a fantastic franchise and.
As we are starting some very preliminary conversations with the buyers, it's attracting a lot of attention.
Because it is a once in a lifetime opportunity here and we have a range of options I'm sure ahead from the IPO sale et cetera, but this is going to take time, we want to do it properly and.
In my time, I mean, a few quarters. So I think we're not anticipating at this very early stage, whether that would be this year or early next year.
But mark why don't.
I pass to you in terms of how we look at the Cta impact of that one yes. So look I mean as you said the entity.
What's going to be important is that we make the right decision.
For the people for the business and equally important for our shareholders and we're going to we're going to absolutely make sure. We do that in terms of the way. This plays out as I think you're aware and Ive mentioned before that we've got.
Roughly a 2.8 $2 9 billion currency translation adjustment.
Related to our consumer Mexico franchise, and so when we when we signed the deal we will have that flow through.
The P&L it ultimately gets offset at closing and so again you would have another timing difference between the accounting impact and the ultimate economic impact, but that's kind of the.
The component that would play through it signing whenever that were to occur.
And your next question comes from Betsy <unk> with Morgan Stanley . Your line is open hi.
Hi, good morning, good morning.
Couple of questions, one a little bit ticky-tacky, Pat on your NIM sensitivity.
Given the 10- Q1 0-K.
It would be helpful to understand how much of that NIM sensitivity is coming from the non legacy businesses. You know how much of that NIM sensitivity is going to be retained.
After you sell out.
Businesses that you've identified.
I don't have that that breakout Betsy.
We will have to kind of get back to you on that I don't have that breakout.
And your next question comes from Vivek <unk> with Jpmorgan. Your line is open.
Hi, Mark James a quick question, probably more for Mark.
Arguably the increase from the higher volatility that you would've seen in your.
Trading assets in the first quarter, what was the offset to that.
So look in the first quarter the major the major driver of that we've seen.
<unk> is.
It's really on the credit risk side from a from an <unk> point of view and that was really tied to soccer.
That's the biggest that's the biggest driver of the fourth quarter, the first quarter of <unk>.
<unk> increase that we that we've seen.
No.
<unk> from a market risk point of view.
<unk> was mostly flat.
Due to.
Reductions in trading book securitization.
No.
That was kind of those are the kind of the main drivers there.
What I'd say is and you said he had this loud and clear from PATCO at Investor Day, a lot of the strategy here is also making sure that we're optimizing our capital we're very mindful around the returns that we're generating and how we allocate and deploy capital.
This is a quarter that.
And the impact of running the businesses have been very mindful around that so that also helped yeah. So like I said securitization.
It would be an offset as would somebody equities derivatives.
And as a reminder, ladies and gentlemen to ask a question simply press star one on your telephone and please do limit your questions to one.
Our next question is from Steven <unk> with Wolfe Research Your line is open.
Hi, good morning.
So Steven.
Okay. So.
It was encouraging certainly to hear you guys reaffirmed the 'twenty two guidance for low single digit revenue growth mid single digit expense growth, but just given the positive surprise on revenues in the quarter. The number of rate hikes getting baked into the forward curve has increased since your last update I wanted to get some perspective on just why you didn't revise the rep.
The new forecast higher and just given the pace and timing of investments as we look ahead to 2023 and beyond how should we think about the timing for when you guys can get back to positive operating leverage.
Yes look on the.
Let me kind of take that so on the on the revenue side as you would've heard us describe there have been puts and takes that are played through the quarter and there's still a fair amount of uncertainty that's out there and so while there have been increases as it relates to rates.
And we've seen and expect to see some benefit play through for that.
Also Ben.
A an impact on banking revenues as we see the uncertainty, creating a dynamic where corporate clients are are pausing, particularly as it relates to equity capital markets and debt capital markets and so as I mentioned, there are offsets that that play out and so we felt comfortable.
Kind of maintaining the guidance on the on the revenue top line in terms of the expenses.
As I mentioned at Investor Day.
The spend that we have going on in expenses is critically important.
And we're still growing them as it relates to transformation and as it relates to business led investments on the business led investment side. The good news is that we're starting to see some of the topline strength play out not just driven by rates, but also driven by things like these which is what we forecasted on.
On the transformation side, we continue to make progress and we've talked about how critically important that is to our operations going.
Going forward, we expect that that will peak or art. If you will as we talked about at Investor day, and that will occur in the near term and will be an important.
Offset if you will to the structural expense base that we have as the efficiencies from those spending from that spending excuse me plays through.
And just to chip in as well in a week, we committed that they all kept the investments on our transformation and growth. We think that both critically important we're equally committed to managing our expense base prudently and current xactly.
And I think the piece that if there's any comfort from our numbers is we're getting on with it.
<unk>.
Hanging around here, you've seen us do that with the divestitures, we're doing the same on.
On our transformation and investment.
Investment side.
Getting very focused on making sure we deliver the results you would expect from them.
You'll see something similar when we start.
Divesting and closing the different transactions.
We'll talk to you about what we're doing on getting those any stranded expenses out.
And getting getting focused on that so you can expect us to see us getting pretty aggressively after different elements of our cost base.
As the timing is appropriate.
And your next question comes from Ken <unk> with Jefferies. Your line is open.
Ken Please check your mute button.
Hmm.
All right if I may move on to the next.
Next question is from Jim Mitchell with Seaport Global Please go ahead.
Hey, good morning, Mark and James maybe just a question on just following up on the last question do you have a specific update for NII growth. This year given the forward curve is substantially higher than 100 basis points and how youre thinking about NII overall, and then as a subset of that how do we think about your deposit base.
Sure.
Institutional deposit base acting in an aggressive qt environment. Thanks.
A short look.
Im not giving.
Kind of guidance kind of broken out if you will for the revenues we're standing by the full year guidance that we've that we've talked about obviously with rates moving the way that they have we would expect that we would see.
Some improvement on the NII line, but I haven't given specific guidance broken out for the two for the two lines.
In terms of the deposit base that we have as you know we've got.
Mix of consumer and corporate client deposits, we skew a bit more heavily towards the corporate client deposit base that comes with generally comes with a higher beta and so they are likely to be more reactive to and reactive sooner to the increase in interest rates, but in quant.
Notate of tightening will certainly have a.
A longer term impact on the level of deposits that's out there, but with that said our plan both in the near term and as we've.
Laid out the Investor day forecast don't hinge upon significant growth in deposits, we would expect some growth but growth consistent with kind of.
Pre pandemic levels, but that's not outsized growth and we believe our strategy, which is broader than just going after deposits, but really is around solutions for corporate clients.
And the full spectrum of financial services for the consumers that we focus on will allow for us to capture an appropriate level consistent with how the economy evolves.
And your next question comes from Erika Najarian with UBS. Your line is open.
Hi, actually Toback and Jim asked my question I think it might be helpful to consider.
For next quarter to break out the NII guide given the.
Obviously, the uncertainty that we all have on forecasting trading and investment banking. Thanks, so much.
Thanks Erica.
The next question comes from Betsy <unk> with Morgan Stanley .
Hi, I just wanted to ask about how youre thinking about the U S card business. This is an area where it feels like in some areas you've been lagging a bit and another areas.
Accelerating and I just wanted to get a sense as to how youre thinking about the trajectory of this year in particular.
Since it's one of the better margin businesses that you've got.
And it also obviously keys into the reserve ratio a bit thanks.
Yes.
Im surprised you feel even lagging because we don't we certainly don't see that I've been really pleased with how the cards franchise has been performing.
Multiple different drivers on client acquisition on the spend on some of the new propositions that we've been bringing in you had been on and about the greatest on proprietary card installment lending credit, 75%, albeit from a small base this quarter.
In multiple different dimensions.
But I think it's.
We're very pleased to see the business actually picking up and as I said, that's it my in my prepared remarks, I like where the business is headed.
I think part of it is I I am more positive around the U S economy.
The U S consumer than really any other geographies around the world and that helps with so much momentum in the labor market.
Still quite a bit of excess.
Excess liquidity sitting there in the in the back pocket of all consumer is in very healthy balance sheet.
With that I think we have peaked in the payment rate.
We're just starting to see the first signs of that coming down and I think that's good because it is a return to double it it should be the return this year to a more healthy behavior. The spend is obviously being quite remarkable it's up in the mid 20%.
Also great to see the experience side in that services side coming back in again on and Thats, what <unk> been seeing it in travel we've been seeing it in apparel people like getting dressed up to go to dinner again in their restaurants.
Yes, it does different things, it's nice to see things coming back to normality, So I'm pretty positive both from cyclically, where this is headed the recovery from Covid, where it's headed and I'm also pretty I'm pretty happy with the strategy the unearned laid out and the progress we're making against it so I think.
Some good things ahead here.
And the only thing I'd add is.
Couple of numbers right. So the sales are up 24% year over year exceeding pre pandemic levels across the categories acquisitions are up 23% year over year.
Bringing on new new card customers into our into our family. If you will revenues are down 2%, but you really have to look through the investments that we're making in acquisitions and the rewards cost associated with those that impact that revenue being down 2%. If you adjust for the acquisition cost actually our revenues would be up.
1% year over year, So I agree completely with you Jane which is we're very pleased with the progress here, we're seeing similar momentum start to play through on the retail services side as well the.
The sequential performance on average interest, earning balances is a good signal for how things will play out and we continue to feel good about the growth we forecasted towards the back half of the year.
And our next question comes from Andrew Lim with Society Generale. Your line is open.
Alright, thanks for taking my questions.
I get the impression that maybe people are surprised by your NII guidance because.
And the policy.
Given it is based on our run off balance sheet, whereas appears place it on a static balance sheet and I think you mentioned.
A few quarters ago.
If it wasn't the same basis stuff that balance sheet that youll NII uplift would be about $2 to 3 billion 400 basis point parallel shift.
Something youre still sticking to.
And then within the safe with that how much what that is.
Due to the shorts have increased by 100 basis points I think you'll you'll move much less sensitive to the short term is that something that you can.
It was a rough figure on.
Sure and good morning.
I'd like to separate kind of NII guidance from the IRS sensitivity and disclosure that we have and so youre, absolutely right and I'm not moving we're not moving off of our already disclosure.
At all the analysis is such that with a parallel shift.
In rates.
Out of 100 basis points that we see somewhere around two and a half to $3 billion.
An increase kind of play through.
And as you know or as I've said before that's cross currencies with about two thirds of that being to non U S. U S currencies and the other third obviously being being U S. So that is that is still.
Our view from an ROE point of view, we're not we haven't changed that view.
And our next question comes from Mike Mayo with Wells Fargo.
Hi.
Follow up I guess, you know this is not new but the expenses or just.
Hi.
And we haven't heard the 4% inflation number from others and maybe others are able to offset that a little bit more in the 1% due to volume related when Jane you mentioned you don't expect this level of capital markets to be sustained so I guess I'm just.
I'm Griping about something that's been around for a while I get it you have the Reg order you have the transformation business sales you said you underinvested in the past and everything else but.
You have 200 basis points between your expense and revenue growth. It just seems so high.
But youre also guiding for what I think is like 300 basis points of that spread.
For the full year. So does that mean this is as bad as it gets and that spread should be narrowed and.
Just some of those other inflation volumes expenses expenses generally because it's it's frustrating for investors.
Yes.
I don't know why don't I take that in <unk>.
Try and talk through it. So the first thing I'd say is that the 10% growth that we have in the quarters consistent with the guidance I just wanted to be clear that in Investor day, That's what we talked about we.
We would love for that number to be different but we understand and we know that this is what's required to get the franchise to where it needs to be and so we're taking those hard decisions. We're spending the money, where we need to spend it we're being diligent about that to make sure that we're not being wasteful in that effort, but we don't want to create or go through.
The things that we've gone through in the past in the way of under investing and so we're going to avoid that the second thing is and you and you acknowledged that kind of in your reference to transformation.
Business led investments on the structural investments.
And I should say about half of that is from inflation, so not the full 4%.
A portion of it is also from non consent order risk and controls spend that we're making things like financial crime unit things like cyber spend things like the work, we're doing around our wholesale credit operations and important things and there are some productivity savings that play through that and then the final piece on the volume.
Related is the transactional cost that are associated with the activity that we do on the trading side there.
Spend that we make in order to drive.
In order to drive that activity and the mix matters and so while revenues kind of play out in one way for the quarter the mix of.
The market's activity impacts the level of volume related expenses that.
That's generated through those transactions. So those are a couple of things.
Again were consistent with guidance, we believe we're on track for the guidance, we gave for the full year of mid single digits.
And we're looking forward to generating the efficiencies that come out of this spend and put a dent in our structural expense base over time.
Yeah.
And let me jump in as well, Mike because this is something mark and I with very very aware of we are managing it.
In excruciating detail on multiple dimensions.
We are taking the lessons that we've got it Matt Yeah, we've got to take some of the short term pain here in order to get us into the position we need to be in the medium term and the long term.
And from the.
The stranded costs and the divestitures, we know we will have opportunities that we talked about investor day also.
Being in a position to simplify the management structure and take out some of the structural expenses. There. So this is going to be an area of <unk>.
<unk> focus for Mark and I that we make sure that not only managing the hawk and ensuring there is one.
But also that we generate the benefits from all shareholders from all of this.
I feel exceedingly high accountability for as a management team we get it.
And there are no more further questions I will turn the call over to Jim Landers for closing remarks.
Thank you everyone for joining us today, if you have any follow up questions. Please reach out to IR enjoyed the day. Thank you.
And this concludes Cds first quarter's earnings call you may now disconnect.
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