Q3 2022 Citigroup Inc Earnings Call

Hello, and welcome to city third quarter 2022 earnings call with the Chief Executive Officer drain James Frazer and Chief Financial Officer, Mark Mason today's call will be hosted by Gen. Lantus head of Citi Investor Relations. We ask that you. Please hold all questions.

Until the completion of the formal remarks at which time, you'll be given instructions for the question and answer session. Also as a reminder, this call is being recorded today. If you have any objections. Please disconnect at this time Ms. Lantus you may begin.

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

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.

<unk> those described in our SEC filings.

With that I'll turn it over to Jane Thank.

Thank you Jen and thanks, everyone for joining us today.

Well, we are certainly still living through interesting times and overall I am pleased with how our bank is navigating through them.

As you'll hear from me shortly we continue to focus intently on executing our strategy and our transformation as we outlined at Investor day, well supporting our clients in this complex environment.

So before I get into the quarter, let me highlight some observations about what we see going on around the world given our unique vantage point.

Global macro outlook that we shared with you over the last couple of quarters has been borne out.

There is accumulating evidence of slowing global growth and we now expect to experience rolling country level recession, starting this quarter.

The severity and timing of these recessions depend where in the world you all although persistently high inflation is driving a global softening of consumer demand for goods.

In the eurozone and the UK the supply shocks I'm most of the growth prospects of deteriorated sharply and headline inflation is running at nearly 10%.

All eyes are on this winters weather forecast and the energy supply.

The U S economy, however remains relatively resilient. So while we are seeing signs of economic slowing consumers and corporates remain healthy as all very low net credit losses demonstrate.

Supply chain constraints are easing the labor market remains strong. So it's all a question of what it takes to truly table persistently high core inflation.

Now history would suggest that that will be quite a lot and for some time. Therefore, he could well see a mild recession in the second half of 'twenty three.

We believe the U S economy is well positioned to withstand it all else being equal in the geopolitical arena that is.

Finally in Asia, we continue to be concerned with China's Covid, Lockdowns, which took a big bite out of economic activity than anticipated exacerbated by a lack of intensified macro stimulus.

It is geopolitical risks and rate the.

<unk> discussions with our corporate clients worldwide and I'd say, we're more focused on market liquidity generally and counterparty risk the not credit risk in the near term.

Nonetheless, we are planning conservatively and we are prepared for all environments.

Against this backdrop today, we reported net income of $3 $5 billion.

EPS of $1 63, and then our TCE of eight 2%.

We grew revenues by 6%, including a gain on sale of our consumer business in the Philippines.

While we had excellent performance in some areas our results could have been better in a few others.

Services delivered another very strong quarter.

T T S. So revenues up 40% year over year with growth in each business and didn't seize.

Key drivers of our strategy such as wallet share trade loan originations and cross border transactions are all trending strongly in the right direction and are ahead of our plan.

Security services was up 15%.

Assets under custody being impacted by the declines in equity market.

We havent boarded over a trillion dollars in AUC and AUR as since the beginning of the year and we're seeing good momentum in issuer services in particular.

Market on the other hand came in lower with revenues down 7%.

In fixed income, we matched last year's particularly good showing through our longstanding strengths and FX offsetting a weaker quarter in spread products.

In equities reduced activity in derivatives switches are cool part of our platform led to lower revenues compared to last year's exceptional performance.

And we continued to optimize our W E in market.

<unk> with our strategy.

Banking was the business most adversely impacted by the macro environment across the industry with geopolitics and fears of recession.

Second reducing deal flows and the appetite for M&A.

We continue to invest in building out our teams for long term growth opportunities, including health care technology, and energy and I'm really pleased with the high caliber bankers, who are attracted to both our platform and our culture.

The environment for wealth management continued to be less than ideal our revenues were down only slightly and meaningfully up outside of Asia.

Strategy to capture the synergies with our businesses such as the wealth referral initiatives between commercial banking retail banking and investment banking is progressing well.

We also continue to steadily attract new clients and increase the ranks of all climbed it buys us as you'll see in all kpis.

Nonetheless, we are slowing the pace of some of the investments in this business given the environment U S personal banking further solidified its growth trajectory.

What sales anr interest, earning balances and customer acquisition all saw good growth and we continued to increase digital uptake.

Retail services joined branded cards, and having double digit revenue growth this quarter.

Retail banking also group contributing to a 10% overall revenue increase for the business.

As you can see in the presentation, our cost of credit reflects the quality of our loan portfolio in both IC G. M. P. D. W. M.

We're effectively no credit losses in IC G and U S consumer and CLS remain well below the pre COVID-19 levels.

Consumer loan growth together with a worsening of the macroeconomic assumptions drove a modest ACL build this quarter.

While our expenses are elevated as we continue to invest in our businesses and in our transformation. We are managing them closely and we remain on track to meet our full year guidance.

As you know the transformation is a multiyear effort.

We're committed to meeting the expectations of our regulators.

Even the paramount importance of safety and soundness.

We continue to be in constructive dialogues with them and are updating our execution plans as appropriate.

Stepping back I'm generally pleased with the advances were making in the key drivers of the strategy. We laid out for you in March and these are laid out on page three we're seeing good momentum and realizing client synergies I mean, attracting talent to grow the franchise.

In terms of simplification, we continue to make progress on the divestitures of our international consumer businesses.

The elimination of their associated stranded costs.

Close the sale of the Philippines during the third quarter and are on track to close block Rang, Malaysia, and Thailand during the fourth quarter.

We also announced the wind down of our consumer franchise in the U K.

Focus fully on the wealth franchise that I would also note. We're ahead of our plan in all Korean consumer wind down.

It continues to shrink our operations in and exposure to Russia to be clear our intention is to wind down our presence in that country in August we announced the wind down of our consumer and local commercial banking business as well.

We have been supporting our multinational clients in Russia.

We are now informing them that we will be ending nearly all of the institutional banking services. We offer by the end of the first quarter of next year.

That point Oney operations in Russia will be those necessary to fulfill our remaining legal.

In a tree obligations.

Turning to capital.

We returned $1 billion to our shareholders through common dividends during the quarter well buybacks continue to be on hold.

We will keep evaluating that decision on a quarterly basis as due to increasing regulatory requirements, we build our CET one ratio to 13% or so by mid next year and that includes a management buffer of 100 basis points.

We ended the quarter at a C E T. One ratio of 12, 2% as we actively managed all all W. A usage throughout our lines of business.

Lastly, our tangible book value per share increased to $80.34.

So the bottom line is that while the environment is a challenging one and we expect it will remain so we continue to focus relentlessly on executing the strategy. We presented to you at our Investor day and are making steady progress.

Now I'd like to turn it over to Mark and then we'd be delighted as always to take your questions.

Thank you Dan and good morning, everyone I'm going to start with the firm wide financial results focusing on year over year comparisons for the third quarter, unless I indicate otherwise and spend a little more time on expenses credit and capital.

I would turn to the results of each segment and end with full year 2022 gardens.

On slide four we show financial results for the full firm.

In the third quarter, we reported net income of $3 5 billion and EPS of $1 63, with an oral TCE of eight 2% on $18 $5 billion of revenues embedded in these results are pretax divestiture related impacts of approximately $520 million largely driven by a gain on.

The sale of the Philippines consumer business.

Excluding divestiture related impacts EPS in our OTC, he would have been $1 50, and seven 5% respectively.

In the quarter total revenues increased 6% on a reported basis, excluding divestiture related impacts revenues were down 1% as growth in net interest income was more than offset by lower noninterest revenue.

Net interest income grew 18% driven by the impact of higher interest rates across the firm and strong loan growth and PWM.

Noninterest revenues were down 12% on a reported basis and 28% excluding divestiture related impacts largely reflecting declines in investment banking markets and investment revenues and well.

Total expenses of $12 $7 billion increased 8% and 7% excluding divestiture related impacts largely driven by transformation inflation and other risk and control initiatives.

Cost of credit was $1 $4 billion, driven by net credit losses of approximately $900 million in an ACL build of approximately $500 million, primarily driven by loan growth and PWM.

At the end of the quarter, we had $18 $7 billion in total reserves with a reserve to funded loan ratio of approximately 2.5%.

On slide five we show net interest income loans and deposits.

In the third quarter total net interest income increased by approximately $600 million on a sequential basis and approximately $1.9 billion on a year over year basis across the firm driven by higher interest rates management of deposit repricing.

And loan growth in P. B W. M.

Average loans were down by approximately 2% largely driven by the impact of foreign exchange translation.

And lower balances in legacy franchise.

Excluding FX loans were largely flat.

And average deposits were down by approximately 2%.

Largely driven by declines in legacy franchises and the impact of foreign exchange translation, partially offset by the issuance of institutional Cds as we continue to diversify the funding profile of the bank.

Excluding FX deposits were up roughly 1%.

And sequentially, our net interest margin increased by seven basis points.

On slide six we show an expense walk for the third quarter with the key underlying drivers as I mentioned earlier expenses increased by 8% and 7% excluding the impact of divestitures too.

2% of the increase was driven by transformation investments with about two thirds related to the risk controls data and finance programs and approximately 25% of the investments in those programs are related to technology.

As of today, we have over 10000 people dedicated to the transformation about 1% of the expense increase was driven by business led investments as we continue to hire commercial and investment bankers as well as client advisors in well and we continue to invest in the client experience as well as front office onboard.

<unk> and platforms.

1% was due to higher volume related expenses across both PWM and ICD.

And approximately 3% was driven by other risk and control investments and inflation, partially offset by productivity savings and the impact of foreign exchange translation.

Across all of these buckets, we continue to invest in technology, including systems and hiring people, resulting in our technology related spend up approximately 16% for the quarter.

On slide seven we show key consumer and corporate credit metrics over the last several years, we've been disciplined with our loan growth and consistent with our risk appetite framework.

This framework includes credit risk limits that consider concentrations, including country industry credit rating and in the case of consumer FICO scores and importantly, these limits apply across the firm in aggregate.

And we continuously analyze our portfolios and concentrations under a range of stress scenarios.

As a result, we feel very good about our asset quality and reserve levels.

As I mentioned earlier, our reserves to funded loan ratio was approximately two 5%.

And within that PWM and U S cards is three 7% and 7.5% respectively. Both right around day, one seasonal levels and PWM. The majority of our card portfolios skewed towards higher FICO customers and while we have started to see signs of normalization and bolt.

Portfolios NCL rates continued to be less than half of pre COVID-19 levels.

C G portfolio of our total exposure over 80% is investment grade.

And non accrual loans remained low and are in line with pre pandemic levels at about 40 basis points of total loans.

We are well reserved for a variety of scenarios and we continuously evaluate our scenarios to reflect the evolving macro environment.

On slide eight we show our summary balance sheet and key capital and liquidity metrics. We maintained a very strong balance sheet of our two four trillion dollars of assets about 23% or $557 billion or high quality liquid assets or <unk>.

And we maintained total liquidity resources of approximately 967 billion.

The combination of earnings generation capital from exits and RW, a optimization drove our CET one ratio up by about 25 basis points to approximately 12, 2% on a standardized basis, which remains our binding constraint.

And our tangible book value per share was $80.34 up 2% from a year ago.

On slide nine we show a sequential CET, one walk to provide more detail on the drivers this quarter and our target over the next few quarters.

First we generated $3 $2 billion of net income to common which added 27 basis points second.

Second we returned $1 billion in the form of common dividends, which drove a reduction of about eight basis points.

Third the interest rate impact on OCI through our E F Fs investment portfolio drove a five basis point reduction.

Changes in the DTA drove a three basis point reduction.

And finally, the remaining 14 basis point increase was largely driven by net RW way optimization.

In light of our increasing regulatory capital requirement, we ended the quarter with a 12, 2% CET one ratio 25 basis points higher than last quarter.

Importantly, 12, 2% is above our current regulatory requirement of 11, 5% as of October one.

And above 12%, which would be a regulatory requirement as of January one of next year. As we said last quarter. We continue to gradually build to our CET one target of approximately 13% by mid year 2023, which includes the current 4% FCB and a 100 basis.

<unk> management buffer.

On Slide 10, we show the results for our institutional clients group revenues were down 5% as strong growth in services was more than offset by lower revenues across markets and banking.

Expenses increased 10% driven by transformation business led investments and volume related expenses, partially offset by productivity and foreign exchange translation.

Foster credit was driven by a reserve build of $86 million.

While deterioration in certain macro variables did lead to a build it was mostly offset by the release of a COVID-19 related uncertainty reserve.

And a release related to direct exposures in Russia.

This resulted in net income of approximately $2 $2 billion down 30% average.

Average loans were up 1% driven by 9% growth in TTS loans, partially offset by the impact of foreign exchange translation.

Average deposits were down 2% also largely driven by foreign exchange translation.

And ICT delivered in Aro TCE of 9% on Slide 11, we show revenue performance by business and the key drivers we laid out on Investor day, which we will show you each quarter.

In services, we continue to see a very strong new client pipeline and deepening with our existing clients and expect that momentum to continue in treasury and trade solutions revenues were up 40% driven by 61% growth in net interest income as well as 8% growth in N I R across all client segments. We continue.

See healthy underlying drivers in TTS that indicate consistently strong client activity with U S dollar clearing volumes up 2%.

Cross border flows up 10% commercial card volumes up roughly 50% and average loans up 9%. So while the rate environment drove about 40% of the growth this quarter business actions drove the remaining 60%.

This includes continuing to manage deposit repricing and deepening with existing clients and significant new client wins across all client segments.

Through the first half of the year based on the industry data that we see we estimate that we gained over 60 basis points of share with large corporate clients and client wins are up approximately 20% across all segments, including wins with financial institutions, which are up almost 50% diesel.

Include marquee transactions, where we are serving as the client's primary operating bank.

In addition, so far this year, we've on boarded approximately 5800 suppliers and we recently launched our innovative suite product in the U S and Asia, which allows clients to connect their liquidity and funding to their operating flows seven days a week.

In security services revenues grew 15% as net interest income grew 73% driven by higher interest rates across currencies, partly offset by a 6% decrease in noninterest revenue due to the impact of market valuations. We continue to be pleased with the execution and security services as we on boarded.

Approximately one trillion dollars of assets under custody and administration. So far this year from significant client wins and we feel very good about the pipeline of new deals.

And we estimate that we have gained about 60 basis points of share in security services through the first half of this year, including in our home market.

As a reminder, the services businesses are central to our strategy and our two of our higher returning businesses with strong linkages across the firm.

<unk> revenues were down 7% largely driven by spread products equities and <unk> actions as we continue to focus on returns.

Fixed income markets revenues were up 1% as strength in rates and FX was largely offset by continued headwinds in spread products and through the first half of the year, we gained approximately 40 basis points of share.

Equity markets revenues were down, 25%, primarily reflecting reduced client activity in equity derivatives relative to a very strong quarter last year.

The actions, we took to optimize our WMA and markets are in line with the strategy, we discussed at Investor Day, and we're making solid progress on our revenue to our WH targets. So far this year.

And finally banking revenues, excluding gains and losses on loan hedges were down 49% driven by investment banking as heightened macro uncertainty and volatility continued to impact client activity also embedded in the results is an impact of approximately $110 million related to <unk>.

<unk>, one loan commitments and losses on loan sales.

So overall, while the market environment remains challenging we feel good about the progress we're making as we continue to deepen existing client relationships as well as acquire new clients.

Now turning to slide 12, we show the results for our personal banking and wealth management business revenues were up 6% as net interest income growth was partially offset by a decline in noninterest revenue driven by lower investment fee revenue and well and higher partner payments and retail services expenses were up.

13% driven by transformation other risk and control initiatives business led investments and volume driven expenses, partially offset by productivity savings.

Cost of credit was $1 1 billion, which included a reserve build primarily driven by card volume growth.

Ncl's were 13% higher year over year from near historically low levels, reflecting normalization, particularly in retail services. Overall, we continue to see strong credit performance across the portfolios average loans grew 5% driven by strong growth across branded cards retail services.

And retail banking.

Average deposits grew 1% driven by growth across retail and well, partially offset by foreign exchange translation.

And PWM delivered in Aro TCE of nine 7%.

On slide 13, we show PWM revenues by product as well as key business drivers and metrics branded cards revenues were up 10% driven by higher net interest income we continue to see strong underlying drivers with new account acquisitions up 10% card spend volumes up 14% and <unk>.

Average loans up 12% retail services revenues were up 12% also driven by higher net interest income, partially offset by higher partner payments.

So despite payment rates remaining elevated the investments we've been making contributed to growth in interest, earning balances of 9% in branded cards and 7% in retail services and we expect to continue to grow these balances in the fourth quarter.

Retail banking revenues were up 2%, primarily driven by interest rates and deposit growth.

Wealth revenues were down 2% as investment fee headwinds, particularly in Asia more than offset net interest income growth.

Excluding Asia revenues were up 4%.

Client advisors were up 5% and we're seeing net new investment inflows and strong new client acquisition across our wealth business with new clients and ultra high net worth and wealth at work up 7% and 27% respectively for the quarter and we're also leveraging our retail network, which has driven.

Almost 50000 wealth referrals, so far this year.

While the environment continues to remain challenging we're seeing strong underlying business drivers as we execute against our strategy.

On Slide 14, we show results for legacy franchise revenues increased 66%, primarily driven by the Philippines gain on sale in the quarter and the absence of the Australia loss on sale in the prior year period.

Excluding these items revenues were down about 12% largely due to the loss of revenues from the Australia, and Philippines closings as well as the impact of the Korea wind down.

Expenses increased 6% driven by divestiture impacts in Asia, and Mexico loans and deposits decreased as a result of the reclassification of signed exits to other assets and other liabilities the closing of the Philippines sale and the impact of the Korea wind down.

On Slide 15, we show results for corporate other.

Revenues increased largely driven by higher net revenue from the investment portfolio, partially offset by the mark to market on certain derivative transactions and.

And expenses were down.

On slide 16, I'll briefly touch on our full year 2022 outlook with one quarter remaining in the year. We continue to expect full year revenues to be up in the low single digit range.

Excluding divestiture related impacts and within that we continue to see a shift with higher in net interest income offset by lower noninterest revenue.

So for the fourth quarter, we expect net interest income excluding markets to be up in the range of one and a half to $1 $8 billion year over year.

Clearly, where we land within that range will be a function of a number of factors including rates.

Loans and deposit volumes deposit betas and currency impacts.

Regarding full year expenses, we continue to expect expenses to grow by 7% to 8% excluding divestiture related impacts.

In terms of cost of credit it will be a function of the evolution of the macro environment normalization that we continue to expect in the cards businesses and loan growth.

And keep in mind that loan growth tends to be higher in the fourth quarter versus the third given typical holiday spending.

Before we move to Q&A I'd like to end with a few key points.

We continue to execute on the strategy that we laid out at Investor day.

We're seeing solid momentum in the underlying drivers of the majority of our businesses and as we said at Investor day, the financial path will not be linear, but we are confident we can achieve our medium term targets and a variety of scenarios.

And with that Jane and I would be happy to take your questions.

Thank you at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing star to once again that is star one to ask a question. Please.

Please note that in the interest of time, we are asking that you. Please limit yourself to one question and one related follow up only.

We will now pause for a moment to allow questions to queue.

Thank you our first question will come from Glenn Schorr with Evercore. Your line is now open.

Hello, Thanks very much.

So definitely good performance out of Cts.

Rates help a ton, but when I see loan growth in fees and I heard your comments about growth across all client segments I Wonder if we could pull back beyond you Peel back the onion, a drop and talk about those two in separate pieces. One is 60.

61% year on year NII.

NII.

How do betas factor in and go forward over the next year in terms of higher rates and how that factors through and then two what specifically is growing within TTS across those clients asking us to drive that high single digit growth.

Sure. Good morning, Glenn why don't why don't I take that.

And kind of take it in two pieces. The two pieces that you laid out so as you know Glen when we think about our business just in aggregate Theres, obviously, a split between the institutional and the and the consumer side, our TTS business, which is on the institutional side and these corporate clients they tend to have higher betas.

In General then obviously the retail banking side, what we've seen is that the betas have been increasing.

They are still running lower than what we had expected, but again they have been increasing and with continued expected rate increases I would expect that those betas will continue to rise in the coming quarters, we have been actively managing.

Deposit pricing and repricing with our clients on an ongoing basis. You know that this is more than just a deposit taking business. This is a business where we are looking to manage the operating accounts of our clients and bring the breadth of what we offer in our franchise to them and so those that's the <unk>.

A conversation we've been having with them and we will continue to do that with an eye towards growing the volume of deposits with both the existing as well as with as with new clients and so we we again expect to see betas to Rob Betas rise, but also expect to see continued contribution.

To the to the NII. The other aspect of your question is what else has been driving the activity I mentioned a couple of those things. So it's not just deepening with existing clients, but it's also onboarding new clients, we've seen cross border transaction value up about 10% the commercial cards.

<unk> is up meaningfully trade originations are up 27% and.

And so a lot of active engagement with our clients, we've been winning new mandates.

We've seen an uptick in client wins up about 20% and we've been gaining share.

Across those client segments and so hopefully that gives you a little bit of example of examples of where the benefits or momentum is coming from on the <unk> side.

<unk> growth of 8% is driven really by the cards the payments and.

And receivables as well as trade.

And I I, just jump in and say I think there's a bit of a mess.

Moment that the global environment is detrimental to activity, we see quite the opposite volatility is something in which we are very active in helping our multinational clients around the world manage the local footprint. We have and then the global network. We have is a tremendous add.

It right now so we're seeing a lot of a lot of positive momentum, which may not always be intuitive to everyone, but I think it's what makes the network the crown jewel at Citi.

No doubt I appreciate all that a quick one on markets.

Not quite as good as yours, but it comes and goes I know that's a function of last year was really strong it's a function of mix in any given quarter, but I really want to focus on is your comments on <unk>.

The other day optimization, what specifically are you doing I know, it's the banking book, but I did see you're taking down your.

Capital call and redemption facility lines, but in markets. What what are you pulling back on our Wi just which pieces of that business when that interesting.

Sure. So so Glenn you'll remember at Investor Day, we talked not only about our Wi optimization broadly, but specifically as it relates to markets and we talked about the idea of increasing our revenue to <unk> ratio for markets to about five and a half.

About five and a half over over over the course of that Investor day period. So we've been actively working across the markets business in equities.

In fixed income and spread products and looking for opportunities where they are low returning uses of RW way to either increase the returns on that or to actually kind of exited and that includes a host of different structures. It includes.

Working with clients to post additional collateral in some instances.

And in other types of structures like that that that improve the <unk>, including hedging and like I said, posting collateral collateral and taking a look at margin that we have in ensuring that we are in fact getting the most for that use of <unk>.

Yeah.

Thank you. Our next question will come from John Mcdaniel Mcdonald with Autonomous Research. Your line is now open.

Yes, hi, Thanks for taking my question Mark wanted to just clarify.

I think the expense guide is for fourth quarter. It seems like the guidance for the full year implies a fourth quarter step up to maybe $12 eight and change from 12, seven and a half this quarter.

That's the right read a little bit of a step up in the fourth quarter and is that just a pull through of investments and what would be driving that.

Yes, so again the guidance on full <unk> full year expenses Hasnt changed its the 7% to 8% ex the impact of divestitures that wouldn't imply a bit of an uptick there. It is on the heels of the continued investments that we're making and that flowing through as well as how we how revenues kind of play out and the associated.

<unk> compensation activity that goes along with that so nothing nothing extraordinary and consistent with the guidance given.

Okay, and I know, it's too early to give formal guidance for next year, but if we look at the Investor day slides. It seems to imply that expenses go up for a few years until you get to the medium term is that the right read and you know when I annualize, where you'll be exiting the fourth quarter here.

Implies at 51 billion or so next year as a starting point I mean is it fair when I read the Investor day slides and think about your investments that Directionally expenses, probably do go up next year.

Yes, John I would say as you know right. We will give guidance for 2023 next quarter, but I think if you think back to the Investor Day, and you think about some of the things that that we just commented on with regard to our services business. We would expect to see continued tailwind as it relates to net interest income.

We would expect to get to the heart of your question that we will continue to invest in the franchise that in.

And the transformation excuse me that that would obviously peak and then we would start to see the benefits start to play out from that in that medium term period, and so yes, you can probably expect some type of a tick up but I'll give you more details on that when we talk about the 'twenty three outlook in the next quarter.

Thank you. Our next question will come from Erika Najarian with UBS. Your line is now open.

Hi, good morning.

Yeah. Good morning, just wanted to.

I just wanted to take a step back your 11% to 12% medium term ROTC target had contemplated in 11.5% to 12% CET one versus the 13% that you're targeting two by midyear next year.

Also that you laid out on that same slide that you were targeting 2% fed funds.

Over the medium term, which seems kind of cute.

Right now, but I guess I'm wondering your confidence in where he said you're confident you can hit maybe medium term targets even with this creep in capital is it really that shift in the rate environment. That's helping you get there despite the higher denominator.

So thank you for the question look I think there are a couple of things to kind of think back on that still hold true which is the strategy that we've built I think is a resilient strategy and it really spoke to topline momentum that we expected not just through rate increases, but also through share gains and also through the business led investments that we.

That we're making in better leveraging the synergies and linkages across the franchise all of those things still hold true to the top line.

Right. The fed funds assumption has changed back in March I think we all were looking at a fed funds rate at the end of the year that was closer to one and a half or so and so now here. We are with the hikes that we've seen at looking at something certainly north of four four and a happened. So that's changed meaningfully but there are a number of other drivers that contribute to achieving that return.

<unk>, including its the medium term so call. It three to five years I think is how we characterized it and starting to see some of the benefits from the transformation investments that we're making to your point on capital. We are building to the 13% remember that is a byproduct of it.

A 4% SCB for this particular CCAR cycle and the strategy that we described includes a mix in our shift of revenues and earnings over time, a mix towards more stable P. P N, our and and more fee revenues that will contribute to.

I think a balance sheet and a mix that is certain that generates fewer losses stress losses than our balance sheet might today. So the contribution of those things. We think will drive that return target that we've set and we still remain confident about the now with that said there are unknowns that are out there I just spoke to.

Any of the nodes and so what happens with further capital requirements and the current regulatory regime, and what likely and what have you. It's hard to predict but we will manage to that as we learn and know more about it.

Got it and my follow up question is given cities valuation on book.

I think your your current and prospective shareholders are waiting for buybacks or potentially a return.

I guess, a two part question here number one.

Especially if you think you could stabilize or P. P NR in the stress tests.

<unk> hundred basis point management buffer versus you know one of your peers at CST that reported today and secondarily as we think about the return of buybacks I imagine that once you hit that 13%.

Buybacks could return, but how does the banamex sale potentially impact the timing as I recall, there's a currency translation adjustment that could be negative upfront at announcement.

If you want that you get that all back during close you know so I guess the real Big question here is how should we think about what are the mile markers for the return of buyback activity at Citi.

Okay. Thank you Erika Theres a lot lot there to unpack so if I forget anything just just please remind me, but it started at the beginning which is.

I know, where we trade in terms of book value and you know I'd love to be in a position, where we were buying back given that valuation.

With that with that said, we're going to take it quarter by quarter as I think you've heard us say and and evaluate what what buyback decisions and capital actions make the most sense in light of the environment that we're managing through it clearly managing through.

Uncertain environment.

We do as I, just said and as you've kind of mentioned as well, we do see our our business mix shifting over time on the heels of our strategy.

Do think that over time that will contribute as I said to the capital requirements that we have but that's over the medium term and we do still see a fair amount of volatility in the stress capital buffer and part of the reason that we have the management buffer is to deal not only with that uncertainty in the SCB, but also.

So in in interest rates and we're seeing volatility in both frankly, and so we'll continue to evaluate the management buffer as well to see what makes sense as we move towards more towards that medium term in terms of in terms of the Mexico transaction.

Youre right in terms of we have mentioned before the Cta component to that that is a timing difference we have factored that in to the path to our 13% by the middle of next year and a factor that into achieving the longer term targets that we that we set for ourselves.

Thank you. Our next question will come from Mike Mayo with Wells Fargo Securities. Your line is now open.

Hi can you hear me.

Yes, we can Mike good morning.

Look I look at the global network as a curse and a blessing.

I guess the curse part is simply the complexity and the expenses and Mark you said expenses should go up higher next year Youre not going to tell us for a few more months, but I'm. Just wondering when you think you can grow revenues faster than expenses I guess, it's not new news there rather than expenses, you got it and you're within that range in check.

And.

And we have to wait a year or three years or how long.

That complexity to get more simplified so revenues.

That's up to that expense growth and then on the blessing side. Marc You mentioned, you said gained share in those client segments I thought that was a little vague I mean, you talked about trade you talk about other activity connecting multinational corporations in this period of volatility. So if you could put a little more meat on the bones as far.

When you talked about market share.

There is tailwind on the revenues, while you have the headwinds on the expenses from the global network.

Mike It's Jay dumping it in because I I I do want to talk a bit about your point on the global network here I have to tell you I'm hard pressed to find a negative to that I bought in that block and we start off with a vision for the bank that we laid out in March it has to be the preeminent.

Banking partner for clients with cross border needs.

Who are those clients it is 5000 multinationals.

And their subsidiaries, it's institutional investors and the ultra high net worth clients without with a heavy tilt to family offices.

And we serve them on FX on liquidity management on that payroll on the supply chain as well as strategic advice financing et cetera.

That's four trillion dollars in daily volume.

80% of that credit portfolio is investment grade so when we're looking at it it's the multinationals it takes a high risk country at some of the client base with something that that global multinational is much more than the local players.

And so this is not a this.

It is a relatively simple high returning well.

Very well growing as we're seeing at the moment capability that is exceedingly hard to replicate so let me pass over to Mark in terms of what are some of the examples of different areas of the drive for Sip grants.

This is this is something as I said at the beginning this is a crown jewel.

It's not a source of complexity for the bank.

Yes, so Mike I'd say, a couple of things one what I said was that we continue to gain share and I referenced specifically about 60 basis points of share with large corporate clients.

And we obviously or not obviously, we're also winning more.

Mandates and gaining share with other client segments as well you know that the commercial banking client segment is one that we're focused on given the strength of our platform and its applicability to those size clients as well I mentioned that our wins are up and specifically they are up 20.

Sent the mandates that we're winning across all client segments and Thats, specifically with that five they are up almost 50%. So hopefully that gives you some sense of where the revenue growth is coming from the takeaway there is both existing as well as new clients as we as we kind of continue to.

To build out the platform and build out our capabilities to reach them. The second part of your question was around expenses and expenses growing and when will we have topline growth that.

Exceeds the expense growth and I would remind you that the work we're doing on the transformation as well as the business led investments.

Our multiyear almost by definition and important in order to drive savings in our structural cost base over time and at Investor Day, I think I pointed to by the time, we got to that medium term period, we would see our operating efficiency go down to <unk>.

And 60%.

I think we've been very.

Liberate about trying to give you guidance and update you on guidance for the full year and along the way and we will we'll be consistent in that discipline and I can certainly give you more color on 'twenty three as I as I mentioned earlier to Jon the next in the next quarter.

I guess, one clarification when you say you've gained 50 basis points of share with large corporate clients. What do you mean by share share of a what.

Yes, the wallet 60 basis point, not 50 60.

So market share with them.

Thank you. Our next question will come from Ebrahim <unk> with Bank of America. Your line is now open.

Good morning.

I guess, one just mark wanted to clarify your NII guide for one five to one point of view does this total and I'd hate to its own next markets or anything it is X markets ex markets any any any perspective or view on maybe see markets heading in fourth quarter, just given what's happened with the rate backdrop.

I don't.

Very intentionally don't forecast markets NII.

In a rising rate environment, you would normally.

See the markets NII come down it tends to be liability sensitive but.

We tend to focus on as you probably heard me say a number of times total revenues for this business and I guess, what I'd highlight is that in periods of uncertainty and lots of market volatility our businesses tend to perform well and so we'll see how the fourth quarter plays out there's obviously some CS.

Analogy to it that has taken place historically and so we'd have to kind of factor all of those things in but we'll have to see how it further evolves.

Thank you. Our next question will come from Betsy <unk> with Morgan Stanley . Your line is now open.

Hi, good morning.

Good morning, Hey, Betsy Hi, just two things one just another question on the expense side I just wanted to follow up with regard to marketing the stranded costs that you had talked about at the Barclays Conference and I'm I'm wondering if I got the message right, there, which is when you exit.

At the consumer businesses.

You know there is 25%.

That is generally managed through a TSA. So it's a service agreement and that expense will come off over time, and then there's another 25% which is.

Likely not to come off is that fair or is there a different message that I'm missing on that yeah that that's not fair.

But I appreciate the.

Clarity so I.

Bucket into three buckets. So one is you know.

When we do these transactions, both Jane and I have deep experience in this.

We tend to see about half of the costs go away to the buyer. So when we do the transaction when we do the sale as you pointed out about 25% is often in place as a as part of a transition service agreement.

So theres revenues that we get paid to offset that expense until things are totally transition and then that goes away and then the third bucket is what I call potentially stranded cost and what Jane calls not stranded cost right and that is big I say potentially because they're regional expense.

Does that get allocated to countries for example, their global expenses that get allocated to the region into the countries for example, and what we have to do and what we're doing is we're attacking what would otherwise be stranded cost and we're attacking that by telling each of the functions in the business that here's your portion of that too.

25% and come back and tell me, how you're going to rethink your org structure simplify your your processes in order to drive that cost out of the company right and so that's what we've been doing remember the expense base here is probably $7 billion. So you can break down kind of the population that we're talking about we've already.

<unk> stood up a team to work with each of the businesses in each of the functions around getting in front of that cost. So that we can drive that down over over the near term period of time and as Scott said, and then I just can't help myself, but jump in here and I think as Mark SUNS, finding that Marc Katz Mark.

And I bet, it's pretty maniacally focused around this but I'd say the amendment we've had a couple of the divestitures class. We have another three next quarter and if this continues on.

We already started on Australia, and the Philippines, and getting those expenses down as Mark said, there is going to be and we will not be shy in capturing as an opportunity to simplify our organization.

Further next year, when we have more diverse just closed and streamlining more of a regional management structure as more of the expenses at the global level. So there is there is more to come on that.

And we'll be we'll be looking to do that.

As I indicated at the Investor day that will be an important part once more of the.

Divestitures are closed them starting in 'twenty three going into 'twenty four.

Right. So you were marks potentially staying the course.

And Jane you are no stranded costs. The no stranded cost is in the guide medium term.

In terms of the time to get it out is that yes, yes.

Okay.

And I think thank you asthma is not talks about expenses you've got to look at the various different dynamics that are going on so yes, we've got investments into the transformation and then many of those translate into better efficiency as well as the safest strongest sun the divestitures translate into lower cost, but also we are.

Eliminate the stranded costs and we simplified the organization.

So you've got a number of different factors that we will make completely transparent to you at play in our expense base from the more structural dimension in the quarters ahead.

Thank you. Our next question will come from Matt O'connor with Deutsche Bank. Your line is now open.

Hi.

Can you guys talk about the pace of addressing some of the regulatory issues out there on the one hand, you got out of the AML consent order earlier, this year, which I think was probably a big positive.

But on the other hand, there wasn't article last month, suggesting regulators want you to go faster and I think we all know regulators always want things to go faster but.

But I did want to.

I ask the question. Thank you.

Yeah, we all want things to go faster.

Our clients all shareholders the management team regulators the Bordeaux. So I think we're fully aligned that I'm maybe.

Maybe if I take a step back on this one transformations our number one priority it will be a multiyear journey.

Prioritizing safety and soundness is a very important global bank.

Is it non negotiable for all of us.

Where are we I think we were delighted to see the AML consent order get close with the OCC, we continue to work on that.

The regulatory orders we have.

I have to say, we have call center and constructive engagement with our regulators. It personally I I find them to be very helpful and essential to two a success. We have got a lot to get done as you can see from the hiring numbers, we've been investing heavily in the talent and the resources that we need.

As we've also said this is not any kind of benefit all safety and soundness, but also in terms of our client excellence in delivery.

And ultimately for our shareholders as well.

The foundation that we need for this is largely in place and so mark and I and frankly, the whole management team, we're very focused on continuing to execute on the various plans, we submitted and the overall transformation of city from a strategic and another dimension, we obviously cant get more more details there.

And that because this is confidential supervisory information, but I hope that gives you a good feel.

And I guess when you say the foundations largely in place like what are some of the things that are missing or is it just a matter of.

Executing on the divestiture.

It's it's time, it's timing so some of the areas for example, where we're making technology investments.

Those ones.

Where we've had fragmented.

Honestly platforms when migrating them into a single platform onto an industry standards, where we've done where we've not been on one that that is.

What we want for the future.

And the scale and pace of the future.

Things take some time to put in place and but you can see from the investments we've made both head count and the shift from consulting to much more of our own people, you'll see the technology increase in that shift as well. So some of that is just the natural progression you would expect over time.

Thank you. Our next question will come from Jim Mitchell with Seaport Global Your line is now open.

Hey, good afternoon, maybe just on deposits and behavior, you guys clearly have a different mix by geography and by business.

Deposits ex currency were up 1% your peers were down close to three so.

How do we think about deposit behavior going forward given your mix of geography and business is it just overseas rate hikes have been behind the curve versus the U S. But we'll start to see more deposit outflows over there or do you think your deposits can hold up a little better.

Yes, it's a great question and so why don't I take that so a couple of things and you started to allude to it.

The first is that when you think about our business you've got about between ICD and our PWM business of 65, 35% split in terms of the deposits. You also have a U S dollar denominated versus non U S dollar denominated split.

That is pretty meaningfully meaningful as well and then to your point, we've got different currencies and different rate hikes by different central banks around the world.

And that then is juxtaposed against different date beta behavior from customers and so on the wholesale on the ICD side, we tend to see higher betas.

And obviously with rates increasing at a more rapid pace, we expect those to get closer to our expectations in the near term, we're starting to see many more hikes around around the globe are outside of the U S. And so again, we expect to see betas, which move at a or operate at a much lower.

Base level outside of the U S, but start to tick up and so over time I think we will see continued tailwind from an NII as but differences between U S and non U S activity.

Play out and and so that should play to our has played to our benefit I think and should continue to play to our benefit. If you think about what I've talked about before in terms of our I R E. Our interest rate exposure and the cash flow approach that we.

Are moving towards taking in some ways. It captures exactly that point and so this is if you see 100 basis point move in the curve cross currencies.

We're looking at as much of a as a $2 2 billion increase.

And when you look at that increase it skews more heavily towards the non U S dollar.

Then the U S dollar and that is in part because of the different moves in rate curves by currency as well as the different betas.

By by client type and U S versus non U S.

Right right. Okay. That's really helpful. And then maybe just second question just on the impact in the fourth quarter gift you're divest closing on three divestitures, how do we think about the P&L or capital impact of that in the fourth quarter.

I think I think I talked about the idea of.

The divestitures contributing.

A $3 billion for the full year of 3.1, or so billion dollars in terms of the capital impact for the full year 2022.

The combination of Australia, and the Philippines gets us to about 2.1 or so.

So the balance of the divestitures that we've scoped out for the fourth quarter.

Should close that gap, Thailand, Malaysia Bahrain.

The signing of a of China et cetera should close that gap to getting us to that $3 one.

With most of that skewing towards the first the first three Thailand, Malaysia Bahrain.

Thank you. Our next question will come from Gerard Cassidy with RBC. Your line is now open.

Thank you Jane good morning, Tyler.

Jamie.

You talked about your global footprint and the strength that gives you as an organization.

So maybe this question is.

Very appropriate for Citigroup, which is the following you guys have a real good window into the global financial markets and then there's been some disruption out there. We all know about what's going on in the U K pension funds you had the Swiss National Bank come into the New York Fed this week for $6 $3 billion of.

Currency swaps, we know there's a large broker having challenges over there. So can you guys give us a flavor what are you seeing from a stress standpoint.

What are the liquidity metrics that you're watching to see.

Some other stresses pop up how the global financial markets will handle that.

Yeah.

It's a it's a very it's a very good question. It's one we spend a lot of time on the other thing is as Mark alluded, we're constantly doing different stress test.

On the market don't clients on different areas and as I said at the I'm just in the opening remarks way more focused on the liquidity in the market at the moment and the impact on some on some counterparties much more than we are on a credit Fitch our credit.

Yes.

That could change over time, depending particularly what happens from the tail risk on the Gi politics here.

What do we think hang on I think a lot of the focus is in Europe , right now, which is sort of at the center of the storm.

We're seeing some areas, where there could be LNG supply constraints are impacting some clients who were watching industrial production moved to the U S. For example, which are the places where the cost of production is lower.

A potential buffer.

For.

Some of the slowdown in U S manufacturing and the like because the demand for goods soften for example, and we're seeing areas where.

Clients on the collateral from them, whether it's a situation of our in our intense volatility that hit sort of a price drop as we saw in gilt is having an impact on liquidity and therefore, margining, which is what happens and has been happening with the UK pension funds with the derivatives. So a lot of the.

Yeah as we look at is the what's the collateral behind different institutions as we have done with the <unk>.

Commodity players earlier I'm, yeah, we've been looking at some of the L. D is at the moment and and as we see different stresses with jumping on it I think the central banks are also ready to jump in as needed.

And it suddenly attuned to the importance of Genesee in these situations as well.

As a.

Large global institutions like ourselves as to how do we help support the market.

Benefit for all bankers, because we're in a strong position on all of our.

Capital and liquidity on balance sheet, and our credit portfolio.

Now as you can see is extraordinary at amendment zero losses, and I see Gee this quarter again.

We're in a position to be able to jump in and play an important role, but it's a it's a bit of whack a mole I would say.

Very good and then Mark just as a follow up.

You touched on your investment banking numbers in your markets numbers, and yes investment banking for everybody who has been a struggle obviously this year.

Your advisory numbers actually were better than your peers on a year over year basis in terms of growth, but DCM was quite a bit weaker can.

Can you kind of give us a little more color there and also how does the pipeline look going into the fourth quarter.

Yeah sure so look as as as we've all seen the wallets have been under.

Meaning full pressure year over year down more than.

50%, we did show some strong performance in parts of the business. We've been hiring frankly is as Jean has mentioned before in filling in gaps that we have across the portfolio in health care Tech energy et cetera, and feel good about that and we're seeing benefits from having made those those hires.

C. M is really more of a function of low deal volume pretty much across the board and there really isn't a whole lot more to it than that but as you know investment banking as part of the strategy that we discussed at Investor day, and a key part of that and we will continue to invest in it and ensure we get.

The productivity out of it that that the investment warrants, but really not a whole lot more in D. C M beyond.

The low deal volume across the board.

Thank you. Our next question will come from Vivek <unk> with Jpmorgan. Your line is now open.

Thanks, Thanks for taking my questions a couple of questions for you Firstly Mark I just wanted to clarify you said NII ex markets to be up one five to one 8 billion year on year in the fourth quarter.

We're up 1.9 billion year on year in the third quarter, given that they've been more rate hikes during the quarter and even later.

In the quarter any color on what's driving that slightly lower.

Accretion rather than it actually being up at a faster pace.

Yeah again, the important factors here include volume, what we see in both the the loan volume the.

The deposit volume.

And obviously betas and how betas play out and we talked about the idea that with the higher frequency and level of rate increases that's going to put pressure on on the beta in terms of seeing it increase across the board and then the third factor is rates and what happens with rates and the tie.

<unk> for which that happens when that happens.

Matters in the quarter in terms of whether you see that benefit in it or in subsequent quarters and so those are the factors that drive that range that I've given you.

And it's across both the PB Wm portfolio as well as how it plays out in TTS and given the world we're managing through.

Quantitative tightening and the like and I think the other the other factors, obviously, FX and and how that plays out. So those are the main drivers vivek in the.

The range reflects you know any variety of ways that they could play out in the quarter.

Okay.

Believe me a different question for both of your security services.

You're talking about a trillion dollars in new business wins seems to be doing really well any color. If you can remind us on what client segments Youre seeing the same and I remember you, saying on the call that it's domestic also but any grand anymore color into where you are growing and where you're seeing all of this.

Yeah.

We were seeing this in a number of different areas that they are the one that is nice material with.

With the the win we had with Blackrock.

In particularly sizeable percentage of our business say here in the states and then a particularly important inaccurate and our attractive part of the security services business as well.

But we have been now we have been winning some sizeable business across the board and part of the a part of this I think comes from the fact that we're able to link the pre and post trade together to drive a lot of efficiencies for our clients and and bring some insights at some of the other players.

Are not able to do and helping them now.

Managing that competitive advantage in their businesses. So we were an attractive one from that market. The only thing I'd add I mean, we're very pleased with the growth here in the win mandates that we've been seeing across the board, but particularly in the U S as Jane highlights and.

Some of it is a rate benefit but a good portion of it is again those new mandates note those new additional assets that we're bringing in the final point that I'd make on it is that and I would reiterate it I guess is that this is not only one of our businesses that's growing quite rapidly, but its also a high returning business for us as well and so consistent with the strategy that we have.

<unk> talked about at Investor day, and one that reflects linkages across the franchise and so we feel very good about that.

Thank you. Our next question will come from Ken Houston with Jefferies. Your line is now open.

Thanks afternoon, just two quick ones, Marc you talked about the capital impact of the legacy exits is there a way you can dimension how much in the fourth quarter from a revenues.

Our revenues and NII perspective comes out from the legacy.

I do not have that in front of me Ken.

I I can.

If we.

And I've got a page in here that reflects the.

Page 22 reflects some of the size of the exit markets, but I do not have that in front of me I'd have to circle back with you Ken.

Okay I would assume that's been a part of the prior question about NII trajectory right, there's a negative impact and embedded in that in the fourth quarter as well right. That's just part of our moving forward that is that is reflected in the NII guidance, but the major the major drivers are largely what I what I referenced.

Yes, it would be reflected in.

Thank you. Our next question will come from Mike Mayo with Wells Fargo Securities. Your line is now open.

Hi, guys a follow up.

Why is city still banking in Russia when.

Like every other major American company or most of them are out of Russia.

And Hey, Dan Mike.

I as I mentioned in my earlier remarks, we are now informing multi national clients, who are all pricing in Russia.

So these that they have.

U S European and Asian coal multinationals with the franchise.

We are ending nearly all of the institutional banking services, we offer them by the end of the first quarter of 2023, the close to <unk>. So I would add is not material.

And so at that point R&D operations in Russia will be those necessary to fulfill our remaining legal and regulatory operations back and it's been very important for days multinationals that we've helped helped support them as they look at exiting the country and.

And that payroll and other elements as they do say, so they've been able to wind down or exit them.

That was super named but we will be as I said at the very beginning our intention here is to wind down our operation.

In the country.

And then just if you can remind US you mentioned more dispositions in the fourth quarter. So after 2022, what's left as far as the dispositions that you had mentioned and how are you tracking with your plan.

Yes.

We are we are we feel very good about how we're tracking with our plan obviously Mexico.

Is left we've got Vietnam.

India.

Taiwan.

This is one of the missing Indonesia, I think this year, what I'm missing. So so those are those are the ones that are left in China right. So those are the ones that arent that are left in the in the balance.

Of 'twenty or beyond 2022.

And I think that is wanting to get in a couple of them has been rather than one sei is.

You have a legal day, one legal day two on its own.

And one guy on Paris, which is why a couple of them.

Later than we had to had originally thought, but they're going well and the work around them and around the stranded costs relates to them as we talked earlier is also growing nicely. So we're pleased with the pace and we are acting on these.

With that didn't see Mike because you would expect.

Yeah.

Thank you there are no further questions at this time I will now turn the call back over to Jim Landers for closing remarks.

Okay.

Thank you everyone for joining us today, if you have any follow up questions. Please reach out to the IR team. Thank you.

Thank you. This concludes cities third quarter 2022 earnings call you may now disconnect.

Okay.

Okay.

[music].

Uh huh.

Uh huh.

[music].

Okay.

Thanks.

[music].

Uh huh.

Okay.

Okay.

Yes.

Okay.

Yes.

Okay.

Thanks.

[music].

Okay.

Yes.

Okay.

Okay.

Okay.

Yes.

[music].

Hum.

Uh huh.

[music].

Okay.

Sure.

Okay.

<unk>.

[music].

Yes.

Okay.

Thanks.

Thank you.

Okay.

[music].