Q2 2019 Earnings Call

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Hi, Good morning me at least every conference I'd number.

I don't know that if the group.

Disagree burning.

I'm sorry.

The city earnings call.

Thank you so much for that Sir and.

May I know the name of the company hosting the conference.

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Hey.

I'm not seeing that.

Conference call, but can you provide the topic again the conference calls.

Okay.

Company is citigroup.

Okay.

And.

Today's conference.

It's their earnings call.

Thank you Sir.

I'll join you now.

Thank you very much.

All in constant dollars with the contribution from every region.

In North America that was led by continued strong performance in branded cards and again, we saw encouraging momentum in deposit growth, which accelerated from the first quarter internationally net income was up 25%.

In Mexico performance was driven by good underlying revenue growth expense management and credit discipline in Asia higher deposit revenues and a recovery in investment revenues drove growth in the region.

In our institutional clients group, we delivered continued growth overall in our steadier transaction and accrual type businesses showing the strength of our global client network, while we saw pressure in our market sensitive businesses, reflecting the broader industry.

Even.

Even in products like investment banking, where we continued to gain share.

During the quarter, we received a non objection from the federal reserve for our 2019 see cars submission that means we will meet the goals set at Investor day to return at least $60 billion in capital over three C car cycles.

Our $21.5 billion capital return will increase to three year total to $62.3 billion and includes raising our dividend to 51 cents in continuing to buyback shares of common stock at roughly the same level as last year's plans.

These buybacks have reduced our common shares outstanding.

By over 10% in the last year alone and helped drive our tangible book value per share up 10% over that same time period.

Given the current environment and market conditions, we'll stay flexible with a focus on making steady progress towards our financial targets through client led growth and resorts discipline, including balance sheet credit and expenses as we look to the second half we'll continue to take a close look at our capacity to make sure that we're right sized for the operating environment. However, we won't change our commitment to safety and soundness and to making investments necessary to strengthen our infrastructure and control environment.

Client engagement remains strong and we continue to enhance our capabilities to serve our clients. The way they want to be served across our network that shed there remains uncertainty with respect to the economic market rate environment, but we think I think we've shown that our franchise can manage through these by focusing on the things that we can control.

Ill now turn it over to Mark and then we'd be happy to take your questions Mark banking, Mike and good morning, everyone. Starting on slide three net income of $4.8 billion in the second quarter grew 7% from last year, including a roughly $350 million pre tax gain on our investment and trade web, which benefited EPS by 12 cents per share.

Excluding the gain EPS of $1.83 grew by 12%, mostly driven by a decline in our average diluted shares outstanding as well as a lower tax rate.

Revenues of $18.8 billion grew 2% from the prior year, reflecting the trade web game as well as solid results in consumer and overall growth in our accrual businesses in ICICI.

However, this growth was partially offset by lower market sensitive revenues in IC G as well as mark to market losses on loan hedges in our corporate lending portfolio.

Expenses declined 2% year over year as volume growth.

Along with continued investments in the franchise were more than offset by efficiency savings and the wind down of legacy assets, resulting in our 11th consecutive quarter of positive operating leverage.

And cost of credit increased driven by volume growth and seasoning as well as a normalization in credit trends in our corporate loan portfolio, while overall credit quality remained stable.

Our return on assets was 97 basis points for the quarter and we generated an ROTC E of 11.9%.

Our effective tax rate for the quarter was 22% slightly better than our outlook.

We expect our tax rate to be between 22% and 23% for the back half of the year.

In constant dollars end of period loans grew 3% year over year to $689 billion as 4% growth in our core businesses was partially offset by the wind down of legacy assets.

And deposits grew 5% with contribution from both our consumer and institutional franchises.

Looking at results for the first half of 2019, we saw continued momentum in consumer as well as the accrual businesses in IC gene, which helped to offset the headwinds of lower market sensitive revenues along with the continued wind down of legacy assets.

And while we did benefit from the trade web game. This was largely offset by the impact of mark to market losses on loan hedges and our corporate lending portfolio.

We delivered positive operating leverage with a 3% decline in expenses.

EPS grew by 15% and our ROTC was 11.9% for the first half.

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

The consumer business showed continued momentum in the second quarter.

Revenues grew 4% with contribution from all regions, while expenses were up 1% driving continued growth in operating margin and earnings.

For the first half of the year, excluding the Hilton gain last year, we generated 4% consumer revenue growth on flat expenses, resulting in 8% growth in operating margin and 13% growth in net income.

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

Second quarter revenues of $5.2 billion were up 3% from last year.

During the quarter, we continued to enhance our digital capabilities and launch new products to lay the foundation for a more integrated multi product relationship model.

Our deposit momentum continued to improve.

As net deposit inflows in the first half of 2019 more than doubled compared with last year.

We are growing deposits with both new and existing retail bank customers in and out of our branch footprint and through both digital and traditional channels.

And digits, we further enhanced our account opening process and launched new products designed to deepen our client relationships, including relationship based offers that leverage our proprietary thankyou and double cash rewards across both card and deposit products.

We generated more than $1 billion into direct and digital deposit sales in the second quarter, bringing our total for the first half to over $2 billion.

Nearly two thirds of these deposit sales were outside of our existing branch footprint and of this amount roughly half were with card customers, who previously did not have a retail banking relationship with us.

Results from our new digital lending product Flex loan also continued to be positive. Following its launch in January as loan originations more than tripled from the first to the second quarter, while maintaining a strong credit profile.

And we will continue to roll out new features and products in the second half of the year. So again, while many of these initiatives are still knew we feel good about our progress.

Turning now to the results of the individual businesses retail banking revenues of $1.4 billion were roughly flat year over year.

Excluding mortgage retail banking revenues grew 1% as the benefit of stronger deposit volumes was partially offset by lower deposit spreads in commercial banking.

Average deposit growth accelerated to 2% year over year and looking at deposits and assets under management in aggregate, we grew customer balances by 4%.

Mortgage revenues were largely stable again this quarter on a sequential basis, but declined year over year, mostly reflecting higher funding costs.

Turning a branded cards revenues of $2.2 billion grew 7% year over year.

Client engagement remains strong with purchase sales up 8%.

And we continue to generate growth in interest, earning balances this quarter up about 10%.

This growth in interest, earning balances drove a year over year improvement in our net interest revenue as a percentage of loans or an IR percent to 896 points this quarter.

Looking forward, we would expect to remain broadly around this level of spreads.

As we look to maintain our current mix of interest earning to non interest earning balances.

Average loan growth improved to 2% this quarter as we saw a smaller drag from promotional balances in the prior year.

And we expect loan growth to continue to improve as we go into the back half of the year.

Finally.

Retail services revenues of $1.6 billion grew 1%.

Driven by loan growth, partially offset by higher contractual partner payments.

Total expenses for North America consumer were up 2% year over year as higher volume related expenses and investments were largely offset by efficiency savings.

Turning to credit.

Net credit losses grew by 12% year over year, reflecting loan growth and seasoning in both cards portfolios.

Current NCL rates were essentially flat quarter over quarter.

And consistent with the pattern seen in prior years, we expect card NCL rates in the second half of the year to be lower than the first half of the year.

Our performance year to date is in line with our full NCL rate outlook for both branded cards and retail services at 300 to 325 basis points and 500 to 525 basis points respectively.

On slide six we show results for international consumer banking in constant dollars.

Second quarter revenues of $3.3 billion grew 4%.

In Latin America total consumer revenues grew 3% or 5% on an underlying basis, excluding the impact of the sale of our asset management business last year.

Loan and deposit growth was muted in Mexico again, this quarter, reflecting the current environment, where we're seeing a deceleration in GDP growth and a slowdown in overall industry volumes.

But importantly, we are managing expenses carefully and maintaining credit discipline in order to preserve profitability and returns as seen again this quarter and our strong EBIT growth year over year.

Turning to Asia consumer revenues grew 5% year over year in the second quarter or 3%, excluding a one time gain.

Mostly driven by higher deposit revenues.

As well as a recovery in investment revenues.

We continued to see strong growth in our underlying wealth management drivers in Asia with 10% growth in city goal clients and 7% growth and net new money versus last year.

In total operating expenses were down 1% in the second quarter as efficiency savings more than offset investment spending and volume driven growth and cost of credit was down 3%, reflecting a smaller LR build relative to the prior year.

Slide seven.

Shows our global consumer credit trends in more detail.

Credit continued to be favorable again, this quarter with NCL and delinquency rates broadly stable across the regions.

Turning now to the institutional clients group on slide eight.

Revenues of $9.7 billion were roughly flat in the second quarter and down 3%, excluding the trade web game as continued momentum in the accrual businesses was more than offset by lower market sensitive revenues and the negative impact from mark to market losses on loan hedges as credit spreads further tightened in the quarter.

Total banking revenues of $5.1 billion were down 1%.

Treasury and trade solutions revenues of $2.4 billion were up 4% as reported and 7% in constant dollars with growth in deposits transaction volumes and trade spreads reflecting continued strong client engagement.

Investment banking revenues of $1.3 billion declined 10% from last year, while outperforming the market wallet.

The decline was primarily driven by a strong prior year performance in M&A, partially offset by continued strength in debt underwriting.

Private bank revenues of $866 million were up 2%.

Reflecting growth with both new and existing clients, which drove higher lending deposits and AUM volumes, partially offset by spread compression.

And corporate lending revenues of $538 million were down, 9%, reflecting lower spreads and higher hedging costs.

Total markets and security services revenues of $4.7 billion were down 4% from last year, excluding the trade web game.

As growth in security services was more than offset by the decline in our markets businesses, where the environment has been challenging and investor client activity has remained muted.

Excluding trade web fixed income revenues declined 4% year over year, reflecting the challenging trading environment, particularly in rates.

Equities revenues were down 9%, reflecting lower client activity in cash equities and prime brokerage, partially offset by strong corporate client activity and derivatives and security services revenues were up 3% on a reported basis and 7% in constant dollars, reflecting higher rates as well as higher client activity.

Total operating expenses of $5.4 billion declined 2% year over year as efficiency savings more than offset investments and volume driven growth.

And cost of credit was $103 million this quarter, reflecting a normalization in credit trends in our corporate loan portfolio.

Credit quality remains stable and total non accrual loans declined both sequentially sequentially and on a year over year basis.

Looking at the first half of the year and IC G.

Our operating margin improved by 1% as solid contributions from our growing higher returning network businesses, most notably TTS and security services were largely offset by the decline in our market sensitive businesses.

We are focused on continuing to build upon the strength that we're seeing in our network businesses by making it easier for our large multinational clients to do more business around the world.

We are investing in technology to further digitize and improve our on boarding processes enhance our client facing platforms and roll out new capabilities across the franchise as we support the growth in cross border flows that we're seeing with our multinational clients and we have a strong pipeline of initiatives going forward.

Slide nine shows the results for corporate other.

Revenues of $532 million increased 1% from last year.

As higher Treasury revenues in gains were largely offset by the wind down of legacy assets.

Expenses were down 20%, mostly reflecting the wind down.

And the pre tax income.

With $73 million this quarter somewhat better than our prior outlook.

Looking ahead.

We would still expect a modest pre tax quarterly loss in corporate other for the remainder of 2019.

Slide 10 shows our net interest revenue and margin trends.

In constant dollars total net interest revenue of nearly $12 billion this quarter.

Grew by roughly $450 million year over year, reflecting higher rates loan growth and a favorable loan mix.

As well as higher trading related and IR.

Hello, along with the absence of the FDIC surcharge.

On a sequential basis net interest revenue grew by roughly $230 million, largely reflecting higher trading related and IR along with one additional day in the quarter.

However, net interest margin declined five basis points sequentially as the benefit of higher revenues was more than offset by higher cash balances, reflecting strong deposit growth in the quarter.

In the first half of 2019, our net interest revenue grew by 6%.

Or roughly $1.3 billion year over year in constant dollars.

Looking ahead to the remainder of the year.

As a reminder, when we set our Eni our outlook for 2019 back in January .

We were assuming one use rate increase in mid 2019.

But the expected benefit of the rate hike had been relatively small.

As of last quarter, we had taken that rate hike out of our assumptions and now we recognize that we may begin to see rate cuts as early as later this month.

But keep in mind that the estimated impact of each rate card remains relatively small.

We continue to estimate that each 25 basis point carton us rates impacts revenues by roughly $50 million on a quarterly basis, but of course this will depend on the competitive environment for deposits and other factors.

So the rate environment continues to evolve, but we are managing our rate sensitivity carefully and we continue to expect to generate net interest revenue growth this year.

Of about 4% in constant dollars, which equates to roughly $2 billion of growth as we have discussed on previous earnings calls.

Turning to noninterest revenue on a full year basis, we continue to expect total noninterest revenue to come in roughly flat to the prior year.

In the first half of 2019 noninterest revenue declined by close to $900 million all of which you saw in the first quarter.

This decline was mostly driven by the gain on the sale of the Hilton portfolio in the prior year.

As well as a very strong prior year comparison in equities in the first quarter.

Along with the drag from Mark to market losses on loan hedges.

In the second quarter, while we saw pressure and underlying markets revenues. It was entirely offset by the trade wed game.

So noninterest revenues were flat to last year.

Looking ahead to the second half of 2019.

As a reminder in consumer.

We will be comparing to the third quarter of 2018, when we had a $250 million gain on the sale of our asset management business in Mexico.

However, we should be able to more than offset this headwind with organic growth across the rest of our accrual and consumer businesses.

And we should see a favorable comparison in markets revenues in the fourth quarter, even if investor client activity remains muted similar to what we've seen so far this year.

On slide set on slide 11.

We show our capital.

We show our key capital metrics.

In the second quarter, our tangible book value per share increased 10% year over year to $67.64.

Driven by net income and a lower share count.

And our CE tier one capital ratio was stable sequentially at 11.9%.

As net income was offset by $4.6 billion of total common share buybacks and dividends.

To conclude.

While the revenue environment as proved challenging for some of our businesses. We made continued progress in the first half of 2019.

From a revenue perspective.

We are seeing solid momentum across the consumer franchise and continued growth in our accrual businesses in ICICI.

And.

While we've seen pressure in some of our market sensitive businesses results have generally reflected the broader industry.

We continue to believe we can generate modest year over year revenue growth in 2019.

Driven by continued growth in net interest revenue and more stable trends in noninterest revenue versus 2018.

On the expense side.

Our productivity savings have exceeded our incremental investments by roughly $300 million. So far this year.

Putting us on track to achieve the upper end of the $500 million to $600 million in incremental net savings we had expected for full year 2019.

Expenses were down year over year in the first half and we believe that was prudent given the revenue headwinds we faced.

Looking ahead, we will maintain this expense discipline relative to the revenue environment.

While continuing to make essential investments in the franchise, including investments in infrastructure and controls.

But we do expect expenses to be lower on a sequential basis from the first half to the second half of the year.

And while the operating environment is uncertain, we will continue to look to all of our return levers with a continued focus on our full year ROTC target of 12% for 2019.

Before we go into Q anyway, let me spend a few moments on our outlook for the third quarter specifically.

Nic Jade.

We expect continued year over year growth in our accrual businesses as we continue to serve our target clients across our global network.

And markets and investment banking revenues should reflect the overall market environment.

On the consumer side in North America.

Solid revenue growth should continue driven by us branded cards in Asia, We expect continued year over year revenue growth and in Mexico as I just mentioned.

We will be comparing to the third quarter last year, which included a gain on the sale of our asset management business.

On an underlying basis similar to the results seen so far this year.

Revenue growth will likely remain somewhat muted, although we expect continued strong growth in pre tax earnings.

For total Citigroup expenses should decline sequentially.

And cost of credit should continue to grow modestly year over year, reflecting volume growth and continued normalization in ICICI.

With that and like and are happy to take any questions.

And at this time, if you do have a question. Please press star one on your telephone keypad.

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

Hi, Good morning, Mark wanted to add more about the.

Hey, John wanted to ask about the RCC goal, so 12% goal for 2019 year on the doorstep for you. So far in the first half of 11.9 as you think about leverage to kind of keep that up in the second half and push over the goal line to get above 12 for the year and second half often as not as strong capital markets.

Obviously hasn't been so good this quarter and beyond so far this year. So just what are the things to think about puts and takes for the second half.

And that can get you over that 12 for the year.

Yes. Thank you so 12% remains the target for 2000 for 2019.

You know as as you heard Mike mentioned you heard me mention we were obviously in an uncertain environment.

The good news is that we have seen continue momentum.

In the consumer franchise, particularly in branded cards as we've talked about over the past couple of quarters with with very strong performance.

This quarter as well on the heels of us converting those promotional balances to more average interest, earning balances and we'd expect.

That revenue growth to continue through the balance of the year.

You heard me mention the international franchises, which are growing.

To have continued growth.

In the balance of the year and where there is muted growth to have.

To offset that with expense management, and therefore have EBIT growth, particularly in the case of of Latin America. So those will be two positive drivers I would point to.

I, obviously point to our our accrual businesses and transaction businesses.

On the IC Gi side, 7% growth in both security services and TTS this quarter.

We would expect continued growth from those businesses.

And on the expense side, we talk to a lie talk too.

Really being on the high end of those productivity savings outweighing investments in and I would expect to certainly come in.

With that six how on the $600 million side of the range that we've that we've talked to their near the bank the big area, where the uncertainty in the environment you can pick the factor whether it's.

The directly on what's going on with rates and volatility around that or trade and Carrick discussions it plays out through the market sensitive businesses. It plays out through.

The trading that you see on both fixed income and equities it plays out.

Through investment banking is it impacts corporate sentiment and those things as you would imagine.

Are difficult to predict we obviously feel good about the client dialog that we've had but thats. Those are the factors that that are a bit harder to manage and when we see that softness which you saw in the first half is that we've pulled levers that we could pull responsibly and you should expect that we would continue to do that in the back half.

Without compromising two things.

One the investments required to continue to grow.

The strong parts of the franchise and to infrastructure and controls.

And and those two things we think are critical to the long term sustainability of the franchise, we will continue to manage credit very carefully.

You saw our tax rate comment a little bit lower this quarter, we'll continue to do work around what we can do to.

To get the tax rate.

As low as we responsibly can get it and you've seen us actually do more on the capital side. So note that combination of things.

We think is helpful. Then and obviously trying to get to that target of the 12%.

They are there is some unpredictability to that particularly on the market side and to the extent that that plays out more severely.

Then than forecasted we would expect to be in and around the range of 12.

I guess also you did say that you expect to have lower card losses in the second half versus the first that should help.

Are there any front loading of marketing or any other expense kind of front loading on vessel frontline and I mean, when you. When you look at the profitability just in general on the consumer business. It does tend to skew towards the back half of the year because of things like marketing spend.

We also and I mentioned this on the last call. We also pulled forward.

Some of the repositioning that we were looking to do as we reorganized around different parts of the franchise and so savings that we were expecting kind of later in in in 2020, we can we'll see some of that benefit play out through the back half of <unk>.

Of 19, so there are those things around levers and actions that we took in the first half that not only help the first half would have the potential to help us in the second half as well.

Okay, and just last thing for me on that note you still looking ahead towards that goal of 13 and a half for next year.

Yes, 13.5% remains the target for next year.

Just to you know, obviously again I'd point back to the environment that we're in we will see how the environment plays out we'll see how the market reacts to rate reductions obviously the activity we saw.

Last week in the way of a market reaction was was pretty favorable to having more certainty around the direction of rates, but we'll see how those some of those things play out and it does remain the target and if we have to identify additional levers to try and pull to to get there we will but but as we stand here today that that 13.5% remains our target for 2020.

Great. Thanks.

Thank you.

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

Hi, Thanks, very much Hello.

Question on on the net interest income trends. So if you look at the 12% decline in non interest bearing deposits and the 9% increase in interest bearing deposits and then also the.

Seven basis point rise in deposit costs sequentially, and then that drop in loan yields.

Those trends combined that while not surprising.

You you would think from the outside would be a more negative tone on and I, but I think your guide was was was actually pretty good.

Are there offsets that we don't see any or are some of those trends like the tail end of things that have been in motion and they actually get better over the next couple of quarters.

Yes so.

In terms of the net interest revenue.

We're obviously.

At about a billion three of net interest revenue with a strong Q1.

About $450 million in Q2.

And as we as we look at that we've obviously factored in at this point not only the shift that you've mentioned from noninterest bearing to interest bearing but also the likelihood of of a rate reduction.

Based on the talk that is that is out there and so as we as we look at it and we look at kind of the continued momentum on the card side.

And we look at the end the deposit growth.

That were that were seeing particularly in the TTS franchise with with higher volumes of growth of 10% or so we feel pretty good about.

Our ability to get to that 4% growth in IR year, notwithstanding that there are other factors that that come into play not the least of which is how many additional cuts play out through the balance of the year, but as we sit here today, we feel pretty good about that the bigger driver of the biggest driver I think would be.

As I mentioned continued continued growth on the branded card side continued growth in the accrual businesses those are going to be to the larger factors at play through the back half of the year.

Okay I appreciate that maybe a little more color on the loan on the loan yield side coming down I'm, assuming that is LIBOR based loans and and then the follow up I have on that is what makes the call on.

On on those loans, meaning LIBOR base first prime based is that you.

Or is it client led I'm just curious on how to think about that as we go forward. So it looks like they are adjusted their prime didn't obviously.

Yes. So we so we've had we had we certainly saw some revenue pressure in the corporate lending book that was a combination of kind of the.

Spread compression. In addition to in addition to some hedging some hedging costs and that certainly certainly played through here in terms of the pricing of the loans that is a both a pride byproduct of what we're seeing in the market and on the way of competition from a pricing point of view.

And obviously and the funding cost that we that we have I think with what we've tried to be diligent about is where they are.

Where they are.

Where there are opportunities to both serve the client and not necessarily tie up the balance sheet. We've taken advantage of those opportunities, particularly in our trading our trade lending activity. So that we're not bringing on.

Economic positions that or positions that are on economical.

We will continue to see pressure from a pricing point of view in Asia, and so you've seen our Asia loans.

Come down just because the combination of the economics, not making sense again as well as as well as just really slowing demand given what's going on with trade and so.

There is there is pressure from a spread point of view.

We do have.

A.

A view towards pricing that not only considers our own internal funding, but also the client demand and the competitive landscape and that combination of factors is what what plays out through the yield.

Okay really appreciate it thank you.

Thank you.

Your next question is from the line of Jim Mitchell with Buckingham Research.

Hey, good morning.

Hey, Jim Hey, maybe just following up on Glenn's question just to zero in on deposits a little bit interest bearing deposit rates paid was up seven basis points without any kind of a hike is that just a mix shift that you mentioned I think I think it looks like Asia deposits were up.

I would imagine there higher rates just trying to figure out what is their domestic pressure on rates paid or is that just mix.

Yes. So so there is some mix shift I mean, there is some shift from noninterest bearing to interest bearing.

The rates paid on interest bearing.

Yes, Thats right and then so the other the other dynamic is in fact, what we're seeing there two things one what we see in the market from a competitive point of view to there tends to be a.

A lag effect from a from the betas that play through on the on the retail side.

And then three as we have been growing some of the us deposits that I mentioned earlier.

Some of that has been growth in and out of our markets, but with high so tight with high yield saving accounts.

Type product.

So would you expect that to continue to creep higher a little bit or start to stabilize.

It it kind of depends on kind of what happens in the broader rate environment. We obviously are talking about rate cuts now and that ultimately over time would have a would have an impact I think the.

The strategic way that I tend to look at it is.

These deposit.

The deposit activity that we have with clients is really geared towards the broader relationship that we have with them as you know and so we had a lot of good deposit growth on the on the TTS side that surround the broader solutions that we that we talk to and work with those clients around the deposit growth we see on the on the consumer side is really about the demonstrating the digital capabilities that we have and really broadening the relationship we have with them. So yes. There is some pricing pressure the rate movement in the future will certainly have an impact on how much more or less of that plays through but we do think we're making progress against the broader strategic objectives.

Okay, and a clarification for the 2 billion in growth. This year are you assuming now a rate cut in that number.

I'm not sure if I heard you say that.

We're assuming one rate card in that number okay. That's very helpful.

And then towards the back half of the year right.

And just one question on on Cts and trade finance.

Okay.

You mentioned spreads being wider and trade. So is sort of the trade were helping you a little bit or have you seen a slowdown certainly trade flows seem to have slowed how do we think about you seem pretty confident in the growth in that business. How are you thinking about the dynamics there.

Yes, I think from a trade perspective, I would say.

I don't want to say Bu the business activity remains a fairly strong I think we've seen some trade routes shifting. The example, we give as you know as opposed to show from the U.S Choi from Brazil.

Et cetera should trade route shifting I think clients are kind of very engaged around kind of studying and trying to stay ahead of that so I don't think we would speak to any kind of slowdown as of yet, but clearly people are paying a lot of attention to it.

Okay, great. Thank you.

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

Good morning.

Good morning.

So you guys are executing on the capital deployment strategy you laid out a couple of years ago and you have to be fair I think there was some kind of debate or.

Concerned whether you could execute on that and you are but now you are sitting Harry performed very well and de fast.

Some of your peers.

Surprised the market and delivered more than expected.

It seems like your position to even more than what you promise couple of years ago, and just what are your thoughts on that.

Whether you can do it and the timing and how youre approaching.

Yes so.

As you mentioned, we back at Investor Day, we talked about $60 billion plus over the three year cycle.

We.

We're going to exceed that we just announced the 21 and two and a half billion dollars over the four quarters covered by this 2019 cycle.

As you know we.

We have an objective of trying to obviously generate the highest return a return as much or as much capital as as we can to our shareholders. We currently manage to a CPT one target of 11.5% net.

That obviously has been presented for some of the uncertainty that's still out there whether it be proposals like FCB and.

Or other other things that impact the variability of capital as we get greater clarity on those things we will.

Obviously continue to kind of look at that but that remains the target going forward. We've got we're still running at 11 91 ratio. So.

Subject to growth needs, we will always be looking at how we ensure that we run that more tightly to that target of 11, and a half and the way we think about the return of capital or distribution of capital going forward is.

Largely as we get close to that 11.5%, which we expect to get close to towards the end of the year will be around how much capital we generate.

Juxtaposed against how much we need to continue to grow and so.

We certainly have the objective of continuing.

To return as much as it makes makes good sense given the the growth opportunities.

For the franchise, if you look back over the three year cycle.

We have return on average about 121% of our of our net income available to common so.

We feel pretty good about that percentage, albeit we started at a higher CPT one ratio years ago.

Thanks, and just remind us as we think about the 11.5% target.

What are some of the areas of clarity that you're looking for in terms of when evaluating that we obviously got some.

Some comments from the fed in recent weeks of that seems like the stress test might be a little bit easier than spared as they bring in the stress capital buffer. There just what are sort of things specifically that youre looking for.

To potentially bring that down.

Yes. So look there there are no you just mentioned one would be FCB thats one of the proposals that that's still out there. We just got as you mentioned some clarity about what we'll see how that.

Factors and there are a number of other proposals that are still that are still outstanding and the dialogue that we've heard from from regulators is largely around ensuring that those things that is understanding how those things will work in aggregate in terms of how they impact the amount of capital that institutions out the whole whether thats.

Additional clarity on.

On on how to think about GCIB, we obviously have cecil that have come into play.

In early 2020, but all of those factors are important.

The we've heard commentary around greater clarity or transparency.

As part of the sea CCAR process, we obviously support greater transparency, we think it will help to remove some of the variability and capital planning. So as that starts to kind of commit continue to come into the fold that will be important to to how we think about this so those are just a couple of examples and I think as we look ahead of market. When we think about the four and a half plus the three plus to three.

What's in some ways on the table is the management buffer the 100 basis points in as you described as we look at GE should've been Cecil and kind of all these things coming together, whether or not there is an opportunity to re examine that or not.

Correct.

Okay, and then just lastly to bring it all together like as you think about Venezuela pieces do you think youll have clarity before the next CCAR cycle.

That might motivate you to resubmit or is it more hoping to have clarity for the next cycle on these factors.

It's.

These things kind of take time to play out I think as we've seen over the past couple of years and so we'll just really have to see how.

How much additional clarity, we get over the coming months and we'll figure that out as as time progresses.

Okay. Thank you.

Your next question is from the line of fall Martinez with GBM.

Hey, guys good morning.

A couple of questions first Mark I, just wanted to clarify the Vienna NII Guide. So I think you mentioned you're still on track to for 2 billion.

Increase this year versus last year.

That.

And 4% that does imply by my calculations that second half the quarterly run rate does continue to ratchet up first versus the first half something like 12 112 too.

Yes that I just wanted to clarify that's right and that's including a rate cut being baked into that outlook.

Yes so.

What.

We are still.

Targeting and on track for.

$2 billion for the full year as as I've stated.

We do have one rate hike that we're assuming rig rate cut that we are assuming excuse me right correct that we're assuming.

On the on the back in the back half of the year, obviously, if that happens sooner.

Happens in in July that would have any impact on.

On on the Eni, our forecast that we have and candidly if there is more than one rate cut.

That would have additional additional impact.

And so those but those are the those are the factors. There are obviously other factors that come into play.

But that is and that is assuming obviously a change in the in the in the us rates. So, but we are still targeting the the $2 billion recognizing there's some risk there.

Got it but given just the 15 million impact from 25 per quarter from 20 to 25 basis points, a cut presumably even yes, even if we do get.

One clutter to cut it seems like you're confident that.

You can get Eni growth in the back end of the year versus the first half.

Yes, I think the I think the broader issue is the uncertainty that that Mike and I have referenced.

That's that's just out there.

And so if we just isolated this too.

Two interest rate cuts in the scheme of a.

$47 billion and IR line, I mean, you're absolutely you're right.

But the reality is that it's the the broader uncertainty thats out there.

That's impacting that's impacting the industry.

And while that flows through the market sensitive.

Sensitive revenues.

And just kind of corporate sentiment more broadly.

As with fair in the past you've broken out this.

Yes.

Slide on page 10.

Or you breakout the accrual versus legacy versus trading is there a reason why you are not doing that this time around.

Yeah, just I mean, as as we kind of exited holdings in and.

And started to kind of wind down those legacy businesses it became.

Less of a.

Significant variable as you as you look these total total revenues.

It was it was probably 5%.

The aggregate revenues in the first quarter and so just wasn't as it wasn't on a constant dollar basis, just wasn't as as meaningful and so we moved towards towards simplifying it with both the legacy breakout as well as the the trading in IR breakdown.

Okay, and one final one from me.

A lot of large portion of the expected profitability expansion in North America consumer comes from right sizing the profitability in retail banking and you gave some positive commentary obviously any feel pleased about the.

The momentum in terms of deposit inflows the digital strategies tapping your your your car to network.

Or your cards clients.

But you also have a lower rate environment and deposit spreads are fair.

Like we are going to come in and I think you didnt have any growth in revenues in retail banking and a tough rate environment can you right size profitability or how much more difficult is it to right size the profitability of your retail banking business. If the fed continues to cut.

Yes, I'd make I'd make two points one is.

As I think about.

The back half of 2019.

And even 2020 for that for that matter.

I think that the work that we've done in branded cards.

Is going to be a meaningful contributor or continue to be a meaningful contributor to the revenue performance that we see in consumer in North America.

The North America retail bank.

As you mentioned, we had runs at a at a high efficiency.

Right at this point.

We are seeing good traction as it relates to deposits increasing we're what again, what thats really about for US is how we deepen the relationships and kind of.

Broaden.

The penetration of those products and services into our card customer base and so over time, I think is going to be more challenging.

To look at just the the retail banking.

Portion of that we breakout in income because because of that broader client strategy.

And so I think.

So I think that's that's kind of how we've thought about it that said.

I mention kind of repositioning that we.

Have taken in the first quarter that weve taken a bit of that in the second quarter, that's largely around the reorganization to support that strategy and moving from a product silos that type of business model to one that is more clock geared towards the client and we think that that will help that obviously will help the margins as we continue to execute against the strategy.

Got it Thats really helpful. Thank you.

Your next question is from the line of Mike Mayo with Wells Fargo Securities.

Hi, I have one very short term question or one very long term question.

The very short term question relates to.

What was the dollar amount of the mark to market hedge losses, you said that.

Roughly offset trade Weber is a much bigger number than what was in the press release, what was that number.

So be it.

In the quarter, the mark to market loss loan losses were.

Losses on loan hedges was $75 million for the half is what I was talking about for the half that number was about $306 million. So by 231 in the first quarter.

And so thats thats the number.

Okay and then the longer term question is how much runway do you have left with technology to improve citigroups efficiency.

Mark when you mentioned the levers to help meet your targets.

ROTC target for 12 cents you didn't mention technology, yet you mentioned, the 300 million spread between the savings from the investments over the new investment level. So what's the runway left kind of short medium and long term. Thanks.

Well in that in that five in that 500 to 600 for the year. The 300 that we've done year to date as it relates to productivity are the benefits of the technology investments that we've been making so some portion of those savings is a byproduct of of technology investments.

We continue we see those technology benefits in the digital capabilities that we've built out and how that plays out in a lower cost to to not only acquire but lower cost to service the clients, we see things like the.

Use of E statements going up we see things like volumes into call centers.

Going down.

All of those things are beneficial or benefits that are generated as a byproduct of technology investments that we've that we've made we expect a similar level.

Productivity saves in in 2020.

We do continue to invest in technology impact what you heard me mentioned earlier in terms of one of the protected areas being infrastructure and control. There are a couple of different ways to look at that protected areas as we invest in technology around our infrastructure and improve the data quality that we have and things of that sort not only does it help us run a.

Safer and more sound organization, but it also arms us with information sooner to enable us to react and serve our clients more quickly.

And so.

Yes. The answer is yes, we do see benefits from technology playing out.

In the in the expense line in the productivity savings that I've referenced both in 19 and 2020.

And likely beyond and those things will help.

And getting us to to the lower levels of operating efficiency that we've talked about achieving over time.

Mike I think if you go to page 21 in the deck you can see we've put in there some different drivers and metrics and I think from a.

The way the way I think about it is today, we really we really run the combination of an analog and digital bank.

And the faster we can continue to drive digital adoption mobile usage, we know that that is cheaper it's significantly cheaper when we're solving issues on your phone or we're solving issues away from physical interaction of voice and again you can see.

We've got roughly 30 million active digital users. We've got 20 million active mobile users between North America and international and you can look at the year over year growth rates.

I think probably amongst the highest in the industry and show. We're on this journey and obviously the investments that we can make to to switch those over we think yields yield quite high returns.

And then last follow up.

Mark you reaffirmed the guidance for the Archie for this year and next and Mike do you also reaffirm that guidance I assume you do.

Absolutely.

So.

City. This predates you missed a lot of targets. This decade as we approach the end of the decade and consensus does not expect to reach those targets.

We have a buy on the stock we haven't always had to buy the stock and we don't have you reaching those targets. So.

Where do you think the disconnect is you think that CD is going to get a 13.5%. Our GC next year and you are hard pressed to find too many other people who agree with you.

Assuming we don't have a recession or anything like that where do you think the market is wrong.

Now let me let me.

Let me try to answer that in a couple of ways. Firstly, let me go back to 19.

For a second because.

Both Mike and I have said that the 12% remains the target for 2019 it absolutely does.

You can also look at the first half of the year for the fourth quarter of last year and and witness strengthen the franchise on the consumer side on the accrual side of the business, which you can also witness the impact of the environment that we're in and the uncertainty around that.

Despite that uncertainty.

We've gotten to 11 nine in the first half through pulling a number of levers.

And we would expect to continue to pull those levers into the back half of this year.

To the extent that that uncertainty.

Increases or there is more significant reaction from the market to the uncertainty.

We will of course look and work to find additional levers, but at some point that becomes challenged in terms of getting to that 12%.

Just given the things we want to protect in this franchise and I believe that even if we were to become challenged that we'd end up in a range around that 12 and that is what we're working towards that target that 12% target in terms of the in terms of 2020.

In the 13.5% target that we have for 2020 in the disconnect I mean, we've talked through the disconnect.

In the past in.

It moves around as as you would you would know very well, but its ranged from being a little bit of a difference of views on the topline, which I think we've started to narrow some of that gap given the performance we've been able to demonstrate through the first half of the year again in those strong areas.

There's also been.

Less of a disconnect on the expense line as I've, given I think a little bit more specificity around the guidance there.

There has been a cost of credit difference of views.

In the past and again, we feel.

Pretty good about our cost of credit outlook, but we obviously recognize that where we are in the cycle.

Theres been obviously tax work that we've continued to do and we'll continue to do and I gave some additional view on that we've done more on capital.

Then.

Than we originally talked about and so it's those those drivers and levers that will continue to pull through the balance of this year, we'll see how this year plays out.

Given all of the the uncertainty referenced.

And we'll go into 2020.

With the 13 and have remaining our target and with the club with clarity on where we think we will end up against it and like the way I think about it simplistically is.

We're going to do everything within our power to to get to those numbers with the exception of two things. One is we are going to continue to make the investments that are necessary to keep our business competitive you can see a lot of things going on around us and I think around our franchises in consumer or in our institutional business. As an example in TTS. Your security services. We think we've just got to make those investments to stay competitive and the second thing is around US is our commitment to our shareholders and our regulators to make sure that we're making the investments.

In terms of safety and soundness, and so we won't put those at risk, but everything else is on the table.

All right. Thank you.

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

Hi, good morning.

Good morning, So wanted to start off with a question on the FICC business and you cited some of the pressures on within FIC and rates in particular, how your business has always been somewhat unique just given the higher contributions from Tcs in particular with non financial corporates, I think thats more than 30% of your total revenue there I'm wondering whether you're seeing greater resiliency on that side of the business, which would suggest maybe even more pronounced pressure within institutional.

So.

I guess, what I'd say is obviously, our fixed income revenues for the quarter were down about 4%. If you exclude the gain from trade where.

I think when you look at what transpired in the quarter, there was a fair amount of volatility.

Around around rate around rates and rate movement, and what we saw was that play out.

Particularly around the Investor client base that we have so to the to the point we've made before we continued to see stable corporate client activity.

Particularly in rates and currencies.

Where there is a strong linkage to our broader franchise and in particular TTS, but we did see decreased activity with our investor clients given all the macro uncertainty that I've mentioned now a couple of times.

Many of the Investor clients remained on the on the sidelines.

And frankly, it was the speed and the magnitude of the rate movements that created a challenging marketing market environment and made it difficult to monetize client flows on the on the.

Equity style units bought equity, but only on the equity side I mean, you did the trade warhead, a similar or trade trade discussions in war had a similar impact.

That kind of flow through.

Particularly again with Investor clients I mentioned earlier impacting.

Impacting both cash equities and prime brokerage, but we did see again corporate client activity.

Even in equities.

Hold up nicely playing out through equity derivatives.

And the way I would shape markers I think is is engagement design engagements very good yes, but I think right now the challenges or maybe it's the opportunity in that we're clearly pivoting from.

Environment, where we had predicted or thought.

Or had been built in rising rates to at this point rates going lower and I think from our perspective, we don't believe that the market has made that full adjustment and there's probably some turn thats got to come as portfolios shut up for that potentially lower rate environment. The question is when will that come and.

To what degree will that come we'll there will we get conviction in terms of the trajectory of this lower rate environment and portfolios have to reposition because I think today, they are not positioned where they need to be fully and again to that to that point.

Just last week when.

There appear to be some signs of greater clarity on the move in rates the reduction in rates and the timing of that.

The equity markets responded very very favorably to that and so to your point, Mike I think clarity.

In direction.

Should yield.

Greater confidence and perhaps a more of a risk on mentality as it relates to the markets.

Very helpful color I appreciate that and just one follow up for me on ICICI credit you guided to for indicate some normalization of credit trends, but the charge off rate. There is quite low at eight basis points. I'm. Just wondering is it fair for us to extrapolate that a basis point loss rate as indicative of what you guys view is normalized and can you maybe just speak to some of the unique aspects of the business like trading trade finance that should drive some lower loss levels through the cycle since that was actually pretty encouraging commentary from our point of view.

Yes, I mean again when you when you think about our corporate lending book and the quality of our exposure or the multinational clients that we cover the 83% of that being investment grade type exposure. Historically, we've had loss rates that have been low in the way of number of basis points five to six basis points historically and yes. We are starting to see some normalization of that I think the quarter cost of credit of $103 million.

Is reflective of that coming out of coming out of last year and and a representative I think of what weve talked to in the way of what to do.

Total look.

To see in the way of normalization.

And so I think it's a byproduct of the quality of the book that we that we have and the nature of the.

The nature of the activity that we do in lending.

Okay, Great. That's it from me thanks for taking my questions. Thank you.

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

Hey, Thanks, a lot just a follow up on the credit side market point out that the.

The on the consumer side of credit that things have also kind of just gone. According to plan you have maintained that guide at what point do you still see the end of the light in terms of the seasoning meeting how long do you think you can kind of stay in this.

Very benign zone for the car type presuming.

That the economy stays and relatively good form any reason to see any change to that I guess the question.

Yes, I mean, not at this stage I mean, its we gave kind of medium term guidance. If you will and we talked about those ranges of 300 to 325 500 to 525.

You know again certainly through the balance of this year, we expect to end up inside of that range. We look at we would look at probably all the things that would be would be obvious to folks and then some so if you look at it just on the macro front, we're obviously looking and watching closely.

The inverted yield curve and what that has meant historically, but when we when we look at that juxtaposed against.

The internal metrics that we that we use whether that'd be card usage patterns or utilization or payment rates or a percentage of customers, making minimum payments.

I mean, thus far those indicators of all remain broadly stable and so.

I don't I don't see any any.

Any color at this point for material concern.

Okay and then the tax rate you mentioned 20 223 in the back half and you've also talked about there potentially being some more levers there.

Help us understand like does that mean that over time, you have a chance to still take the tax rate lower as you look into 20 and as part of your plan for the art ROTC improvement.

We're constantly looking at it and trying to identify opportunities.

Looking at obviously, where we book business and.

The client demands around that the and where there are opportunities to do that but at this point I'm not taking down.

The guidance I'm, just I was pointing out perhaps the obvious which is that it's one of the levers that we continue to to push on and explore.

Understood last one just on the deposit cost side, you have with the potential rates, turning and some non us central banks already cutting what's the lag effect here in terms of this quarter. The deposit costs were up seven basis points, what's the rate of change that you need to see before you can see a leveling out of the of the basis point increases that we see on the deposit cost side. Thanks Mark.

Yes.

So I guess is.

You know what weve seen what we've seen.

During the rate rise or increases whether that be the betas on the on the corporate side on the commercial side of kind of kind of tick up a lot faster and there tends to be a lag on the on the retail consumer side and.

As things as things turn.

I would expect.

To some extent similar similar type of direction notwithstanding that the retail deposit side still has that lag to it and there are other factors such as the competitive landscape that's out there for.

For deposits and so it's a little bit hard to kind of pinpoint exactly when when that stabilizes just given all of those factors, but were obviously managing it closely and managing it in the context of the broader strategy that I referenced a couple of times down.

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

Hi, good morning.

Good morning Betsy.

A couple of questions just on the deposit business a follow up there could you give us a sense I think you mentioned at the beginning of the call that you had a 2 billion dollar increase in deposits.

That was from the digital efforts you've got two thirds outside.

Your footprint and half of the two coming from folks that have your card, but didn't have a banking relationship with you just give us a sense of how that was relative to expectations and what you think the major drivers were for generating that growth.

Speaking to rate versus you know marketing versus any other factors that you want to add.

Yep.

So so one I would say that is that is in line with what we were expecting in the way of deposit performance through the digital sales channel. We have seen kind of broadly just good activity within our consumer retail clients not just with the net deposits, but also retaining deposits as they shift into into Asia, Oems and so and as as clients start to to make investments and so the flow levels have been very good. If you include both Oems and the deposits.

I would say we would expect continued growth in the in the deposits in the back half of the year.

It is a combination of and if you think about our strategy again to target card customers. A good portion of the deposit growth that we that we achieved were outside of our six markets.

And with our card customers, who did not have a retail banking relationship.

It's a byproduct I would say of not only.

Right. So there was some portion that is that is tied to the high yield savings account, although that you've been that does demonstrate the power of the model.

Because we know with these customers and they're not cannibal its not a cannibalization of what we'd gather inside of our inside of our market, but it's also a by product of the work we've been doing around.

Creating a value proposition and understanding which of our which of our clients are likely to respond to which what rewards and so you heard me mention.

Thank you points and and double cash rewards bills were part of the offerings.

Two two clients to to join US in terms of the retail banking products that we offer in exchange for.

Either more thank you points or more benefits that accrue from the double cash rewards. So it is a combination of.

Marketing targeted marketing in terms of knowing the customers we want to go after and what they're likely to respond to some of it is rate, yes, but it's a combination of all of those things and we expect.

Continued.

Continued growth.

And then I know you mentioned that the NIM came under a little bit of pressure as you had significant increase in.

Deposit growth and.

The the tie in question here is is there anything you need to see from these customers is there like do they need to keep their deposits with you for a certain amount of time before you're able to.

You know take some duration with these deposits on the asset side or.

Should we anticipate that as you're growing.

Your new deposits here out of footprint.

That that.

Gets reinvested in the front end of the curve.

Yes, so I mean, obviously there their LCR treatment for different types of deposits. These are largely time deposits that.

That we that we've.

Been bringing in I think that we would expect that to.

Like I said like that to continue.

Down the path, there's no reason for us to to feel as though the.

These are kind of short term in nature or anything of that sort of.

Okay, but they'd be match funded or match invested I should say is yes, sorry, Okay. And then just two other questions one on the TSS business.

Could you give us a sense of how you expect that business operates or performs in a declining interest rate environment. If we look at the forward curve, how should we expect TSS to behave and then you mentioned some strong pipeline with initiatives for the clients, maybe you could speak to that and I'm kind of interested in understanding what you're planning on.

Vis-a-vis the Libra announcement that came out of Facebook now I know Libra seems like it's more personal related but.

There is a C to b and a baby element with that so wanted to understand what your plans are.

Yeah.

My basic question is why do we need Libra seems like you might have what companies need so maybe just speak to that a little bit. Thanks.

Yes, I guess I'll start and then.

Mike May want to chime in so just in terms of the Cts business.

We obviously have seen very strong growth into TTS business over the over the past number of years and quarters.

And even this quarter with 7% growth, which is probably a little bit lower than what we've seen.

In prior years.

Just as the rate increases has started to.

Become fewer and now we move into a rate.

Likely rate reduction.

The impact of Dts is factored into.

At least the estimate that I gave you in terms of the impact of a 25 basis points.

Reduction it obviously would have an impact on.

On the growth rate, but I would I would say that the majority of the growth rates that we've experienced in our GTS business is not tied towards.

Toward not tied to the interest rate.

But instead tied towards.

Growth that we've had in both with multinational clients that are large and that we've been with for a long time, but also new.

Emerging clients as they've entered into two new markets, new countries and we've been there to assist them with.

With how they kind of grow their businesses and operations in those new environments, where it whether it be working capital or supply chain.

Needs that they that Theyve had and so I would expect to see continued growth.

In TTS, albeit at a slower pace in light of.

The rate environment, but again, our relationship with our clients are broader than just us taking their cash in holding your cash and we're offering them solutions that are a lot broader than just the rate that we pay them.

For cash the other piece that I'd mentioned.

Is that we have been and will continue to invest in technology around our TTS franchise.

It is it is obviously a very competitive space, but it's one where we've had a strong position for a long time, it's it's been nicely growing it's very efficient as high returning were nicely entrenched with many of our customers and we've got to continue to invest in the client experience.

In enabling faster cross border activity for those clients and so.

Good growth I expect to see continued good growth.

Requires investment were front of that investment to stay competitive and we'll continue to do so and I'll, let Mike kind of comment on some of the other piece as you mentioned.

Mark I would just going back to TTS for one second Betsy.

Operating in a declining rate environment is nothing new it's certainly not new in the US and you look at our GTS business or our operating around the world. Many many.

Jurisdictions, we operate we've been in declining rate environments for period of time and I think the work the team has done.

Moving from interest rate sensitive to more fee driven.

Types of relationships has been helpful. In that on your question pertaining to.

What's going on from a technology perspective, and in this case Libra.

In particular.

One is.

I am not we are not dismissive at all of these we look at them we study them.

As we've said we were not.

They are not part of the inaugural group.

Read the white paper several times.

At this point in time and again I look.

No and there's I think some.

Redeeming or there's some.

Some qualitative aspects that are appealing and I think theres theres, others that might raise some questions I think the way we think about it is that.

The market is moving and likely moving quickly towards.

24, seven real time frictionless.

Ubiquitous global money movements in payments and that's just a reality and that's going to happen and I think we're pretty well.

Positioned around that is I think of things like Libra not a question of if it's when the digital currency comes it's a question is that currency one that kind of operates as a consortium or is it a federal reserve or is it a central bank backed type currency and I think we're preparing for a world were both of those were.

Consumers businesses are going to have flexibility in terms of their choices of what they choose to you to use and our goal objective and mandate really is to be there was a system. That's got the capacity to operate across all of those.

So a lot of times think tackle highlight friction in the system and opportunities they have to cut friction out meaning you know takeout fee rates of legacy businesses.

Could you speak to how you're thinking about that because I think.

Some people might view.

He was a legacy business with.

No margin that can be taken out how do you how do you answer that kind of question.

Yes in the Betsy I would probably break our businesses into two components I would break it into a consumer business into it institutional payments business I think in the consumer business. It's clear that interchanges. An example is a friction that has existed for a period of time and as we've seen elsewhere in the world will likely to continue to come down.

And so.

And I think Thats, one reason why you've seen the disruptors the innovators show focused on consumer versus institutional payments because on the institutional side, there's really not much money in the pure movement of money. It's in the up it's in the it's in the operation of the operating account, where yes, you do get some float but by the way Libra.

As flow in their flow as I've read there are actually not paying that's where the partners are receiving their income.

There are frictions in foreign exchange there are frictions in terms of rates and other things that we combined with that but you've got to have the backend that can provide those services in today's age not only provide them, but provide them in a real time of scale way. So again, not dismissive, but on the institutional side of things that from a payments perspective, you've got to have the full package. It's not just the movement of money is not the answer in there and so again not dismissive, but and that's why the investments in areas like GTS. Our show important that we're continuing to to build out the front end, we're continuing to take pain points out whether those frictions or in the forms of fees your money or probably to our customers benefit even more so in the form of Onboarding.

And kind of all the the frictions that come in terms of account opening and making sure that we're investing in via Shea a mill and those other pieces such that we can continue to distinguish ourselves with our clients as the place to go.

Okay, great. Thank you.

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

And Erika your line is open.

Yes, Hi can you hear me now.

Good morning.

Hi, good morning. Thank you so much for answering the questions on your ROTC targets.

Maybe asking it a different way in the market seems to me now expecting three rate cuts between now and the end of 2020 I think previously you said set an efficiency goal of 53% for 2020 with 175 basis points of improved.

18, and 25 and 2020 and I was wondering if we do get free rate cuts and corporate activity.

Remained at current levels is there enough productivity savings that you can identify to reiterate the efficiency targets as well.

Yes.

Look I mean, we obviously the.

Volatility or rental rate movement has been pretty pretty significant over the past couple of quarters from us implement increase to now a reduction in profit and possibly three reductions and so on.

If we had significant moves in rates.

We can kind of do the math as to what the implications.

It would be I think we'd also have to make some assumptions around those other factors that are in the environment and what happens with those whether its trade and tariffs et cetera in order to really have a fulsome answer in terms of what the implications would be on achieving a 13 and a half and then being able to ascertain what levers we'd be able to pull so it's it's a difficult question to answer as I sit here today as to whether.

Which levers and how much of those levers we'd be able to pull walk protecting the things that Mike and I have referenced in still hitting a 13.5% I think to some extent I want to see how.

This first rate cut plays out and what the implications are for additional rate cuts. So again, we we could very well see as Mike suggested the market having to react to a rate reduction and certainty around the direction in a way that is favorable to trading businesses, but but we've got to kind of wait and see how some of that plays out.

Okay. Thank you.

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

Yes, good morning.

A quick question branded cards, you said you expect to maintain the current mix between the full rate and promotional but I guess breaking that down are you still expecting migration to bigger occurring from a promotional to full rate.

And you're just going to be relying on promotional for loan balances going forward.

More heavily relying on promotional balances going so in order to in order to maintain both the mix that we have we will need to continue to invest in promotional and bringing on promotional balances.

And so we will continue to do that they will continue now we have obviously a track record of understanding how to do that and and understanding the timing for which it takes for them to convert and flip into.

Average interest, earning balances, but we now are reaching a mix that we think is a a healthy mix for us and in order to maintain that we will need to continue to to invest.

Okay, and then secondly, you mentioned that you are seeing for macro conditions are slowing and Latin America, specifically, Mexico, but there was additional levers you can pull on the expense side I mean, what are examples of those additional levers that you have that are already in budget.

In.

In Latin America, and in Mexico, What we saw last year, we saw our expenses were up I want to say about 8% last year.

And what I, what I referenced.

What I what I referenced.

This year or this quarter and last quarter was the growth that we were seeing in EBIT and the growth that we're seeing in EBIT.

Is a byproduct in some ways of of the investment spend that we.

Made last year now starting to play pay dividends so to speak.

Through 2019 and so.

Investments or the digital capabilities that we.

That we invested in from a technology point of view.

The organization or business model structure that we put in place in terms of our our retail activity there and all of those things are are starting to play out as as expected we're about.

Don't know halfway through.

The investment plan that we announced a couple of years ago.

And we have the opportunity obviously to temper.

The remaining spend.

That was planned for to ensure that it's it's done consistent with the market opportunity that we see.

And so that obviously is a is a factor that would help on the expense line.

And then we're tempering.

Growth in terms of loan activity loan volume in light of what's going on.

In the economy and that obviously helps at least.

As we think about expected cost of credit and whatever so those are a number of factors that play out there.

Okay. Thanks.

Your next question is from the line of Marty Mosby with Vining Sparks.

Thanks for taking the questions. This morning.

Good morning.

To hit on the Razzi targets again.

What success.

During those goals in the fourth quarter of each of these years or what success be ultimate success actually for the whole year. So as you're kind of visiting that I kind of targets have you kind of reaching those by the end of each year, but are you really saying you're going to be 13.5% average for the whole year of 2020.

So the got the target that we've set.

Was for a 12% was the full year return on tangible common equity target.

And as was the case for the 13 and a half or 2020.

And then when you think about capital markets, our institutional business, it's been compressed or depressed for a while we keep thinking this is uncertainty in the marketplace or its related to something thats, causing a.

Just a short term hit.

But it's a somewhat more secular and when you start thinking about your goals for next year, especially in 2020.

Are we assuming some of this pressure there were end against the release.

And can you give us any kind of feel for the estimate of what you're kind of assuming the uncertainty and that has had an impact on the short term capital markets types of businesses.

Sure.

Marty what I would say is I think that theres part of it.

It is secular but today I would argue the majority of it is cyclical and what drives me to that statement is the intervention of central banks around the world and the amount of quantitative easing. If you tell me the curious just there forever.

And I would probably move towards the majority of it being secular.

But at some point the central banks have to start to back out of the market in terms of asset purchases in terms of liquidity and I actually think that theres going to be an opportunity for those that are there to step in and provide the liquidity and leadership on that on that front and again, what you see is and you see it you.

You follow it closely you listen to what everybody says, we're not measuring trading by the year, we're not measuring it by the quarter no trading in today's age is kind of day to day week to week month to month.

A change of sentiment out of the fed causes markets to react quickly and I think it's what's what makes the forecasting as you know.

Either mark or I speak at these conferences, so difficult you tend to kind of speak mid quarter and these things can change in either direction pretty quickly and so it's not a lack of engagement.

From a client perspective, it's a lack of conviction and again I think we've we've got the comment the combination of that with a bit of overhang from an environmental perspective, and clearly I think the central banks.

Continuing to be actively involved in some ways.

Taking part of the role that ultimately.

The banks will need to play in the future.

The thing that I'd add I'd add to that you know as we see the pressures that we have talked about impacting the trading businesses in many ways. We're not we're not just standing still.

As this happens and so you are you seeing.

You've seen us announce kind of the reorganization, if you will of our spread products or in our spread products area.

We recently announced recently announced under the new leadership in end markets.

Combining kind of our rates and currencies business both in an effort to ensure that we're better covering.

Better covering our clients and better positioned to cover our clients.

And you'll continue to see as markets evolve and as the industry evolves for us to constantly be looking at our business model for ways to improve it and to improve the effectiveness of it to improve the.

Profitability and returns associated with it and so we're we're we're mindful of kind of how things are changing.

To Mike's point, they do appear to be cyclical in nature, but we're constantly evaluating our businesses and trying to position ourselves effectively.

Thanks that was very helpful. And then lastly, I wanted to ask you as we think the fed.

Could begin to pull short term interest rates down.

Are we preparing to be able to begin to lower deposit rates instead of actually increasing so this has been a.

Quick inflection point, but I do think that youll be able to offset some of the impact as you're able to pull those deposit rates back now.

Yes, I mean look we've seen we've talked a little bit about earlier about the betas and how they vary from the corporate clients and commercial clients to the retail consumer client base and.

I think there are other important factors as rates start to move in a downward direction.

We have seen some of the players in the industry start to take rate down.

The other factors include the competitive landscape, that's out there and how players decide to adjust their pricing.

But it also includes how you think about the relationship with the customer.

And if it is in fact more than just that deposit relationship thats going to factor. It factor into how you think about pricing strategy, but I would imagine over over time.

With a a a clarity on the direction that you will see.

Baiters respond.

Overtime.

And historically, we've seen the backdrop of higher deposit betas as rates initially drop meaning you drop a little bit more and then eventually that has a slow down kind of reverse of what we had on the way up so thanks for your.

Answers for that.

Do your final question comes from the line of Gerard Cassidy with RBC.

Good morning, Mark Good morning, Mike Good morning Gerard.

You guys did very well in the C car. This year in terms of the amount of capital that was reduced during the stress test I think you dropped about 500 basis points, which was the lowest and maybe four or five years.

What was the primary driver was obviously.

De risking the balance sheet, but was it primarily coming from Citi Holdings falling off and then second.

If it continues to go this way would you consider lowering your CE tier one capital ratio.

And your target that is.

Yes so.

As Mike kind of alluded to earlier.

There are couple of factors that are involved in the in the CDT one ratio just taking that part of the question first.

And obviously we've had.

Our management buffer that is included there.

Of about 100 basis points, we have kind of a 3% place holder in terms of the.

The FCB.

And we are getting more clarity on on that it seems like in some of the recent commentary and as we get.

More clarity on the FCB proposal and other proposals and it takes out the risk of variability to how we think about capital planning, we will certainly take a look at the.

11.5% and see that that still that's still make sense.

You know in terms of the ask that we that we made of the 21 and a half billion in what was what was approved we obviously.

Ran our scenario with an eye towards.

The targets that were set in 11 and a half and this base case, but also ensuring we can achieve at least the minimums during the stress stress scenario and and the mix of assets that we have on the balance sheet, we have been.

Thoughtful first about the client needs through the course of 2018.

With an eye towards what the implication would be from a stress point of view as we go into a c. CCAR cycle and the longer term planning of the business and ensure that we ended the year in a in a place again that allow for us to serve those needs, but was mindful of the return necessary in light of stress losses that may be a by product of those types of assets. So that's what's kind of played out through.

The scenario in through the asset that we ultimately made.

Very good and Mark can you remind us or they still.

Implementing the operating risk capital charge for companies like yours that have exited businesses, but you're still being assessed a capital charge for those businesses, even though you're not.

Yes.

Very good and nonsense.

Hop up yet risk R.W. Baird.

And how much is that for you folks that is caution you in terms of capital I don't think we break that out we haven't we haven't broken.

Okay is there any color do you think coming from the new regulatory regime to maybe give you and your peers. Some relief in this area.

I don't I don't I don't panels, and so I think if you look across as we look across the industry peers, it's pretty consistent and that hasn't been contemplated just just and just to be clear I think you I think you know this but we were looking at or we utilize kind of boggabri standardize as it relates to our risk weighted assets right that is that is the.

The metric that that is that is involved there.

Very good and then shifting over to the institutional clients group, Mike I think you touched on in the markets area that there is some cyclical factors affecting you talked about this the quantitative easing.

In terms of secular in the cash equities area.

Did you guys see much of a mid two changes affecting your cash equity business this quarter.

This quarter.

No.

No again I think that.

You know over the kind of glide path of implementations are really haven't we haven't seen really many surprises and we actually went into this and continue to believe that we've got the ability as.

Clients kind of rationalize the counterparties to people that they deal with the cities in a position to be a winner in that and I think we we continue I think as you've seen is continue to climb up the tables continue to take share there.

Great and then just sit tight and can you guys give us a flavor for the investment banking pipeline. How does it look at the end of the second quarter relative to the end of the first quarter.

Yes, again on investment banking kind of as you as you saw in the numbers, we ended down 10%, but better than.

What I talked about that.

At Morgan Stanley the.

The strength, we saw in the end at the end of the quarter was really a pull forward with both with both some LCM activity as well as in M&A that said the dialogue that we have with with clients in investment banking remains strong and fully engaged in and quite quite constructive.

And.

We've seen particular strength in the us M&A activity.

Continue and so we kind of go into the balance of the year.

Feeling good again about that dialogue, but also recognizing that all these factors that we that we talked about influences the corporate sentiment and willingness to.

To take action and George when I think of it it's in some ways. It's.

The pipeline is your or find the pipelines are pretty good shape, but whats the market willing to accept what can get priced on what terms and so I think the pipelines are there I think the question is in what ways or the markets open to to get those deals done.

Great. Thank you for the color gentlemen, thank you.

Thank you.

Hi.

And presenters do you have any closing remarks.

Thank you everyone.

Have a good day.

This does conclude city second quarter 2019 earnings review call you may now disconnect.