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«PRESENTATION MATT O’CONNOR: Okay. Thanks, everyone. Up next is Citigroup. From our point of view, it seems like management has made a lot of ...»

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Deutsche Bank Global Financial Services Investor Conference

May 27, 2014


Matt O’Connor, Deutsche Bank


John Gerspach, Citigroup Chief Financial Officer


MATT O’CONNOR: Okay. Thanks, everyone. Up next is Citigroup. From our point of view, it seems like

management has made a lot of progress the last couple of years, obviously growing capital significantly,

lowering the volatility of earnings, regaining some share that they lost in capital markets, and then gaining some share on top of what they had lost a few years ago, and better managing expenses.

But clearly the latest CCAR round and denial of Citi's capital plan has a lot of folks scratching their head as to what more needs to be done before Citi can buy back stock. And I'm thinking there's a good chance that John will address some of these concerns in his presentation.

Just in terms of format, John's going to present for about 30 minutes, and then we're going to open it up right to Q&A from the audience. So please queue up your questions now. And with that, let me turn it over to Citi's CFO, John Gerspach.

JOHN GERSPACH: Thank you. I don't know, Matt, I think you got a much bigger round of applause than I did. So I guess when you're buying lunch for everybody, that kind of goes with the territory. So anyway, thank you all for joining me today. Today, I'd like to cover a few topics including Citi's recent results, the progress we're making on the execution priorities we laid out for you last year, and finally our tangible common equity allocations by business.

While the operating environment has proved challenging over the past year, we have taken significant actions in each of our execution priorities. And importantly, we believe that we can do better. You'll see that our core franchise is actually performing quite well, given the environment, with mid-teens returns on the tangible common equity supporting the operating businesses. Our goal is to better reflect these strong returns at the Citigroup level as we continue to utilize our deferred tax assets, wind down Citi Holdings, and ultimately position the firm for increased return of capital over time.

Turning briefly to our financial results. On slide 3, you'll see the progress that we've made at Citigroup since 2011. Our return on assets has improved steadily from 52 basis points in 2011 to 74 basis points for the most recent 12 months, driven by earnings growth in Citicorp, a significantly reduced drag in Citi Holdings, and a reduced balance sheet.

While we faced revenue pressures over the past year, we have also continued to deepen our relationships with our target clients. And we've taken significant actions to improve the efficiency of how we come to market, simplifying and standardizing our operations and in some areas paring back to focus our resources on a better defined set of activities.

These executions are consistent with the priorities that our CEO, Mike Corbat, laid out for you just about a year ago, with three key areas of focus which remain in place today. First is continuing to improve the efficiency of Citicorp by allocating our resources to the most productive markets, products, and client segments, all while funding growth and absorbing higher regulatory and compliance costs.

Second is driving Citi Holdings closer to break even as we continue to wind down the assets in an economically rational manner and move past our legacy legal issues. And finally, we want to demonstrate a consistent ability to generate regulatory capital through both high-quality earnings and the utilization of our deferred tax assets.

Copyright © 2014 Citigroup Inc.

TRANSCRIPT Deutsche Bank Global Financial Services Investor Conference May 27, 2014 This is a first step. And I believe our progress over the past five quarters is clear. But the real goal, of course, is to be able to return a growing portion of our capital we generate back to our shareholders. The Fed's objection to our 2014 capital plan was a deep disappointment, and we are committed to bringing our capital planning process in line with the highest standards, thereby paving the way for a sustainable return of capital over time.

Let me take a moment to update you on the actions we've taken starting with Citicorp on slide 6. While the revenue environment has been challenging, we have been able to offset much of this pressure with expense discipline, driving the efficiency ratio in Citicorp from 63% in 2011 to 59% over the last 12 months.

At the same time, we've continued to deepen our client relationships with steady growth in loans and deposits across both our consumer and institutional franchise. This progress reflects a better allocation of our resources within Citicorp, optimizing our expense base across markets, further concentrating our efforts on our target client base, and finding ways to simplify and standardize our operations.

I'll start with an update on our markets. Last year, we rolled out a resource allocation framework categorizing each market into one of four buckets. Attractive markets where we had a strong position, good efficiency metrics, and opportunities to expand were characterized as “invest-to-grow” markets, comprising about 30% of Citicorp revenues.

Markets where we had a strong position and good efficiency but where we saw fewer growth opportunities were designated as “stay the course”, representing about 5% of revenues. And then about two-thirds of our revenues were in markets where we saw the need to drive better efficiency and returns.

“Optimize-then-grow” markets represent about 55% of revenues including large markets in the U.S. and U.K. And “optimize/restructure” markets with 10% of revenues with those with the least attractive efficiency metrics and returns.

Slide 7 shows our Citicorp markets under the same definitions as last year to provide comparability. Some numbers have changed modestly from last year, reflecting the movement of Credicard into discontinued operations as well as some updated cost allocations. But on a comparable basis, you can see the progress we've made in the optimized markets where we've reduced the total efficiency ratio by over 300 basis points from 2012 to 2013.

We've taken additional actions in 2014 including the announced sale of our consumer business in Honduras, which is in the “optimize/restructure” bucket on this slide. While we are pleased with the progress, we are far from satisfied. These optimize markets still create a drag on our overall efficiency, and in order to hit our mid-50%s efficiency ratio target for Citicorp in 2015, there is further work to be done across the consumer and institutional businesses.

Taking each business in turn, slide 8 shows a snapshot of Citi's Global Consumer Bank. We operate roughly 3,600 retail branches across 35 markets, and our goal is to be the preeminent bank for emerging affluent and affluent customers in large urban areas where we can achieve attractive returns.

GCB generated close $38 billion of revenues and over $6.5 billion of net income over the last 12 months, with a return on assets of roughly 170 basis points. Our diversified footprint affords us unique exposure to faster growing regions of the world where we have been successful in growing our loan portfolio with largely stable credit trends. We have unparalleled scale in our cards business as the number one credit card issuer globally by loans; and we tend to serve a consumer base with a higher amount of deposits and investible funds through our Citigold retail franchise – we have $169 billion of assets under management.

With this unique model as a starting point, slide 9 shows the key efficiency priorities for our business.

First, as I just mentioned, we are focusing our resources on attractive markets where we have a Copyright © 2014 Citigroup Inc.

TRANSCRIPT Deutsche Bank Global Financial Services Investor Conference May 27, 2014 competitive position. This means not just rationalizing our footprint to focus on the major cities but also transforming our network to leverage branch, digital and other channels.

We're also sharpening our focus on our target client segments, high credit quality customers in the world's top cities, with a somewhat broader reach in cards and certain markets like Mexico. We have a retail banking presence in more than 120 of the world's top cities, where we target clients with very similar banking needs across these markets.

With this footprint and client focus, we believe we can leverage our global scale by driving our business to more common products, processes and platforms. This means strengthening and simplifying our product offerings, standardizing our processes for better efficiency, better controls and better customer service, and driving our 35 markets to a common infrastructure.

To this end, we have taken several actions over the past six quarters. We've exited or announced the sale of six consumer markets across Europe and Latin America. We sold our non-core mass market credit card business in Brazil. We've nearly completed the repositioning of our franchise in Korea, concentrating more of our branch network in the major cities and on our target client base.

We're actively resizing our North America mortgage business for the lower revenue environment. And at the same time, we've been closing or selling branches outside the major cities in North America. Again, focusing our efforts on target markets, where we have a competitive position.

We're continuing to rationalize our number of card products. We were rapidly consolidating support sites for better efficiency. And we remained focused on migrating our 35 markets onto a common technology platform. While we've accomplished a great deal, we are by no means finished, and the statistics on the right side give you an idea of where we expect to end the year on some key expense drivers.

Slide 11 shows the efficiency ratio for Global Consumer Banking on a trailing 12-month basis. Total franchise results are shown on the light blue line, while the dark blue bars represent the efficiency ratio excluding North America mortgage and Korea. As we have discussed in the past, revenues have declined in both North America mortgage and Korea over the past year. And this resulted in a significant drag on our reported operating efficiency.

Outside of these businesses, we have made steady progress, reducing our efficiency ratio from nearly 56% a year ago to just over 54% today, all while continuing to invest in those markets where we see growth opportunities. While we believe the revenues in North America mortgage and Korea have largely stabilized, we will continue to take actions to reduce our cost base and improve efficiency in these businesses, as well as our consumer business more broadly.

Turning to our institutional business, over the past 12 months, ICG generated over $33 billion in revenues and $9.5 billion in net income for a return on assets of 89 basis points. I know from the outside it is difficult to compare one institutional business to another, but it is the global nature of our franchise that really differentiates us from our peers.

We operate the largest proprietary closed loop payment network in the world with direct connectivity to the banking systems in roughly 100 countries. We have trading desks in 80 countries. We have clearing and custody capability in roughly 60 countries. And we facilitate about $3 trillion of transaction flows on a daily basis. This drives significant capital markets activity in areas like foreign exchange as we help our clients grow and transact around the world.

On slide 13, we frame our key execution priorities. First, we are focused on deepening our relationships with our target clients, the world's largest multinational corporations and investors who truly value our global franchise as they grow and operate around the world. In almost every case, we already have a relationship with these companies, and our goal is to serve our clients across more products and more Copyright © 2014 Citigroup Inc.

TRANSCRIPT Deutsche Bank Global Financial Services Investor Conference May 27, 2014 geographies in an integrated manner. And importantly, we are doing so with a keen focus on efficiency and resource allocation given today's cyclical headwinds and the challenging revenue environment.

With these priorities in mind, we've taken several actions over the past year and a half. First, we've gained overall market share with our target clients across many products and regions. This progress has helped us diversify our revenues and grow historically undersized businesses such as our private bank, investment banking, and equities. We've also simplified our organization, removing the management layers in Securities & Banking and Transaction Services to operate in a more integrated manner.

We've rationalized our coverage efforts, better allocating our resources to a defined set of target clients.

We reduced capacity in certain areas, and we're focused on improving our back and middle office efficiency. The result of these efforts, as shown on the right side of this slide, is that over the past year and a half, we've diversified our revenues with growth in non-FICC businesses while improving our overall efficiency.

Turning to slide 15, as we have shown in our earnings presentations, on a trailing 12-month basis, we have reduced the operating expense base in ICG in every quarter for over two years, though there is still work to be done for ICG to achieve our 2015 target efficiency ratio of 53% to 57%. Both our efficiency ratio at 59% and our comp ratio at 29% compare favorably to peers today.

Turning briefly now to Citi Holdings. We've made significant progress in reducing the assets in Citi Holdings, down by roughly $700 billion from its peak in early 2008, and by almost $100 billion or 45% over the last two years. Over 60% of the remaining assets are North America mortgages, and we continue to sell those loans opportunistically but do not see an opportunity right now for a larger scale sale at attractive levels.

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