Citigroup, Inc.

Hello and welcome to Citi's 4th Quarter 2018 Earnings Review. Today we are joined by Citi's Chief Executive Officer, Mike Corbett, the Chief Financial Officer, John Gersback, and Citi's incoming CFO, Mark Mason. Today's call will be hosted by Susan Kendall, Head of Citi Investor Relations. We ask that you please hold all questions until the completion of the formal remarks at which time you will be given instructions for the question and answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Ms. Kendall, you may begin.

Thank you, Natalia. Good morning, and thank you all for joining us. On our call today, our CEO, Mike Corbett, will speak first. Then John Gersback, our CFO, will take you through the earnings presentation, which is available for download on our website, Citigroup.com. Afterwards, we'll be happy to take questions. Before we get started, I would like to remind you that today's presentation may contain forward-looking statements which are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results in capital and other financial conditions may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today, and those included in our SEC filings, including without limitation the risk factors section of our 2017 Form 10-K. With that said, let me turn it over to Mike.

Thank you, Susan. Good morning, everyone. Excluding the one-time impact of tax reform, we reported earnings of $4.2 billion for the fourth quarter of 2018, or $1.61 per share. Our net income for the year totaled $18 billion, or $6.65 per share, a 25% increase from 2017. During 2018, we made solid progress towards the 2020 targets as we had committed. Our return on tangible common equity reached 10.9%, exceeding the 10.5% we targeted for the year. And despite the market conditions we experienced throughout the fourth quarter, we still improved our operating efficiency to 57% for the year. In addition, we grew loans and deposits and constant dollars by 4% and 7% respectively, improved our return on assets to 93 basis points, and managed our affected tax rate down to the 23% range, a little better than we had forecast. We had positive operating leverage, and our EBIT was up 5% on an underlying basis. While the revenue environment was more challenging than we had anticipated, we responded decisively by managing both our expenses and our balance sheet in light of the lower market-sensitive revenues. Our expense base declined by 4% both year over year and sequentially this quarter, taking our annual expense base to below $42 billion, and we continued to prudently manage risk-weighted assets to optimize our capital needs. While we won't sacrifice the investments which are key to competing in the future, we also have to ensure that we remain flexible and adapt to whatever market conditions and economic conditions that materialize. Turning to the quarter, in the institutional clients group, our market-sensitive products generally had a challenging quarter, especially in fixed income. We did gain share in M&A. but investment banking was impacted by a decline in equity and debt originations during the quarter. Our accrual businesses, which consist of Treasury and Trade Solutions, Security Services, the private bank, and corporate lending, continued their very strong performance, up 11% for the full year in constant dollars. And as a matter of fact, we've now had five straight years of consecutive growth in TTS and are confident that we can continue with that momentum. In global consumer banking in the US, we saw 4% underlying growth in branded cards and 6% revenue growth in retail services this quarter, and retail banking grew 5% ex-mortgages. Internationally, we saw good growth in Mexico, especially in the cards products, while Asia was impacted by lower revenues from investment products. During the year, We returned $18.4 billion in capital to our shareholders. Buybacks of common stock reduced the shares outstanding by over 200 million shares from a year ago, or 8%, and our tangible book value per share increased by 6%. We finished the year with a common equity tier one ratio of 11.9%, up from 11.7 in the third quarter as risk-weighted assets declined. We'll be making our CCAR submission in the spring and believe we've got the capacity to reach our three-year capital return target of $60 billion. As 2019 begins, we find ourselves operating in a more uncertain macro environment. From what we see, economic growth is stronger and more resilient than recent market volatility would indicate. That said, we're prepared to make adjustments if we get the sense economic conditions are changing. We remain committed to our 2020 financial targets, and this year we've targeted increasing our return on tangible common equity to 12% and further improving our efficiency ratio. We continue to utilize technology to improve the client experience and lower our cost to serve, whether it's by automating processes or enhancing our mobile channels and will continue to roll out new digital capabilities throughout the year. As I mentioned before, we have levers we can pull if revenues come in lower, but we're very cognizant of the need to invest for the long term so that we can serve our clients with distinction. One thing before we go to Q&A, I want to take a minute on the occasion of his final earnings call to thank John for his 28 years of service to the firm. and to congratulate him on his retirement. I know those on the phone respect him for his candor and honesty, and we'll miss him. He leaves things in good hands with Mark Mason, and I know everybody's going to enjoy working with Mark. With that, John will go through our presentation, and then we'd be happy to answer your questions. John? Thank you very much, Mike. Good morning, everyone. Starting on slide three, first let me note that all comparisons throughout this presentation exclude the one-time impact of tax reform in the fourth quarter of 2017, as well as a subsequent adjustment in the fourth quarter of 2018. As previously disclosed, we recorded a non-cash charge of $22.6 billion related to tax reform in the fourth quarter of 2017. At that time, we noted that the final impact of tax reform could differ from the provisional estimate, based on the finalization of our own analysis, as well as additional guidance to be received from the U.S. Treasury Department. In the recent quarter, we finalized our analysis and adjusted the provisional charge, resulting in a benefit to income taxes of nearly $100 million, or 3 cents per share. Excluding this benefit, we earned $1.61 per share in the fourth quarter of 2018. Now, looking at our results on this basis, net income of $4.2 billion in the fourth quarter grew 14% from last year, driven by a reduction in expenses, lower cost of credit, and a lower effective tax rate. And EPS grew 26%, including the impact of an 8% reduction in average diluted shares outstanding. Revenues of $17.1 billion declined 2% from the prior year, primarily reflecting lower fixed income markets revenues, as well as the wind down of legacy assets in corporate other. Expenses declined by 4%, or over $400 million year over year, resulting in our ninth consecutive quarter of positive operating leverage. And cost of credit was down 7% versus last year. Our effective tax rate was 21% for the quarter, reflecting an adjustment to our full year estimate of income taxes under the new tax regime, as well as other resulting actions we have taken. This results in an effective tax rate of just over 23% for full year 2018, which we believe to be an appropriate tax rate as we look into 2019. In constant dollars, Citigroup end-of-period loans grew 4% year-over-year to $684 billion and deposits grew 7% to $1 trillion. Now, looking at full year results on slide four, we made steady progress in 2018, although revenue growth remained somewhat below our medium-term outlook. As a reminder, in 2017, we recorded a one-time gain of roughly $580 million on the sale of a fixed income analytics business in ICG. In 2018, we had a gain of roughly $250 million on the sale of our Mexico asset management business in consumer. Excluding these items, consumer revenues grew 3% in constant dollars, slightly below our medium-term goal. This is primarily driven by the near-term impact of weaker market sentiment on our Asia wealth management revenues, the impact of partnership terms that came into effect in 2018 in U.S.-branded cards, which we have now lapped as we go into 2019, and finally, in U.S. retail, a drag from lower U.S. mortgage revenues, which should abate going forward, as well as rising deposit sensitivity. Institutional revenues also grew 3%, as strengthened our accrual businesses in treasury and trade solutions, security services, corporate lending, and the private bank was partially offset by weakness in fixed income, as well as softness in equity and debt underwriting. These results largely reflect the macro uncertainty seen in the fourth quarter, which created a challenging trading environment, as well as an industry-wide slowdown in underwriting activity. Despite these headwinds, we made continued progress on our efficiency goals, driving our full-year efficiency ratio to 57%. Credit quality remained broadly stable across the franchise, and underlying pre-tax earnings grew 5%. EPS grew by 25%, including the benefit of share buybacks, as well as a lower effective tax rate. And our full-year ROTCE is just under 11%, well above our target for 2018, which positions us well relative to our 12% goal for 2019. Turning now to each business, slide five shows the results for North America consumer in more detail. In total, revenues of $5.3 billion grew 1% in the fourth quarter. Retail banking revenues of $1.3 billion declined 1% year-over-year. Mortgage revenues continued to decline, mostly reflecting lower origination activity and higher funding costs. Excluding mortgage, retail banking revenues grew 5% year-over-year in the fourth quarter, slightly better growth than we saw in the third quarter as deposit spread stabilized in our commercial portfolio and we faced fewer headwinds from episodic transaction activity. Average deposits declined 1% year-over-year, primarily driven by the transfer of deposits into investments. Assets under management were flat year-over-year as 5% underlying growth was offset by the impact of market movements, given the equity market sell-off at year-end. Excluding market movements, total deposits in assets under management grew 1% with improving momentum. If you look at 2018 versus 2017, we more than doubled our net new money inflows across consumer deposits and investments this year, and we retained a larger dollar amount of those deposits that transferred into investments. Turning to branded cards, revenues were roughly flat versus the prior year. including the impact of the sale of the Hilton portfolio, as well as partnership terms that went into effect in 2018. Excluding Hilton, revenues grew 2% year over year, including 7% growth in net interest revenue, reflecting loan growth and spread improvement versus the prior year. Average loans grew 3% versus last year, including 9% growth in interest earning balances, as recent vintages continued to mature and we saw strong balance retention across our portfolio. This growth improved by over 30 basis points to nearly 880 basis points, a little better than we had anticipated for the fourth quarter. We're now approaching a more optimal mix of interest earning and non-interest earning balances. As such, we expect to remain broadly around this level of spreads going forward, although we will see quarterly fluctuations and actual performance will depend on a number of factors, including our acquisition mix, the rate environment, and our balance between proprietary and co-brand portfolios over time. This should fuel strong underlying revenue growth in 2019 and beyond as we've now lapped the impact of partnership renewals on our fee income and we're growing loan volumes at more attractive spreads. We continue to expect reported growth in total revenues in 2019, even considering the Hilton and Visa B gains we took in 2018. Finally, Retail services revenues of $1.7 billion through 6%, driven by organic loan growth, as well as the benefit of the acquisition of the LL Bean card portfolio. Total expenses for North America consumer were up 3%, primarily reflecting investments. Turning to credit, total credit costs were up 2% year over year, reflecting loan growth and portfolio seasoning in both branded cards and retail services. Our NCL rate in U.S. branded cards was 297 basis points for full year 2018, exactly in line with our 3% outlook. And in retail services, our NCL rate was 488 basis points for the full year, which is again consistent with our 5% outlook in that segment. On slide six, we show results for international consumer banking in constant dollars. Fourth quarter revenues of $3.2 billion grew 1% driven by Latin America. In Latin America, total consumer revenues grew 5%, or 7%, excluding the ongoing impact of the sale of our asset management business in the third quarter. Card revenues grew 8% on continued strength in purchase sales and loan growth, while retail banking revenues grew 6%, excluding the impact of the asset management sale. Retail loan growth was muted in Mexico this quarter, driven by an episodic pay down in our commercial portfolio, while we continued to generate solid growth in deposits. Turning to Asia, consumer revenues grew 1% year over year in the fourth quarter, excluding the impact of a modest gain on the sale of a merchant acquiring business in the prior year. Excluding the gain, card revenues grew 3% year-over-year on continued growth in loans and purchase sales, and retail banking revenues declined 1%, reflecting the lower investment revenues. While investment revenues remain under pressure, we continue to see positive inflows into assets under management, as well as 8% growth in Citigold clients. and excluding investment revenues, our underlying Asia consumer growth remains broadly in line with our medium-term expectations driven by growth in loans and deposits. Total average loan growth of 3% in Asia includes the impact of our continued repositioning away from lower return mortgage assets. Excluding mortgages, loans grew 5% year over year. In total, Operating expenses were up 1% in the fourth quarter, as investment spending and volume-driven growth were largely offset by efficiency savings. And cost of credit declined 1%, reflecting a modest reserve release in Latin America this quarter. Slide 7 shows our global consumer credit trends in more detail. Credit remained broadly favorable again this quarter across regions. In North America, the sequential uptick in delinquencies is consistent with the seasonal trend we've seen in other years from the third to the fourth quarter, driven by CARTS. This typically translates then into higher NCL rates in the first half relative to the second half of the year. Turning now to the institutional clients group on slide eight, revenues of $8.2 billion were down 1% in the fourth quarter, as strength in our accrual businesses, as well as revenue growth in M&A and equity markets, were more than offset by weakness in fixed income. Total banking revenues of $5 billion grew 5%. Treasury and trade solutions revenues of $2.4 billion were up 7% as reported and 11% in constant dollars, reflecting continued growth in transaction volumes and deposits, as well as improved spreads. Investment banking revenues of $1.3 billion were down 1% from last year, as strong M&A performance was more than offset by a decline in underwriting reflecting lower market activity. Private bank revenues of $797 million grew 3% year over year. driven by growth in loans and investments, as well as improved deposit spreads. And corporate lending revenues of $559 million were up 9%, reflecting loan growth along with lower hedging costs. Total markets and security services revenues of $3.1 billion declined 11% in the fourth quarter. Fixed income revenues of $1.9 billion declined declined 21% year over year due to a challenging trading environment during the quarter. At the Goldman Conference in early December, I noted that while clients remained engaged, we did not see the level of transaction activity we had originally expected this quarter, in G10 rates in particular, as clients had largely stayed on the sidelines in an uncertain macro environment. Thereafter, the environment continued to deteriorate, characterized by volatile market conditions and widening credit spreads. This resulted in a risk-off sentiment where market making became even more challenging in December across both rates and currencies and spread products. Equities revenues were up 18%, mainly reflecting the impact of an episodic loss in the prior year. On an underlying basis, revenues were down slightly, as strong client activity, particularly in derivatives, was offset by a challenging trading environment and lower client financing balances. And finally, in security services, revenues were up 7% as reported and 12% in constant dollars, driven by continued growth in client volumes and higher interest revenues. Total operating expenses of $4.8 billion declined 2% year over year on lower compensation costs associated with lower revenues. And finally, cost of credit was $129 million this quarter, reflecting a normalization in credit trends in our corporate loan portfolio. Looking at the full year, Excluding the previously mentioned gain of roughly $580 million in 2017, both revenues and expenses grew by 3% in 2018. We generated over half of our revenues in banking, which grew 5% on continued momentum in TTS, the private bank, and corporate lending. Security services grew 11%. as we continue to deepen client relationships while also benefiting from the higher rate environment. And in equities, we made solid progress with revenues up 19% for the full year. The combined strong performance in these businesses helped to offset weakness in investment banking and fixed income down 7% and 6% respectfully on a full year basis. But even within these businesses, there are still some standouts. In investment banking, we showed continued progress in M&A with revenues up 16%. And in fixed income, if you look at our total G10 FX and local markets rates and currencies business, revenues were far more stable at roughly flat to last year as we benefited from steady corporate flow activity across our global network. Cost of credit was higher than the prior year given lower reserve releases but credit quality remains solid with roughly five basis points of losses for the year. Slide 9 shows the results for corporate other. Revenues of $470 million declined 37% from last year, driven primarily by the wind-down of legacy assets. Expenses were down 45%, also reflecting the wind-down, as well as lower infrastructure costs. And pre-tax income was $44 million this quarter, better than our outlook, reflecting episodic gains in our investment portfolio, as well as lower total expenses relative to our prior expectations. Looking ahead, we would still expect a modest pre-tax quarterly loss in corporate other in 2019. Slide 10 shows our net interest revenue and margin trend. As you can see, total net interest revenue of $11.9 billion this quarter grew roughly 8% from last year in constant dollars, as growth in core accrual net interest revenue was partially offset by lower trading-related net interest revenue, as well as the continued wind-down of legacy assets in corporate other. Core accrual net interest revenue grew by $1.4 billion year over year, well above our prior expectations driven by the FDIC surcharge benefit, improved spreads in our U.S.-branded cards business, and balance sheet optimization as we deployed more cash into better-yielding assets. On a sequential basis, our core accrual net interest margin improved by 12 basis points to 372 basis points, including four basis points from the FDIC surcharge benefit. The remaining eight basis points reflect momentum we've seen building over the second half of the year, given higher interest rates, continued loan growth, and an improved loan mix. As we noted last quarter, even though core accrual net interest revenues grew sequentially from the second to the third quarter of 2018, our net interest margin remained flat at 360 basis points as the benefits of higher rates and loan growth were offset by higher average cash balances during the quarter. As we deployed that liquidity into better yielding assets, you can now see that underlying revenue improvement pull through in the net interest margin. On a full year basis, core accrual revenue grew by more than $4 billion over 2017, ahead of our outlook of $3.7 billion for the year, with about $1 billion coming from the benefit of higher interest rates. As we had expected, this was partially offset by a nearly $500 million decline in the net interest revenue generated in the legacy wind-down portfolio in Corporate Other. And trading-related net interest revenue declined by nearly $1.7 billion year-over-year, similar to the year-over-year decline seen in 2017. So if you look at our total net interest revenue for full year 2018, we grew by about $2 billion year over year in constant dollars. As we look at net interest revenue for 2019, we're unlikely to get the same magnitude of benefit from rate hikes this year. However, a slowing rate trajectory should also translate into a smaller drag from trading-related net interest revenue from 2018 to 2019. We should also see a smaller drag from the wind down of legacy assets. And then, of course, we will benefit from the absence of the FDIC surcharge, which is about a $400 million benefit year over year. So, on a net basis, we expect to generate as much or even more than the $2 billion of growth in net interest revenue that we saw in 2018, even if we see less incremental benefit from rate hikes. Of course, In 2018, this growth in net interest revenue was partially offset by a roughly $1 billion decline in non-interest revenues, driven by a drag from partnership renewal terms and lower mortgage revenues in consumer, the wind down of legacy assets, the impact of gains we took in 2017 on hedging activity in corporate treasuries, and the net impact of previously mentioned one-time gains on asset sales. We do not expect non-interest revenues to decline again in 2019 as we've now lapped the operating revenue headwinds in consumer, and we expect less pressure from the wind-down of legacy assets. On slide 11, we show our key capital metrics. In the fourth quarter, our tangible book value per share increased 6% year-over-year, to $63.79 driven by the lower share count, and our CET1 capital ratio improved to 11.9% driven by a reduction in risk-weighted assets as we continued to prudently manage the balance sheet. Our total CET1 capital declined modestly during the quarter as net income and DTA utilization were more than offset by $5.8 billion of total share buybacks and dividends. For the full year, we returned over $18 billion of capital to common shareholders for a payout of 110% of net income to common. And based on our 2018 CCAR capital plan, we expect to return an additional $9.8 billion of capital in the first half of 2019. In summary, we made continued progress in 2018. And while the revenue environment proved more challenging than we had anticipated, especially in the fourth quarter, we delivered on several key objectives. We improved our ROTCE by nearly 300 basis points, achieving a full-year ROTCE of 10.9% and exceeding our goal of 10.5% in the year. We delivered nearly 100 basis points of improvement in our efficiency ratio while continuing to invest in our futures. We maintained our credit discipline, growing our loan portfolio while maintaining loss rates that were well within our medium-term expectations across every business and region. We achieved a benefit to our ongoing effective tax rate under the new tax regime that exceeded our initial estimates. And we delivered on our capital optimization goals, returning over $18 billion of capital through share buybacks and dividends during the year. we recognize that the bar gets even higher as we go into 2019. We also recognize that we're in an uncertain macro environment, where the market is beginning to discount future growth, and this may create a more volatile operating environment, as we saw in the fourth quarter. But we're continuing to manage the franchise responsibly, and we're committed to steady, sustainable improvement in both our efficiency and returns. If you look at our performance in 2018, several businesses performed well with good visibility into 2019. The largest of these is our Treasury and Trade Solutions franchise, which generated over $9 billion of revenues and posted its fifth consecutive year of growth in constant dollars. Our other accrual businesses in ICG, across security services, corporate lending, and the private bank, generated another $8 billion of revenues with good line of sight into 2019. Our Mexico consumer franchise, with nearly $6 billion of revenues, continued to grow with a favorable market backdrop, including record low unemployment and strong consumer confidence. And while our U.S. branded cards franchise generated only 1% growth for the full year, we saw 3% underlying growth in that franchise in 2018, with momentum as we exited the fourth quarter. That's a business with nearly $9 billion of annual revenues, where we are now realizing the benefits of our investments over the past three years. We also made significant progress in bringing our U.S. consumer business together for a more powerful client-centric franchise as we go forward. And we took on new portfolios like the LLB and CART acquisition to augment our organic growth. Of course, it's more difficult to predict the operating environment in areas like trading and investment banking. But we continue to show good progress in M&A and equities this year, and our global FX business proved to be resilient in a challenging market. As we look to 2019, we're preparing for a range of operating environments with the focus on achieving our ROTCE target of 12% this year in a responsible, sustainable way. From a revenue perspective, in addition to the good momentum we're seeing in many of our businesses, we also have other revenue tailwinds, including the absence of the FDIC surcharge, as well as a smaller expected drag from the wind down of legacy assets and corp others. In 2018, we absorbed over $1 billion of total revenue drag from legacy assets, which depressed top-line growth by about 1%, and it should drop to about half that amount in 2019. In addition, on the expense side, we're now beginning to see efficiency savings meaningfully outpace the incremental investments we continue to make in the franchise. In the second half of 2018, we realize a net benefit to expenses of roughly $200 million as savings exceeded incremental investments. That should grow to around $500 to $600 million of net incremental savings in 2019, plus an additional $500 to $600 million of net incremental benefits in 2020. These net savings should offset volume-driven expenses as we continue to grow the business. And it should also result in positive operating leverage for Citi and Total and for our consumer and institutional businesses in 2019. Of course, the magnitude of operating leverage we can achieve this year is sensitive to the revenue environment. But even if the environment is challenging, we believe we can deliver more total efficiency improvement than we did in 2018. And achieving our 12% ROTCE goal for this year is not dependent on capturing the full efficiency benefits we laid out in the fall, which showed roughly 175 basis points of improvement to our efficiency ratio in 2019. Credit continues to perform well. Our effective tax rate is coming in better than we had originally estimated under the new tax regime with the potential to move somewhat lower. And as you saw in the fourth quarter, if growth opportunities are limited, we will prudently manage the balance sheet to limit RWA growth and therefore our capital needs. It's still our goal to get the efficiency ratio into the low 50% range. and we believe at the right level given the investments we're making in digital and automation as well as our mix of businesses. But our primary goal is to responsibly and sustainably improve the return we're delivering on our shareholders' equities from the roughly 11% we achieved in 2018 to about 12% this year and over 13.5% in 2020. And with that, Mike, Mark, and I are happy to take any and all questions.