Citigroup, Inc.

Hello, and welcome to Citi's First Quarter 2019 Earnings Review with Chief Executive Officer, Mike Carbet, and Chief Financial Officer, Mark Mason, CFO. 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 former 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, and Mark Mason, 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 2018 Form 10-K. With that said, let me turn it over to Mike.

Thank you, Susan, and good morning, everyone. This morning we reported earnings of $4.7 billion for the first quarter of 2019. Our earnings per share of $1.87 are up 11% from a year ago. We continue to make progress against our financial targets and strategic priorities. First, in regards to improving our return on capital, our return on tangible common equity rose to 11.9%, up 50 basis points from a year ago. We had positive operating leverage and improved our efficiency for the 10th straight quarter. And we had strong growth in both loans and deposits in our core businesses. In our global consumer bank, we had underlying revenue growth and positive operating leverage in every region, excluding the Hilton gain last year. Total revenues grew 4% on flat expenses. We grew our operating margin by 8%. and credit costs remain broadly in line with our expectations, driving double-digit EBIT growth. In North America, we saw strong underlying growth of 5% in our branded cards portfolio and 3% growth in retail services. We saw deposit growth in retail banking and introduced new products to support our branch-light digital heavy strategy in the U.S. In Mexico, we had 5% underlying growth and while Asia grew at a slower rate due to a very strong prior year in investment revenues, loan and deposit growth remained solid. Our institutional clients group also performed well. In our steady accrual-type businesses, such as Treasury and Trade Solutions and Security Services, overall revenues were up 7% in constant dollars. We also had a 20% increase in investment banking, where we have steadily been gaining share among our target clients. Fixed income did rebound from the fourth quarter with modest year-over-year growth, while equities was impacted by a weaker environment. We continued to execute against our second goal in regards to improving the return of capital to our shareholders. During the quarter, we returned over $5 billion in the form of buybacks and dividends. We repurchased 66 million common shares in the quarter and have reduced our shares outstanding by 9 percent from a year ago. We believe we're on track to reach the commitment we made at Investor Day of returning at least $60 billion to our shareholders over the three CCAR cycles ending next year, subject, of course, to regulatory approval. We recently completed our 2018-2019 CCAR submission to the Federal Reserve, which is the third tranche of that commitment. When we entered the year, we talked about the need for us to be flexible to meet a range of operating environments given the way 2018 ended. We have multiple levers at our disposal, including expenses, balance sheet, and continued credit discipline. I think we used them correctly, and now the environment seems to be normalizing. While GDP growth does appear to be slowing somewhat, we still see good consumer and corporate engagement. We'll continue to focus on serving our clients and finding opportunities to deepen our relationships across our consumer and institutional businesses. We remain committed to executing our strategy and to meeting our financial targets. As you know, we pride ourselves on having a deep bench, and last week we called on that depth when we selected new leadership who helped drive our firm forward in light of Jamie Faris's retirement. Haku Ibarra, Carrie Lathrop, Andy Morton, Mary McNiff, and Jessica Roos all have decades of experience at our firm. I also think that change at the top is healthy and creates opportunities to do things differently and shows that we take our talent and succession planning seriously. Now I'll turn it over to Mark, then we'd be happy to take your questions. Mark.

Thank you, Mike, and good morning, everyone. Starting on slide three, Net income of $4.7 billion in the first quarter grew 2% from last year, as a reduction in expenses and a lower tax rate more than offset lower revenues as well as higher credit costs. EPS grew 11%, including the impact of a 9% reduction in average diluted shares outstanding. Revenues of $18.6 billion declined 2% from the prior year, and were down 1%, excluding the $150 million gain on the sale of the Hilton portfolio last year, primarily reflecting lower equity markets revenues and mark-to-market losses on loan hedges in our corporate lending portfolio, along with the continued wind-down of legacy assets in corporate other. Expenses declined 3% year-over-year, as continued investments in the franchise were more than offset by efficiency savings and the wind-down of legacy assets. resulting in our 10th consecutive quarter of positive operating leverage. And cost of credit increased, driven by volume growth and seasoning, while overall credit quality remained stable. Our return on assets was 98 basis points for the quarter, and ROTCE improved to 11.9%. Our effective tax rate was 21% for the quarter, below our full-year outlook, reflecting a discrete item related to tax reform, as well as a small benefit associated with stock-based incentive compensation. The lower tax rate resulted in a benefit of about 4 cents per share this quarter. We expect to be closer to our 23% tax rate outlook for the remainder of the year. In constant dollars, end-of-period loans grew 3% year-over-year to $682 billion, as 5% growth in our core businesses was partially offset by wind-downs by the wind-down of legacy assets, and deposits grew 5 percent to over $1 trillion. Turning now to each business, slide four shows the results for global consumer banking and constant dollars. Excluding the previously mentioned gain on the sale of the Hilton portfolio, revenues grew 4 percent with contribution from all regions, while expenses remained flat, resulting in positive operating leverage and an 8 percent improvement in operating margins. and pre-tax earnings grew 11 percent. Slide five shows the results for North America consumer in more detail. First quarter revenues of $5.2 billion were up 4 percent from last year, excluding the Hilton gain. Retail banking revenues of $1.3 billion grew 1 percent year over year. Mortgage revenues stabilized sequentially but declined again year-over-year, mostly reflecting lower origination activity and higher funding costs. Excluding mortgage, retail banking revenues grew 2%, driven by modest deposit growth and spread expansion. Average deposits increased 1% year-over-year, reflecting growth in both branch-based deposits as well as through digital channels. And looking at deposits and assets under management in aggregate, We grew balances 3% from last year, excluding the impact of market movements. Turning to branded cards, revenues grew 5%, excluding the Hilton gain. Client engagement remained strong, with purchase sales up 7% year-over-year, excluding Hilton. And we continued to generate growth in interest-earning balances this quarter, up about 9% year-over-year. This growth in interest earning balances drove an improvement in our net interest revenue as a percentage of loans, or NIR%, to 912 basis points this quarter. Looking forward, the NIR% should decline seasonally from the first quarter to the second quarter. And for the full year, we continue to expect spreads to remain at a level similar to or perhaps slightly higher than the fourth quarter of last year. Average loan growth of 1% was somewhat muted this quarter, but I would note that the first quarter of 2018 represented the peak level of promotional balances last year. Since that time, we have optimized our mix of interest-earning to non-interest-earning balances while continuing to drive account growth. And we expect loan growth to revert to more recent levels starting in the second quarter. Finally, retail services revenues of $1.7 billion grew 3%, driven by organic loan growth as well as the impact of the L.L. Bean portfolio acquisition. Total expenses for North America consumer were up 1% year over year, as higher volume related expenses and investments were largely offset by efficiency savings. We continue to drive transaction volumes to lower cost channels and digital engagement remained strong with 12% growth in mobile users year over year. Turning to credit, net credit losses grew by 10% year over year, reflecting loan growth and seasoning in both cards' portfolios. Consistent with the pattern seen in prior years, we expect card NCL rates in the first half of the year to be higher than the second half of the year. Our NCL rate in U.S.-branded cards was 326 basis points in the first quarter, in line with our full-year outlook for an NCL rate in the range of 300 to 325 basis points. And in retail services, our NCL rate was 536 basis points, which is also consistent with our full-year outlook for an NCL rate in the range of 500 to 525 basis points. 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. We simplified our deposit account opening process for both new customers and existing cardholders, and at the same time successfully launched a new digital savings product targeted to customers outside our core retail markets. Looking across all deposit products, we have already seen digital deposit sales in the first quarter of 2019 that are roughly equal to all of last year. More than two-thirds of the new accounts from digital channels are new to our retail banks, and more than half are outside of our branch footprint. We also launched a new digital lending product, FlexLoans. that allows eligible cardholders to convert a portion of their credit line into a fixed-rate personal loan, leveraging our experience in Asia. And we will continue to launch new products and relationship-based offers in the second quarter that leverage our proprietary thank you and double cash rewards across both card and deposit products. This will also initially be targeted to eligible card customers outside our core retail markets. So while many of these initiatives are still new, we feel good about our progress today. On slide six, we show results for international consumer banking in constant dollars. First quarter revenues of $3.3 billion grew 3%. In Latin America, total consumer revenues grew 6% or 5% on an underlying basis, excluding the impact of the sale of our asset management business last year. The impact was a net benefit in the first quarter as we recorded a small residual gain on the sale, partially offset by the absence of related revenues. Retail loan growth was muted in Mexico again this quarter, driven by a slowdown in activity in our commercial banking franchise. where client sentiment has become more cautious under the new administration. While consumer confidence remains quite strong in Mexico this quarter, we have begun to see a slowdown in GDP growth and overall industry lending volumes. And while a slowdown in GDP is not unusual in a post-election year, we are watching the economy closely. Importantly, we are managing expenses carefully, and maintaining credit discipline in order to preserve profitability and returns as seen this quarter in our strong EBIT growth. Turning to Asia, consumer revenues grew 1% year-over-year in the first quarter as growth in deposit, lending, and insurance revenues was largely offset by lower investment revenues. While investment revenues remained under pressure in the first quarter, we continue to see positive flows into assets under management, as well as 10% year-over-year growth in Citi Gold clients. And our revenue comparisons should become easier from here, as investment revenues peaked last year in the first quarter. Excluding investment revenues, our underlying Asia consumer growth remains broadly in line with our medium-term expectations. In total, Operating expenses were down 1 percent for the first quarter, as efficiency savings more than offset investment spending and volume-driven growth. And cost of credit declined 4 percent, reflecting a modest reserve relief this quarter compared to a modest build in the prior year. Slide seven shows our global consumer credit trends in more detail. Credit remained broadly favorable again this quarter, with stable delinquency trends across regions. In North America, the NCO rate increased sequentially, mostly reflecting seasonality in cards. And in Mexico, the NCO rate reflects continued seasoning in the cards portfolio, as well as the impact of lower overall volume growth. Turning now to the institutional clients group on slide eight. Revenues of $9.7 billion declined 2% in the first quarter, as strength in TTS and investment banking was more than offset by weakness in equities, as well as the impact of $230 million of mark-to-market losses on loan hedges, as credit spreads tightened throughout the quarter. Total banking revenues of $5.2 billion grew 8%. Treasury and trade solutions revenues of $2.4 billion were up 6% as reported and 10% in constant dollars, reflecting higher volumes and improved deposit and trade spreads. Investment banking revenues of $1.4 billion were up 20% from last year, outperforming the market wallet, driven by strength in M&A and investment-grade debt underwriting. Private bank revenues of $880 million declined 3 percent versus a strong quarter in the prior year, reflecting lower managed investment revenues as well as higher funding costs. And corporate lending revenues of $569 million were up 9 percent, reflecting growth in volumes and spreads. Total markets and securities revenues of $4.7 billion declined 6 percent from last year. Fixed income revenues of $3.5 billion grew 1% year-over-year as strength in rates and spread products was partially offset by weakness in FX, given the low currency volatility seen this quarter, while corporate client activity remained stable. Equities revenues were down 24% versus a particularly strong quarter in the prior year, reflecting lower market volumes and client financing balances. And finally, in securities services, revenues were flat on a reported basis, but up 5 percent in constant dollars, driven by growth in client volumes and higher interest revenue. Total operating expenses of $5.4 billion declined 1 percent year-over-year, as efficiency savings more than offset investments and volume-driven growth. And cost of credit was $21 million this quarter, driven by portfolio growth partially offset by loan-specific reserve releases. Total non-accrual loans increased sequentially this quarter, but the ratio of non-accrual to total corporate loans remained low at 41 basis points. And the addition to non-accruals this quarter did not negatively impact our cost of credit, as these loans were covered by previously established reserves. Slide 9 shows the results for corporate others. Revenues of $431 million declined 27% from last year, and expenses were down 26%, mostly reflecting the wind-down of legacy assets. And the pre-tax loss was $93 million this quarter, in line with our outlook. Looking ahead, we continue to 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 $11.8 billion this quarter grew by roughly $860 million year-over-year, reflecting higher rates, loan growth, and a favorable loan mix, as well as the absence of the FDIC surcharge. These results included a modest drag from the lower trading-related net interest revenue and the continued wind-down of legacy assets. As we had anticipated, the drag from these items was far less material this quarter than it had been a year ago. And in total, these revenues now comprise less than 5% of our total net interest revenue. Therefore, we believe it is most relevant to look at our net interest revenue and net interest margin trends on a consolidated basis going forward. On a sequential basis, net interest revenue declined by roughly $240 million, reflecting two fewer days in the quarter. And our NIM expanded by one basis point, reflecting higher rates and improved loan mix. On a full-year basis, we continue to expect to generate at least $2 billion of growth in net interest revenue year over year. We are no longer assuming a mid-year rate increase in 2019, but the expected benefit from the rate hike had been relatively small at less than $100 million of incremental revenue. In the first quarter, the year-over-year growth in net interest revenue was more than offset by a decline in non-interest revenue. However, this decline in non-interest revenue was mostly driven by the $150 million Hilton gain in the prior year a $250 million year-over-year drag from the mark-to-market losses on loan hedges, and the comparison to a very strong prior year in equities. We also saw a small residual drag on non-interest revenue from the wind-down of legacy assets, but less than we've seen in prior years. On a full-year basis, we continue to expect total non-interest revenue to come in at least flat to the prior year. On slide eight, on slide 11, we show our key capital metrics. In the first quarter, our tangible book value per share increased 7 percent year over year to $65.55, driven by lower share count. And our CET1 capital ratio was stable sequentially at 11.9 percent, as net income was offset by $5.1 billion of total common share buybacks and dividends. Before we go to Q&A, let me spend a few moments on our outlook. We continue to prepare for a range of operating environments with a focus on achieving our full-year ROTCE target of 12 percent for 2019. For the full year, we continue to expect modest revenue growth, flattish expenses, and higher but manageable cost of credit. combined with continued balance sheet and capital optimization to drive improved returns for our shareholders. Looking to the second quarter, we expect to return to year-over-year revenue growth. We face fewer headwinds in areas like Asia Consumer, equities, and the private bank, which presented difficult comparisons for us this quarter. And the underlying growth in North America consumer should be more evident as we move beyond the impact of the Hilton portfolio sale. For the second quarter in ICG, in fixed income and equity markets, given the slower start to the year, we do not expect to see the same magnitude of seasonal decline in revenues we typically see from the first quarter to the second quarter. Investment banking revenues should reflect the overall environment but given the strength of our performance in the prior year, we expect to be somewhat down year over year. And we expect continued year over year growth in our accrual businesses across TTS, security services, corporate lending, and the private bank as we continue to serve our target clients across our global network. On the consumer side, in North America, we expect continued year over year revenue growth with U.S.-branded cars now on a solid path. In Asia, year-over-year revenue growth should improve as we continue to grow our accrual businesses and we face less of a headwind from investment revenues. And in Mexico, year-over-year revenue growth will likely be muted given strong growth and performance in the second quarter of last year, although we expect continued growth in pre-tax earnings. For total Citigroup, we expect expenses in the second quarter to be roughly flattish to last year. And cost of credit should continue to reflect loan growth and normal portfolio season. In addition, we look forward to receiving our CCAR results late in the second quarter. At Investor Day, we stated our goal of returning at least $60 billion of capital to shareholders as part of the 2017, 2018, and 2019 CCAR process. And subject to regulatory approval, we remain on track to deliver on this goal. With that, Mike and I are happy to take any questions.

Ladies and gentlemen, at this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Again, that is star 1, We will pause for just a moment to compile the Q&A roster. Your first question is from the line of John McDonald with Autonomous Research.

Good morning. Thanks. Mark, I wanted to ask you about the efficiency improvement that you're looking for. This quarter, it looks like the efficiency ratio improved 90 basis points year-over-year, but X to help them look closer to 140 basis points. I guess is that 140 basis points more of what you're looking for this year in terms of efficiency better than you did last year, and what are the key drivers of that?

Yeah, so thank you, Don, and good to talk to you. I guess I'd say we are certainly pleased with the expense levels we were able to deliver against this quarter. We came into the year on the heels of a fourth quarter that was obviously under a lot of revenue pressure. And so we wanted to be thoughtful about managing all the levers that we had in Q1. And, in fact, that is what we've done. For the full year, as I mentioned, we are looking for some top-line revenue growth for total city and expenses that would be roughly flattish to what we had seen in the prior year. That will obviously result in improved operating efficiency and versus last year, but probably equally important, certainly equally important, we're managing those other levers, whether it be the cost of credit or capital, to ensure that we're getting to that ROTCE of 12%, and that we stay on a trajectory to get to 13.5 plus in the outer years. What's involved with that, to the other part of your question, is continued momentum, continued growth in the accrual businesses that we have that I mentioned earlier, TTS, security services, private bank, et cetera. Continued strength in our consumer franchise, which grew globally at 4% this year, but U.S.-branded cards, ex-Hilton, grew 5%. We expect that growth to continue and continue strengthening NIR line percentage for the branded cards business, and a continued normalization or stable market more broadly that should hopefully bode well for our markets businesses. So those are kind of the drivers on the top line. On the expense line, we will, as mentioned last quarter, see the benefit of our productivity outweigh the investments that we're making, and that should generate another $500 to $600 million over the course of 2019 that will be available to either fund expenses related to volume growth and certainly contribute to the overall performance metrics that we mentioned. And so those items, as well as the results coming out of CCAR and what that means for capital, will be important levers that get us to the returns and get us to the resulting operating efficiency.

Great. That's very helpful. Just as a follow-up, it looks like the average deposits in North America consumers showed a pickup and a better trend this quarter. What's driving that improvement in your view? And could you remind us more broadly of your strategy to grow U.S. retail deposits and why you feel comfortable doing so despite a smaller physical footprint?

Sure. So we grew the deposits, U.S. retail deposits, by about 1%. We got about $180 billion of deposits, about 30 or so are commercial deposits. The balance are consumer-related deposits. We saw very good growth through our digital channel, so digital-generated deposits on the heels of really executing against the strategy that we've talked about. And so we have a relatively small footprint with 689 or so branches. That said, we've got access to over 65,000 ATMs, and we've got a very, very large U.S. cards portfolio. And our strategy, as you know, is a client-led revenue growth strategy where we are looking to take advantage of the large customer base we have in cards and through enhanced digital capabilities, offer them value propositions that adhere to what they're most responsive to. And so what we saw in the quarter in this growth, in this deposit growth, was a combination of getting good traction with our digital platform and with our customers, both new-to-bank customers but also existing branch customers and with some of our cards customers. We'll continue to roll out new products in the second quarter. We rolled out FlexLoan this quarter. We'll roll out additional products in the second quarter around thank you and double cash rewards. And, again, those will involve value propositions that we think will appeal to our clients and drive a broader penetration of their wallet and a deeper customer relationship. Great. Thank you. You're welcome.

Your next question is from the line of Glenn Shore with Evercore ISI.

Hi. Thanks very much.

Good morning.

So I think both growth in the consumer side in Mexico and Asia are below where your goals were. It does sound like you felt good about Asia getting better. I heard your comments on Mexico looking at slower GDP growth and worse loan trends. So what do you look for there? And more importantly, what can you do if the just general macro backdrop in Mexico is a little slower? What's the goal there? Do you power through and and grow the underlying franchise, or do you cut back to manage profitability?

I think in that, Glenn, what we've talked about and I think what Mark pointed out in his remarks is we think we've got the ability to manage the cost line there and to manage for both EBIT growth as well as returns. So I think we've talked about some of the investment we've made there. I think we're starting to see the ability to pull the levers on positive operating leverage and sustainability of that. At the same time, through some of the other things we've done, capital optimization, et cetera, not only drive net income but also drive returns. So I think if we saw growth rates continue to slow a bit, I think we think we've got the ability to manage through that and continue to still get the growth we want there at the bottom line in returns.

Okay. And if I could follow up on John's and your answer on his card question. Offering card customers tailored rewards to bring in banking business. I happen to be a big fan of that, but I think it's getting a little – active where you and a couple other big players are doing that. Can you drill down a little bit more of what exactly you're offering? Is it in motion right now? And is it too early to talk about initial results?

Well, I think it's too early to talk about results because we're really kind of just at the stage of launch. But if you think, Glenn, about what we have that makes us a bit unique, I'm going to leave some of our partner retail services relationships aside, but we effectively have 28 million people in the United States that carry city plastic. And somewhere between, thank you, double cash, a value proposition that clearly people bought into. So as we go into these markets non-core, when we go outside of R6, we don't go in on a de novo basis. We go in already having established city customers in those areas. We know who they are. We know what they spend on. We know who their bank is, right? We've seen their payments come in if it's not us. And we think we've got the ability around our value proposition to target them offers, which has the ability or gives us the ability to compete on something other than rate. And so I think we feel excited about it. You'll see us out in the market in Q2. with that. And so I think it's early to tell, but, you know, the early tests and things we've done, we're excited about it.

All right. Thanks very much.

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

Hey, good morning. Maybe just, Mark, a quick question on rate sensitivity. I think you guys have been much less sensitive to the long end of the um than your peers um can you kind of i guess two questions on that i guess could you discuss you know it's the the risk of a rate cut um given your short end sensitivity and i guess uh secondly how you think about your positioning here is there any opportunities or risks in this if the flatter curve is here for a while sure so i guess i'd make a couple of comments um

One, just as it relates to what we forecasted for 2019, and I mentioned it in my remarks, in that we had originally forecasted one rate hike of about 25 basis points in the second half of the year. That one rate hike essentially equated to about $100 million of revenues. And so not a material impact. We've taken that out of our forecast now as I sit here and talk to you about the outlook, but not a material impact to the revenue forecast that we have for 2019. Similarly, we've continued over time to kind of take down our IRE exposure, and we certainly have done that and continue to do that through this quarter. If we were to look at a rate cut, we've kind of looked at our exposure there, and a rate cut would be somewhere around $50 million for the quarter, or $35 to $50 million for the quarter. And so not a material impact of a rate cut either. And so we feel we obviously, if rates remain flat, or decline for an extended period of time, we obviously will manage and look at the balance sheet very carefully and thoughtfully there. But we feel good about where we stand today as it relates to the rate environment.

That's very helpful. And then when we think about your $2 billion plus for the year, I guess what scenario drives the plus? Is it just loan growth or is there some other aspects of the market that could help?

Yeah, I mean, it's largely going to be, you know, loan growth and the amount of volume we're able to capture there. But we continue to feel very good about the $2 billion NIR forecast, that net interest revenue forecast that we've talked about. And we think that the continued momentum that we see in branded cards and other parts of the portfolio will allow for us to deliver against that. So... We remain on target for that. We did $860 million in Q1. It's roughly 8% more than the prior year, and so we feel good about that momentum. I guess the other component would be mix. So loan growth and mix would be the other component that would be an important driver there. That is to say consumer versus corporate growth, that type of mix.

Okay, maybe just one follow-up on Asia Consumer. Accounts, both card and retail banking accounts, were pretty flat. Is there an opportunity to grow that from here? What's sort of the strategy in Asia to grow accounts, or is it just more of a mature market?

Yeah, I'd make two points on Asia Consumer. One, we did see good growth with our Citigold customers, about 10% growth in Citigold accounts. And then, two, we saw good growth as it relates to investment AUMs adjusted for market movements, so good momentum there as well. And so we think we're showing good signs for when that market does return in terms of the broader market activity to capture some of that upside, given the account growth and given the investment AUMs we've been growing.

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

Good morning. I was just wondering if you could elaborate a little bit on the management turnover. I think it's three of the top five people that presented on Investor Day have retired. And, you know, I'm not looking for a meaningful change in strategy, but are there kind of changes around the edges in terms of execution? And, you know, just elaborate a bit on, you know, some of the senior people leaving the company.

Sure, Matt. I think if you look back and kind of go back through the years, really not just since I became CEO in 2012, but actually if we go back at the senior leadership levels of the firm, I think by any standard it's been pretty remarkable stability. And if you look at the retirements that we announced in the fall or Jamie's retirement, in most cases all retirees 30-year-plus veterans, not only of the industry, but almost in every case, or most cases, our firm. And so below that, as you can imagine, we've, you know, over the years, built an equally strong and robust bench. And so, you know, while I hate to see people move on, at the same time, you know, in Jamie's case, you know, Jamie's been a terrific partner, friend, you know, if you look at The success we've had in ICG, he's obviously been the leader of that and I think done a nice job of building that. But I think a lot of the credit also, as he would give, you know, goes to the team below in terms of what they've done. So I think in this instance, we're excited about the people I talked about in my opening remarks of having been at the firm for quite a while and having their shot at putting their fingerprint on the business. And I think if you look at the underlying growth, the market share gains, The customer feedback we get from many of the surveys, that obviously goes as great as he is beyond one person in the organization. And so they're excited, we're excited. I'm excited to have him at my table and the things that we can do to continue to grow the business going forward.

And if I recall correctly, I don't think he appointed a new president. And I'm wondering if you do intend to do that and if it would come from someone internally or... potentially somebody externally. Thank you.

I have no plans to do that as of now.

Thank you.

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

Hi. Hi, Mike. So what are your ROTCE and efficiency targets for 2019 and 2020? So I really just want to know where you're guiding us. I think consensus has really backed off some of the targets you had last year. So let's start with ROTCE. You've reiterated a 12% target for 2019. That's clear. And then at the September presentation from last year, you said 13.5% for 2020. And Mark, today you said the outer years. Again, consensus does not expect this, but Are you still looking for 13.5 percent for 2020? And if not, what are you looking for?

Male Speaker 1 Yeah, so let me be clear, and I apologize if I misstated something. So, for 2019, the ROTC target is 12 percent. For 2020, the ROTC target is 13.5 plus percent. Male Speaker 1 Okay.

Well, there seems like a disconnect between consensus and what you're guiding, so I guess there's some skepticism. And maybe one reason for the skepticism is on the efficiency. And I appreciate that efficiency is a means to an end. That is, your goal is to improve the returns. You get it. But that September presentation last year, you highlighted efficiency improving from 57% in 2018 to 53% in 2020 with a 175 basis point improvement in 2019 and a 225 basis point improvement in in 2020. And you might have pulled back a little bit from that on the fourth quarter earnings call. I'm not sure. But what is your efficiency target now for the firm? And if you can give any color on GCB and ICG, that would be great, too.

So I'll make a couple of statements. One is, longer term, we still remain committed to getting to the low 50s from an operating efficiency point of view. We believe the investments that we've made, the productivity that we're expecting, will allow for us to get there over time. The targets that you referenced for 19 and 20 are certainly targets that we have and that we've set and constructed the plans based on. We presented those. I will tell you, as you witnessed on the heels of 2018, and frankly, as we continue to go through the balance of 19, that we're going to pull whatever levers we need to pull to get to the return targets that we've set, while at the same time trying to protect investments that are critically important to the growth of the franchise. And that's an important tradeoff that... that we have to do, that we have to make, and we've done it in the past. We did it in Q4, and we'll continue to do it. So I'm not moving away from those targets. What I'm doing is I'm recognizing, and hopefully others are recognizing, that there are multiple levers that can be pulled, that we've got a long-term objective of delivering shareholder value, and we don't want to make short-term decisions that compromise our ability to do that.

So with the chance to kind of... clear the deck a little bit. And again, consensus does not assume you're going to get that 53% efficiency ratio next year. You talked about not relying on one additional rate increase. You want to protect the critical investments. So do you want to give us any guidance for efficiency improvement in 2019 and 2020?

I'm not giving any additional guidance at this point in time beyond what's out there.

And then last follow-up That's fine. I understood. Then last follow-up. Mike, back in 2013, you gave a target to improve the ROA to 90 to 110 basis points. And I think if you adjust for taxes, you still might not be in that range. So I think some of the frustration reflected in the valuation in the stock is some missed financial targets. Can you give some sort of context to the missed financial targets, whether it's that one or some of the efficiency guidance that was given over the last few years, why they weren't met, and why you can maybe make your targets now, at least for the ROTCE? Thanks. That's my last question.

Sure. So, Mike, on the ROA, we've talked about this on these calls and in different forums before, and that is if you look at what's happened from a capital perspective and a capital optimization perspective, Our binding constraint today, and probably has been for a bit and will likely to be into the future, is around standardized stressed base capital. And what we've talked about from a balance sheet or from an RWA optimization is making sure that we're using the balance sheet in a way that is accretive to our shareholders. And so, you know, the example I give, which remains the case today, and I think witness in our numbers for the quarter, that we had outperformance in terms of our rates and in terms of our spread product. Those are accretive businesses to our shareholders. And rather than choose to optimize our balance sheet simply based on a blunt number of assets of assets over earnings to actually look at the capital and the optimization of return. And that's what we've done. And I think we've talked about that. We've tried to be transparent with that. I think in the numbers you see in terms of RWA usage and allocation, we've tried to stay mindful to that, which we think is clearly the best outcome.

Can I squeeze one last short question?

Sure.

Without the efficiency targets, do you think you can commit to show better efficiency this year and next in each region in GCB, because you showed it this quarter, and in ICG? Is that too much of an ask or is that something that's achievable?

I think it's achievable. I'm not going to commit here because, again, I don't know what the environment brings and simply rather say that we're committing to positive operating leverage in every region, every business. You know, I would just go back to Mark's point, that we understand how it plays in the math. We're committed to getting the company into the low 50s. I think, as you've seen, our ability to drive leading performance in terms of operating efficiency. But if it comes down to the choice of not being able to make an investment in an area that we view as critical or accretive or something that's offering real opportunity versus hitting that target, I think our shareholders have been very clear, certainly to me and to Mark, that they would want us to make that investment. So here, Mike, I won't commit to that. All right.

Thank you.

Your next question is from the line of Saul Martinez with UBS.

Hey, guys. Good morning. I want to follow up on the ROTC question. Obviously, the street is well below UBS. your guidance for this year and especially for 2020. And I'm sure you look at analyst estimates and your IR team looks at analyst estimates in terms of where they're at. I mean, where do you think there's the most scope for outperformance? Where do you guys differ, you think, in terms of what your expectations are versus where you think the street is?

Yeah, there's... There's some difference as it relates to revenue. There's some revenue difference. There's some cost of credit difference when you kind of look at analyst expectations versus where we are. Our cost of credit is estimates are lower than that of the street. And then, obviously, we're at 11.9 of a CET1 ratio going down to the 11.5 at the end of the year. And so what we do with capital is another assumption that's in there. I think the tax rate, certainly we came in lower this quarter, but we talked about that being at about a 23% for the full year. So most of the differential, I think, is going to be a little bit on the top line. in the cost of credit as well. And then, you know, the rest of it, I think, is pretty much there. We talked about class expenses, which I think people have picked up on.

Yeah, so there's a little bit on the revenue side, and you're building in a lot less normalization in terms of credit costs than maybe what most of us have.

I kind of feel like we're looking at a normalized view of it, but... Okay, got it.

If I could change gears then on the retail banking earnings, income from continuing operations this quarter, I believe, was 80-something million this quarter, far below what it's been in the recent past. And I guess a couple questions. First, was there anything idiosyncratic in that number? And two, I get that you've highlighted some of the newer initiatives, and those will take time to kind of play out and filter into numbers. But any sense of when you think that will start to actually filter into the results and you'll start to see better results in retail banking?

So retail banking for North America, we started to see, I think, some good growth this quarter, particularly if you exclude mortgages. And so we think that that will continue to play out. As I mentioned, we're seeing deposit growth there. That's going to help on the revenue line, and we expect that to continue as we execute against that strategy. I don't think there's anything in particular in the way of expenses, except what I would say is that the productivity that we've talked about, is going to start, will continue to play out through the balance of the year. And so that's going to help when you look at kind of the retail banking profitability in the outer quarters as we start to see the productivity savings outweigh the investments that we've been making across that piece of the franchise. So a combination of continued revenue growth, Continued expense improvement on the heels of productivity saves should help drive improved performance there.

Was there anything unusual in the line item this quarter? The $83 million of operating earnings has been running about $130 to $160 in recent quarters. Or is that just a tough quarter?

Not that I can recall. We talked about the investments that we've been making. So, you know, the digital investments that we've been making in the platform, I mean, those are the things that would be playing out through Q1. And, again, it's somewhat backloaded in terms of the productivity saves that start to play out in the balance of the year. Okay. Okay, got it. I guess the other thing I'd mention is, and I mentioned this at a conference I did in March, which is that as we came into the year, and again on the heels of the fourth quarter where we saw material softness in revenue, we wanted to be very thoughtful about the 2019 plan. And we did take an opportunity in Q1 – to pull forward some of our restructuring decisions, if you will, or reorganization decisions. And so while we don't break the item out, you know, there's probably some repositioning dollars inside Q1 for retail banking in particular that is driving that 83 that you see in the quarter. Again, you'll see the benefits of that start to play out in the outer quarters. So it would be investments and some repo spendings.

Got it. That's helpful. Thank you.

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

Thanks. Good morning. Mark, just to follow up there, you had a really good start year over year on the expense side, and then you're mentioning flattish on the second quarter, which would be up a touch from the first, even though history would show that first quarter often is the peak for the year. just given the way you guys accrue in your institutional businesses. So can you just talk through, is it perhaps just more of a better aspiration on the revenue side of why you'd only expect flat year over year, given the point you just made about having perhaps a little restructuring under there and then the better start already that you had in the first quarter of the year?

Yeah, so to be clear, we do expect to see revenue growth through the balance of the year. And so that obviously will drive some expense dollars with that. We still expect that the absolute dollar of expenses will be higher in the first half versus the second half of 2019. But on a year-over-year basis, you could see some growth in the second half, resulting in an aggregate 18 to 19 that's flattish on the expenses.

Okay, got it. And on credit, you know, you talked about being inside the bands for your full year expected card losses, and also that first half will similarly also be higher than second there. Just wanted to ask you, you know, anything you're seeing in the consumer side outside of normal seasoning that would change your views one way or the other as far as credit cards specifically and loss trajectories going forward? Thanks.

Sure. No, there's nothing. We look at a whole host of metrics, as you would imagine, whether it's days delinquent or min pay and all of those important metrics, and we're not seeing any signs of significant concern or of concern as it relates to the portfolio. You referenced exactly what I think the numbers reflect, which is some seasoning and seasonality that's kind of playing out, even when you look at The chart on slide 7, you know, if you look at North America, that bump from the 260 to the 297, you know, one, there's a single-name kind of commercial credit in there that's dropping probably four basis points, and the rest is really just tied to the seasonality that you can see in prior year quarters. Even in Latin America, it's less of an increase in NCL dollars and more a byproduct of lower volumes in the denominator there. And so the answer is no, we're not seeing any particular signs around consumer or credit concerns. And I'd extrapolate that more broadly to suggest that is the case for institutional as well.

Okay, understood. Thank you.

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

Hi, good morning.

Hi, Betsy.

I wanted to touch base on an announcement that you made at the end of March that had to do with Citi building out its digital consumer payments platform. And I know we talked earlier on the call about the issuer side, but I think this is more on the merchant side. And I just wanted to understand – what your expectations are for the TAM that you're looking at, what your market share improvement is that you think you can get with this over time, and do you feel that this would also bleed into opportunity on issuance as you deliver more services to your clients? Maybe just spend a little time on that. Thanks.

Sure. So, you know, I think if you look at what's going on in the payment space, I think we've seen a lot – we've had a lot more engagement from our business customers of wanting to create a direct C to B channel. And so, you know, I think some people look at this different ways through different merchant acquiring models, but I think the way that we're set up and we've worked closely with MasterCard and others is really trying to create that channel where our consumers have the ability directly through our pipes – to create payments in there. And I think in some ways that plays to our strength. It plays a little bit to our uniqueness of the things that we do. And so we're excited about that. I think if you look at the pace of payments that's kind of going in that direction, obviously picking up. And I think importantly, both the business expectation and the consumer expectation is that that channel, if it doesn't exist, needs to exist. Early stages, but again, based on the pipes and the things we've had both from the consumer side as well as from the ICG side, we think we've got the connectivity. And I think unlike others, we're actually leading this from the ICG or the TTS side in our firm.

Okay. Maybe we could broaden it out a little bit to talk about the B2B platform that you're working on as well as the cross-border payments, In general, we're hearing from some other institutions as well that there's a lot of interest in developing direct merchant-to-merchant or corporate-to-corporate B2B payment cross-border at T. And I'm wondering where you are with your offering there and if it's something that you're focused on building out or not.

Well, yes. I would start out by saying, Betsy, I think that's the business we're in, right, that that's when you look at our TTS business, historically the TTS portion of that has been predominantly has been B2B. You've seen the growth rates that we've had there. I think you've seen this kind of not only operating with Fortune 5000 to Fortune 5000, but also working down and, you know, when John would historically kind of talk about what TTS is, in terms of treasury management, supply chain, cash, working capital, I think all of those. And so I think that's what you described as the area where I think we've seen a lot of our penetration and growth coming from over the past couple of years, and it's obviously an area that we're going to continue to stay focused on.

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

Hi, good morning. I just had one follow-up question. Mark, in terms of the guidance for growth for NIR, is it based off of the $46 billion in NIR that you presented in slide 10? I'm just remembering from previous quarter that you talked about core accrual net interest revenue, which would be I think based on the fourth quarter slides, a base of $44 billion.

The $2 billion was based on total NIR.

Okay, terrific. Thank you. You're welcome.

Your next question is from the line of Stephen Chubak with Wolf Research.

Hi, good morning. So I wanted to start off with a question on the capital targets. You noted the commitment to achieving the ROTCE goals for 19 and 20, so that's certainly quite encouraging. but I was hoping you could remind us just what the underlying CET1 or capital target that's contemplated as part of those goals and maybe any update in terms of the sensitivity to those goals if capital targets have to actually increase under the SEB.

Sure. So, you know, again, our goal or our target, I should say, from a CET1 ratio point of view is 11.5%. And that 11.5% is comprised of a CET1 minimum capital requirement of 4.5%. We have a GSIB surcharge of about 3%. And we have an estimate for SCB of about 3% as well. And then there's a management buffer that we've added in there of 1%, which is really designed to cover variability in various elements of the capital requirements. And so that gets us to the 11.5%. We've obviously been running at 11.9% in the fourth quarter and again in the first quarter. The fourth quarter will inform what we're able to request and therefore hopefully get approved from a regulatory CCAR point of view. But that gives us another 40 basis points above our target to absorb a worse scenario, if that were the case, or to request more capital should that be an opportunity that we deem or think makes sense. I think as it relates to, you know, there really isn't a lot of new information as it relates to the SCB proposal. And so I think the last that's been out there from a news point of view has been in 2020. We get some guidance for 2020. We don't have any additional guidance or direction around that. What's going to drive our ability to return capital in the future will be the combination of how much net income we're able to generate to commons. The utilization of our DTA, our disallowed DTA, today our disallowed DTA is about $11 billion. We've been using somewhere between a billion and a billion three on an annual basis. I'd expect that to still be the case. So the combination of those two things combined with what we're seeing in the way of growth in our business and or opportunities that we think make sense to invest will get us to kind of a core number in terms of what would be available for us to return to shareholders. And so we think we're well-positioned with the 11.5%, and we've made our submission and are looking forward to regulatory approval sometime in the second quarter, at the end of the second quarter.

Thanks, Mark, for all that helpful color there. And just one follow-up from me on CECL. At the 2017 Investor Day, You guided to $1.5 billion to $2 billion pre-tax impact. You were quite brave being so early in giving that guidance. I'm wondering, now that we have better visibility into the accounting rules, whether you can give us updated targets on the CECL reserve impact, whether you're still comfortable with that initial guidance of $1.5 billion to $2 billion.

Sure. Thank you. So you're absolutely right. We have previously indicated that we expect the impact of CECL versus our current reserves to be on the upper end of the 10 to 20 percent range. We have been, as you would imagine, spending a lot of time on finalizing our CECL models, working through assumptions, in many instances receiving clarification from regulators and other standard-setters. And at this stage, we believe the outcome could be a little bit higher than that range, so potentially 20 to 30 percent, primarily driven by credit cards. But keep in mind, even if or even at a 30% level, the incremental impact to regulatory capital is manageable. So that would be less than about 30 basis points of CET1 capital. And then in addition, we'd benefit from the regulatory capital phasing over four years.

Got it. Thanks for taking my questions, Mark. Thank you.

Your next question is from the line of Gerard Cassidy with RBC.

Thank you. Good morning, Mark. Good morning, Mike. Good morning. Mark, can you share with us, just give us a good detail of the amount of money that might be available each year to give back to shareholders through NIN Income as well as the DTA? Okay. How much of net income do you guys think you're going to need to support the organic growth of the organization on a go-forward basis?

How much net income?

Yes. How much are they, you know, if we assume that, you know, you could theoretically give back 100% of income every year, but obviously you want to support your growth and you're going to need to retain some of it. Do you have an idea of how much of it you would need to keep each year to support that organic growth?

Yeah, so, I mean, look, obviously, since we've been running at CET1 ratios going back as high as 12% or so, we've been able to return, you know, more capital and have a payout ratio that was north of what the net income is that we've been able to generate. I would imagine as we get closer to the 11.5%, and considering your point around investing in the business through either balance sheet which would impact the RWA or the expense line itself, I would still imagine we'd have a payout ratio that was considerably high. It wouldn't be 100%, but it'd likely be consistent with what we see with peers in the industry. So I'm not prepared to give you an actual percentage payout ratio post-2020, but I'd say it'd be pretty high and certainly consistent with what peers are paying out.

Very good. And then circling back up on CECL into your comments that you just made, do you guys think you'll give to us, the investors, by the end of the year, some color on what everyone has been very good at, the day one reserve build, which you just gave us or refined for us today? But any thoughts about what the day two, you know, the loan loss provision number could look like on a quarterly basis going forward versus what you're going to report in 2019 under the old methodology?

Yeah, so I guess what I'd say to that is, you know, if you think about our – our plan, if you will, our forecast and what's out there, from an adoption of CECL point of view, we've contemplated that in our 2020 plan and the return targets. And while we continue to refine the analyses around CECL and its impact, we don't expect a material impact on our EBIT or returns.

Very good. Thank you. You're welcome.

Your final question is from the line of Al Avizakis with HBC.

Hi, good morning. Thank you for taking my question. It's regarding the fixed income performance. I was surprised because it was too strong, I think, given the market backdrop. I just wanted to get a bit of clarity between the different regions. What kind of performance did you see in the U.S. versus Asia or Europe? Thank you.

Yeah, so our fixed income revenues grew 1% versus the prior year, and what we really saw was a normalization of rate and credit markets at the turn of the year coming out of the fourth quarter and the dislocation that was there. Within fixed income results, our G10 rates outperformed, driven really by strong client activity. In North America, we did see a pickup in or an uptick, I should say, in corporate hedging deals on the back of strong DCM activity. And in EMEA, the results included increased revenue on structured note issuances as investors kind of sought out additional yield. This was offset by the weakness I mentioned earlier in FX, given the declining currency volatility. But as you mentioned, strong or solid performance, I should say, in fixed income also aided by solid results in spread products with strong performance in the flow credit products. And we also had a strong quarter in commodities, particularly in EMEA, driven by good client activity in oils and metals. So a good mix of North America performance and EMEA performance. Thank you. You're welcome.

There are no further questions.

Great. Thank you all for joining us this morning. And if you have any follow-up questions, please feel free to reach out to Investor Relations. Thank you.

This concludes today's earnings call. Thank you for your participation. You may now disconnect.