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spk08: the FDIC special assessment that we saw earlier in the year, and it excludes the CMP of 136.
spk06: Got it. And my second question is for Jane. And I'm sure you're getting tired of the question on capital return. So, you're buying back a billion, you plan to buy back a billion this quarter. It looks like you didn't buy back any in the second quarter. And I'm asking this question in this context because, you know, consensus has a buyback of nearly a billion in the fourth quarter. and staying at this rate for the first half of next year and ramping higher. And I guess, is the billion-dollar number a catch-up pace because you didn't buy back any in the second quarter? And I fully appreciate that you also have the Banamex IPO coming, which is different from peers that are also waiting for Basel clarifications. But I'm just wondering, do we need to wait for that Banamex IPO for the company to feel comfortable moving away from that quarter-to-quarter guidance? And also, of course, I just want to readdress the beginning of the question when I asked specifically about the PACE.
spk07: Okay. So we are... not going to be giving guidance going forward around our buybacks. We are going to continue to make a quarterly determination as to the level. And a lot of that is to do with the uncertainty about the forthcoming regulatory changes. I think we were delighted to see a slight reduction in our stress capital buffer, reflecting the financial strength and resiliency of our business model. Also good to see the benefits of our strategy playing out. But with the regulatory changes uncertain, that's one of the major factors for us to continue with the quarterly guidance.
spk08: Yeah, that's right. And on the first part of your question, Eric, I'd say, look, we were in discussions, you know, with our regulators and we made a prudent call as it relates to buybacks in the quarter for Q2. So Q3, as we talked about, would be at a billion dollars and that should not be necessarily viewed as a run rate level. As Jane mentioned, we'll take it quarter by quarter from here.
spk04: The next question is from Judard Cassidy with RBC. Your line is now open. Please go ahead.
spk00: Thank you. Hi, Jane. Hi, Mark. Good morning. Mark, regarding the comments you made about, you know, the higher credit losses, the three factors that you gave us, Can you also talk about if this was a factor at all for you folks? Was there any FICO score inflation back during the pandemic that might be playing into these kind of credit losses? And as part of the credit card question, you mentioned the CFPB, you know, the fees that you have factored them, you know, the lower fees, you factored that into your forward look. Where do we stand on that? Do you guys have any color on that as well?
spk08: Yeah, so on the first part of the question, look, we all kind of have talked about in the past the prospect of FICO inflation back during the COVID period of time. You know, we've been very, very focused on ensuring that acquisitions that we've made, you know, have been appropriately kind of analyzed in the underwriting of that to get comfortable with the quality of new customers that we've been bringing on. In light of the environment we have, you know, looked at moving towards higher FICO scores for new account acquisitions. But as I think about what we're seeing now, there is that dichotomy that I mentioned where we have the higher FICO score customers that are driving the spend growth and that frankly have, you know, still continued strong balances and savings. And it's really the lower FICO band customers where we're seeing the sharper drop in payment rates and more borrowing. And so the FICO inflation has effectively kind of fizzled out when we look at the mix and dynamic of the customer portfolio that we have at this point. And in terms of the CFPB late fees, I don't have an update on that. Like I said, we built in an assumption, you know, in our forecast. But in terms of the timing, I don't have a formal update on the certainty of it.
spk04: The next question is from Ken Houston with Jefferies. Your line is now open. Please go ahead.
spk10: Hey, thanks. Good morning. Hey, Mark, you know, talking about the NII outlook and the fact that now we've got a little bit of a discrepancy starting between U.S. rates, maybe higher for longer, and then the beginnings of some of the non-U.S. curves starting to at least put forth their first cut. I know we've got that good chart that you have in the queues about the relative contributions. Can you just help us understand a little bit of, like, just generally how you're thinking through that discrepancy and how that informs the difference between, you know, U.S.-related NII and non-U.S.-related NII as you go forward?
spk08: Yeah, thank you. So, look, I think that, you know, as we look at it out through the, certainly through the medium term, we expect to see continued NII growth at obviously a modest level, certainly lower than what we've seen historically. And that's in large part because, or in part, I should say, because of how we've been managing the balance sheet. And that has allowed for us to reinvest as securities have rolled off and earn a higher yield on them relative to what we were earning. In some instances, there were five-year terms on some of these investments. And so we still think there's some upside from a reinvestment point of view. The point you make around kind of non-U.S. dollar or U.S. rates kind of coming off, you know, that'll play through a little bit as we think about the beta increases that we're expecting outside of the U.S. And so we've assumed that we have higher betas pick up outside of the U.S. if rates kind of come off. in a more substantive way than we could see kind of a little less NII pressure than we're forecasting there. But net as I think about the combination of volume growth that we're expecting between loans and deposits over that medium term, the higher yield we can earn on our assets combined with, you know, the pricing, capabilities that we have across the portfolio, offsetting some of that beta, we believe we'll have continued NII growth. As I think about what I often point to in terms of the IRE analysis, and you have to remember that that is a shock to the current balance sheet, and it assumes that the full curve is moving simultaneously across currencies And in that case, the 100 basis point parallel shift downward would be a negative $1.6 billion, with about $1.3 billion of that coming from non-U.S. dollar. But again, that does assume that all of those currencies come down at the same time and doesn't account for the rebalancing of the balance sheet and things that I mentioned, like the reinvestment higher yields that we'd be able to earn.
spk10: Got it. Okay. And just one follow-up on the OCC amendment, and that's specifically related to the resource review plan. Do you have a line of sight on how long that'll take you guys to finish? And is that what we should be thinking about in terms of just understanding what the side of what you need to get done in terms of the other language that's written in the order?
spk07: Well, Ken, look, the resource review plan is just that. It's a plan to ensure that we have sufficient resources allocated towards achieving a timely and sustainable compliance with the order. Essentially, if an area is delayed or looking as if it could be, we'll determine what additional resourcing, if any, is required to get back on track. And then we'll share that with the OCC in a more formalized way than we do today. We obviously review this pretty constantly ourselves. We're already working on the plan. After it's finalized with the OCC, it will be confidential supervisory information that we can't disclose. So we won't be able to tell you that the plan is... what the nature of the plan is going to be, but it won't be much more complicated than what we talked about. And we're expecting to get it, you know, we're not expecting this to take long.
spk04: The next question is from Betsy Gracek with Morgan Stanley. Your line is now open. Please go ahead.
spk01: Hi, good afternoon.
spk04: Hello.
spk01: Hi, Betsy. Okay, so I know we talked a lot about expenses. I just have one kind of overarching question here, which is on how we should think about the path of expenses between now and the medium term as we have, you know, come quite a long way in the simplification process. You know, maybe you could give us a sense as to how far along simplification impact on expenses we are. And you know, overlapping with the regulatory requirements, do these met out or are we skewed a little bit more towards regulatory requirements being a bit heavier than what's left on simplification from here? Thanks.
spk08: Thank you, Betsy. I guess I'd say a couple things. So I think we've said it in the past. So the target for the medium term, I think 2026, is somewhere around $51 to $53 billion of expenses. As we've said, we'll have about a billion and a half in savings related to the restructuring that we've done, and another $500 million to a billion related to net expense reductions from eliminating the stranded costs. as well as additional productivity over that medium term period. And so we've made, I think, very good headway, as Jane has mentioned, in the org simplification and the restructuring charges associated with that. Those saves will, you know, have started to generate. Some of those saves in the early part of that, meaning this year, will likely be offset by continued investment that we're making in areas of the business, like transformation, but also in business-led or driven growth. And you should expect in terms of the trend that we would have a downward trend towards 2026 and achieving that range.
spk07: And I just want to reiterate, we remain confident that we will meet our 11 to 12% ROTCE target over the medium term. And we've got the, we have the ability to manage the different elements we've been talking about today, making sure that we're investing sufficient resources into the transformation so we can be on track with that, as well as in our businesses, as well as the return of capital to our shareholders. And so we feel confident around that and good about it. We can manage this.
spk08: Yeah, I think that's a great point, Jane. Look, the reality is, as was pointed out earlier, we spent about $3 billion last year, a little bit under that, on the transformation-related work. And, you know, the plan has called for us to spend a little bit more than that this year. And, frankly, in the first half of the year, as we work through the transformation work and some of the things that Jane and I have mentioned earlier in the year that we've been focused on, like data and data related to regulatory reporting, We've had to spend more than we had planned for in the first half, right? And we've done that, and we've funded that. We've been able to find productivity opportunities that allow for us to still stay within the guidance that we've given for the full year. So we are managing this entire expense base. Right. So not the whole 53 plus billion dollars of it. We are actively managing that with an eye towards what's required from a transformation point of view to keep it on track, to accelerate in areas where we're behind and to shore up areas where we're tracking in accordance to what the order requires. And where are there other inefficiencies? That can allow for us to free up the expense base. And so things like the work that Andy Sig has done with the finance team around that expense base and finding efficiencies there are opportunities that we've been able to tease out of the business. Things that we have done in parts of USPB and that we have continued to get at, they're in parts of banking, which you see in the down 10% this quarter, are areas where we've been keenly focused on where there are duplicative roles. Where are there inefficient processes that we can actually drive greater efficiency out of? So long-winded way of saying we understand the expense guidance that we've given. We also understand and stress the importance of funding the transformation with what's required, and we're doing both.
spk01: Okay, great. Thank you very much. Appreciate that.
spk04: The next question is from Vivek Duneja with JP Morgan. Your line is now open. Please go ahead.
spk11: Hi. Okay. Let me just clarify this, Mark and Jane, just to make sure that we all have it right. The 53.5 to 53.8 does not include anything thus far on what you think you may need to spend. on the resource review plan, meaning what additional resources you would have to put to fix the consent order. Am I right there?
spk07: No, you're not right. So, I think as you've heard us talk about the VEC for a while now, that we knew there were areas that we were behind. in elements of our transformation program, and that we began addressing those and making the investments. Some of that's in people. Some of that is in technology spend. It's using different tools and capabilities to get areas addressed earlier. And we began that earlier in the year. And you saw that acknowledged as well by our regulators who pointed to the fact that we've already begun addressing the areas that we're behind. Mark?
spk08: That's right, Jane. And what you have heard is that despite having to spend more, some $250 million or so more, we're not changing the guidance, right? And so we have, as Jane mentioned— We have worked on areas already that we've needed to, and we have looked for ways to absorb that and are doing so within our guidance. Okay.
spk11: So, going forward, even though this plan is still to be sort of put together and approved by the regulators, we should not expect any change to this expense?
spk08: Got it. Look, the plan, the resource review plan, as Jane mentioned, is what we're working through now with the regulators. That will be a process for demonstrating to them that we are spending and allocating the appropriate resources to accomplishing the commitments that we have. Appropriate resources can range from people to technology to enhancing our processes and ensuring better execution. If you think about what that will entail, it will entail areas where we are delayed or behind as we identify those areas, being able to tease out the root cause of any delay and ensure that we've got proper funding allocated to get it back on track. And that's me framing out how I think about what something like this might look like. And so what we're saying is that if we identify issues in the quarters to come that we haven't identified already, that's the process we're going to apply to those issues. And as you've heard us say repeatedly, we're going to spend whatever is necessary to then get those things back on track. And as we've done thus far this year, we're going to look for opportunities to absorb those headwinds. I hope that's clear.
spk04: The next question is from Matt O'Connor with Dutchess Bank. Your line is now open. Please go ahead.
spk12: Hi. Apologies if I missed in the opening remarks, but what drove the decline in credit card revenues from 1Q to 2Q? It looks like they were down about 6% in aggregate, even though average loans went up, spending went up. What was the driver of that?
spk08: Credit card revenues, seasonality.
spk07: Yeah, seasonality.
spk08: Seasonality playing through there.
spk07: Sequentially.
spk08: Yeah, sequentially.
spk07: Yep. I think if you look year over year, you'll be able to see a pretty common trend there. The consumer is slowing in the spend, as Mark had referred to, Matt. And a lot of the spending and the growth areas we are seeing in the underlying numbers is being driven by the affluent customer.
spk08: Yeah, I think there's also the dynamic on the CRS of the reward or across the portfolio of rewards playing through from one quarter to the other. So the combination of those things are playing through the revenue line there.
spk07: But nothing that's particularly worrying us, Matt.
spk12: Okay. And then just separately on the very early kind of part of the prepared remarks you talked about, the dividends being capped in terms of what can be upstreamed from the bank to the holding company because of the OCC thing that came out this week. For all intents and purposes, like, does that impact how you run the company or subsidiary or impact liquidity or capital? I understood the comment, no change to dividends or buybacks at the holding company. But is there any impact from that that we would notice on the outside? Thank you.
spk07: Look, let's be clear, this action does not impact our ability to return capital to our shareholders. The dividends that are referenced are just intercompany payments from CB&A to the parent. So, first of all, don't confuse what a dividend is here. We will, it's not going to impact how we run the company, the subsidiary, the capital, or the liquidity at all. And the dividends are not capped.
spk08: Yeah. Yeah. I think, Jane, that's right. And I think let's not lose sight of the purpose of the orders that are there. And the purpose of the orders that are there are to ensure that we're funding and allocating the effort appropriately, right? So the regulators want essentially the same thing we want, right, is for us to get this done. And so that is the primary objective. The reference to the dividend from out of CB&A up to the parent is certainly referenced there between now and establishing that resource review plan. But as Jane mentioned, that does not constrain the parent from doing the things that it will need to do. And as opposed to, it's not a cap. What it is is that Anything above the debt service of the parent or the preferred dividend and other non-discretionary obligations would require a non-objection from the OCC.
spk07: Until the resource plan is agreed. Until the resource plan. As you'll have seen, the resource plan needs to be submitted within 30 days. And as I indicated, we're working on that one and not anticipating that to be a problem.
spk04: The next question is from Saul Martinez with HSBC. Your line is now open. Please go ahead.
spk09: Saul Martinez Hi. Good afternoon. Thanks for taking my question. I guess I just want to follow up on the latter question. I just want to be very clear. What you're saying is that the requirement that CB&A receive a non-objection before dividending upstream to the parent, that does not impact how you think about your capital flexibility, how you think about, you know, it doesn't restrict you in any way and shouldn't impact, for example, your ability to benefit. from, for example, a Basel endgame rule that is softened or some of the benefits, Mark, that you talked about in terms of simplification. So you don't see this impacting your ongoing level of capital flexibility and your ability to repurchase stock going forward if some of these things actually do play out?
spk08: No.
spk09: Is that right?
spk08: No, I don't.
spk09: Fair enough. That's clear as can be. Good. Thank you. Second question on, I just want to follow up on USPB. I mean, I still, you know, I get the point that, you know, you're seeing normalization and losses in cards. But, you know, even if I adjust for reserve bills, your Roth is still single digits. I would think even at these NCO levels, your cards business is pretty profitable, right? You're a scale player when you're above sort of pre-pandemic levels, but not, I don't know, it doesn't seem like it's that much higher by a dramatic amount. It would seem to imply that the retail bank is, you know, a huge drag on profitability, even, you know, maybe even losing money. I don't know. But can you just talk about what you can do to sort of improve the retail bank profitability and just give any more color to that you can in terms of the path to get to that high teen ROTC you talked about.
spk07: Yeah, let me kick off there. And let's say, look, clearly we're very focused on improving the returns in USPB to get us to the high teens level over the medium term. And you've seen us generating healthy positive operating leverage this quarter. We've had a number of quarters of good revenue growth. And as Mark said, we're at the low point of the credit cycle. And we knew this year we would see the pressure on returns from the elevated NCLs and some of the industry headwinds we've talked about. But as the NCL rates approach steady state levels, and the mitigating actions that all of us have been putting in place against the industry headwinds. As those take hold, we expect the returns will improve and support the firm-wide medium-term targets. In the retail bank, we're continuing to focus on growing share in our six core markets, and we're doing that leveraging our physical and digital assets. It plays an important role in enabling the wealth continuum and the growth that we're looking at in our wealth franchise. We're continuing to improve our operating efficiency, being very disciplined. in expense management and managing carefully the branch and digital productivity of the retail bank network. But we're at the high point of the credit cycle. It's driving the low point for USPB. And as I said in my remarks, we're expecting to see those returns improve from here.
spk04: The next question is from Steven Chubeck with Wolff Research. Your line is now open. Please go ahead.
spk03: Steven Chubeck, Wolff Research, Hi. Good afternoon. So, Mark, I have a fairly technical question on DTA utilization and specifically the NOLs. The deduction is still fairly significant at $12 billion. It roughly equates to about 10% of your market cap. And the good news here, I suppose, is that it should come back into capital over time. but we've seen very little utilization over the past two years, despite the firm being profitable. And so I wanted to better understand just what's constraining your ability to utilize those DTAs, and are there catalysts on the horizon that can actually help accelerate that utilization beyond organic earnings generation?
spk08: Yep, thank you. So I'm going to give you a very simple answer to a very complicated question. It really comes down to driving U.S. income. And so we are focused on not just all of the things that we've mentioned, but driving higher income in the U.S. that allows for us to utilize the disallowed DTA. We saw some of that in the quarter, and we expect to see more of it as we move through the medium term. But that is the major driver of that utilization.
spk07: And we have many of our business heads very much focused around that opportunity as well. So winning in the U.S. is a very important leg, for example, of the strategy that Viz is refreshing. Similarly, we see opportunities from the commercial bank. We see it in wealth. We see it in, obviously, in U.S. personal banking and in services. So We're focused from a business strategy point of view on this, not just from the financial side.
spk03: Thank you both for that, Culler. And maybe just a quick follow-up just on the retail services business. We are seeing some evidence that your competitors in this space are have been more aggressive, leading with price in an effort to win some new mandates. And would some of you be able to speak to what you're seeing across the competitor set and your appetite or willingness to potentially offer better economics in response to increased competition from some of your peers?
spk07: I think you'll be delighted to hear that we're very focused on returns rather than just on revenues. So when we enter into discussions with a partner who may be a new RFP for their portfolio or looking at new ones, such as the one we just agreed with Dillard's, it's all about the returns. and the profile of the business rather than the revenue side of things. And it's a shift probably from some of the ways in the past, but I'm very pleased with how disciplined the team is being around this and we're seeing the benefits of it.
spk08: And that may be different from what you hear and see from other players in the space. But as Jane mentioned, we're keenly focused on ensuring that, yes, we have a good partnership, but that we're generating an appropriate return. That's part of achieving our medium-term targets. And as you know, since you brought up retail cards, I mean, when we think about how CECL works and the reserves you have to establish for these partnerships, we're establishing full lifetime reserves that's on the balance sheet where ultimately we end up splitting those through the partner sharing economics. So it's another important aspect. consideration as we think about expanding and taking on these relationships and renegotiating partnerships to making sure that returns make good sense for us.
spk07: And Mark and I have no problem saying no to revenue that doesn't come at the right returns and being very disciplined around that.
spk04: The next question is from Vivek Juneja with JP Morgan. Your line is now open. Please go ahead.
spk11: Hi. Sorry, just to follow up on this whole consent order stuff, Jane, what do you think this does in terms of timing? How much longer for you to sort of get this past you? Are you talking a couple of years? Is it now longer by a year? Any sense of that? Any sense of helping us think through that?
spk07: Look, in terms of the consent order process, and the the areas we've had delays there are four areas to the consent order it is it's risk management it's data governance is around compliance and it's around controls as we've said we were falling behind in certain areas related to uh data um and we've been investing to address the areas that we were behind. We also saw an increase in the scope related to regulatory reporting, so we added some more bodies of work there, and we're well underway. So we are not expecting this to extend the original expectations that we have on when we will complete the body of work for the consent order. We have a target state for the different areas of it. We have the plan to achieve those target states. We'll make the investments necessary to ensure that we do so. We'll try and get this done as quickly but as robustly as possible. And we're doing this by making strategic fixes and investments. rather than what I would call the old city way, which is a series of Band-Aids that remediate but don't actually fix the underlying issue. And that way we are delivering for our shareholders as well as our regulators and our clients because we're putting in strategic solutions that will benefit all. But I'm not expecting this to change the timeframes.
spk02: Thank you.
spk04: The final question comes from the line of Mike Mayo with Wells Fargo. Your line is now open. Please go ahead.
spk02: Hi, just two clarifications. So this is a very high profile amendment to the consent order. And I think what I hear you saying, but if you can confirm your risk compliance and controls are getting passing grades it's really the data and as it relates to the data you're talking about 11 000 regulatory reports some which have 750 000 lines of data is that really the scope of what you need to fix because people see this externally and say hey you're failing in terms of overall controls and resiliency but i think i hear you saying it's really more about just the data and the regulatory reporting which is important but more of a slice of a broader picture. Is that correct?
spk07: Yeah, Mike, maybe you're asking a great and it's an important question. So maybe I try and explain the data elements because it's an area that Mark and I have pointed to. So first of all, we use data all over the firm. We use it to deliver 72 million customer statements every month. Our corporate clients, as you heard about at our Service Investor Day, access account data real-time across multiple countries on Citi Direct. And we're moving $5 trillion roughly per day for those clients around the world. We trade billions of dollars in a millisecond on our trading platforms. We can see our liquidity positions real-time around the world. This can only be done if you've got pretty pristine data and highly automated ecosystems. But what is the transformation doing? What it is doing is simplifying how data moves through the firm, And it's about upgrading the management and governance over those flows. And as I've said, we're doing a strategic overhaul of large parts of our infrastructure. So what are we doing? We're making sure we're capturing data accurately using smart tools and automation. We'll often talk about this smart system, make sure there's no errors when we book a trade. We've seen our error rate down 85% as a result of it. We're housing our upstream data in two standardized repositories. They're the golden sources, Olympus and DataHub, which you've heard me talk about a few times. And they're a golden source now for all of the downstream data use, populating the thousands of regulatory reports Mark talked about and other areas. And what a single repository means is that the data models, the data quality rules, the controls you put in place to govern and manage that data, they all sit in one place rather than being distributed all over the firm as they have been historically. Mark's been investing in building a standardized reporting infrastructure. You've heard us talk about a single full suite reporting ledger versus the six or so reporting ledgers that we've had in the past. And we're delivering all of this through consolidated systems, through the automation and streamlining of data flows. So instead of being in multiple pipes, the flows go through single pipes. Sorry to get a bit plumber on you for a moment, but I think it's important to understand what it is, because it's a lot of work. It's a strategic overhaul. It's not a series of tactical fixes. Where we're behind as we do the work on data, we identify specific issues we need to fix as we execute the plan that we have in place. There's some more areas to address than we knew back when we did the plan, and we've also accelerated the work on improving the accuracy of our regulatory reports, and we increased the scope of this work as well. It's more comprehensive than originally planned. So what we're doing? We're adding resources and data experts. We're learning from best practices. We're using some great AI and other data tools that are helping to identify anomalies in data and data flows much quickly. We're also, to some of the culture side, we're learning from pilots how do we accelerate broader deployment at scale across the firm in a consistent enterprise-wide manner. So all of these things in the data side are going to enable us to leapfrog competitors, more revenue opportunities, better client service, fewer buffers, drive more efficiencies. And the end goal here is it becomes a competitive advantage for the firm. That is the data plan. Clearly, there's a very important element of it related to the consent orders. We're behind in a few areas. We're investing. We've already begun that investment, as Mark and I have talked about, to get it done. We'll get it done.
spk02: Real short follow-up to that. So you're doing all this great stuff. But you still fell short just in like one sentence, despite doing all this great stuff that you described. The regulators still said you didn't get it done. Why, after doing all that, didn't you get it done in the eyes of the regulators? And why will it be fixed now? Just like a one-sentence explanation for that, if you have it.
spk07: I always said that a transformation of this magnitude over multiple years would not be linear. We have many steps forward. We have setbacks. We adjust. We learn from them. We move forward and we get back on track.
spk08: And Mike, if I could just put one number into context, because you played back the 11,000, which was a number of global regulatory reports across the landscape here. There are probably 15 to 30 that are core U.S. reports that are pivotal to our U.S. regulators. And a lot of what we're discussing here is about ensuring that we're prioritizing the data that impacts those 15 to 30 reports as we work through this.
spk04: There are no further questions. I'll now turn the call over to Jen Landis for closing remarks.
spk05: Thank you all for joining us. Please let us know if you have any follow-up questions. Thank you.
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