Citigroup Q4 2023 Earnings Call Transcript

Well, thank you very much indeed, Mike. I'll start with who is Citi? Citi is, I'm delighted to say, finally, simple. At Investor Day, I set out a vision to be the pre-eminent banking partner for clients with cross border needs. That vision was based on five core interconnected businesses. We set out on a deliberate path to get there, and over the last three years, we've done so.

Page 4 is, who we are today. We are five interconnected businesses. No more, no less. We have our organization that now aligns with those five businesses, and this enables us to focus on two priorities: the first is, improving the performance and the returns of those five core businesses, so that we can meet the medium term RoTCE target we laid out; and the second is, on addressing our regulatory issues through the transformation. And I would also be -- I need to note that I fully recognize that 2024 is an inflection year, Mike, and I and the management team are accountable to deliver, and that you and our investors have the transparency you need to hold us accountable.

So why is this time different? Look, it's not lost on me that there have been many attempts in the past to change this firm. I and the management are fully committed to transforming this company for the long-term and we are addressing the issues that have held us back in the past. And you've got proof points of the last three years where we've made a lot of tough decisions and we have put through a tremendous amount of change to get to the simple Citi that we are today. We completely reset our strategy, so we now have a significantly more focused business and operating model.

We've announced the most consequential set of changes to our organizational model; and frankly, from my perspective, more importantly, how we run the bank since the financial crisis, aimed at simplifying the bank and increasing accountability. You've seen, we've moved quickly. We're on track with our execution of this effort and it will generate over $1 billion of run rate saves at the end of the first quarter purely from the organization efforts that we've put in, that we announced in September.

We've done this while investing, and I think this is another difference. We've invested heavily in our transformation and while that was catalyzed by our consent orders, these investments will ultimately deliver benefits from automation, from well governed data, from consolidated platforms. We also have made significant investments in our business to support the 4% to 5% revenue growth and to ensure client momentum. And those investments have helped us expand our product suite, invest in digital capabilities, automate our processes, capture synergies through the client organization.

We've also brought in some incredible external talent in key strategic areas, including Andy to lead Wealth. And we now have a good balance between experienced Citi people and external talent with fresh perspectives through multiple layers of the organization. So we are doing things the right way, we're doing it for the long-term, and we're moving with urgency. We will need and are spending the money that we need to, to address our regulatory requirements, but that's already embedded in our path to the eleven to 12% RoTCE in the medium-term, and this, this already feels like a different bank.

We have more work to do. I recognize '24 is a critical year and as I said, the decks are much clearer now, so that we can focus on two imperatives, improving our business performance and executing the transformation. Neither is an entirely linear path as we've seen over the last three years, we all know that. We get, we have to build our credibility, we're committed to doing so, and we are providing far more transparency around the business performance so investors have a better sense of how we're doing. And I and my management team, to your final question, are fully accountable for getting this all done. We will. Mark, expenses?

Yeah. Thanks, Jane. And why are expenses down more? I think to your point, Jane, we've been investing in the franchise, both on the front end and importantly, on the transformation and the risk and controls. What I would point out is that in 2023, we delivered expenses of $54.3 billion, ex the FDIC charge. That is the guidance that we gave.

But I'd also highlight that we also included $780 million associated with the restructuring charge. That is more than I had articulated in the way of guidance. So the capacity that we created through our efforts through the year. We use that in a smart way. We use that to fund the org simplification cost, so that we can realize the savings down the line. And we're going to continue to manage our expenses in a disciplined and smart fashion. That means, spending what we need to spend on the transformation and risk and controls, but driving greater efficiencies and productivities along the way to ensure we get to that 11% to 12%.

And to your point, if revenues are to come down or come in lower than expected? We'll adjust the expenses accordingly.

Yeah. Thanks, Glenn. I guess I'll start, and Jane feel free to add in on it. Look, it is a balancing effort, right? And we do look at each of our five core businesses. We obviously are clear on the strategy. But where's the growth? Where are the return opportunities associated with them? And how do we ensure we're deploying resources after them in order to deliver for the client and deliver on those returns over time?

We have to juxtapose that against the required investment to modernize our operations, and we're making those trade-offs on a regular basis. But importantly, when we do invest to capture those growth opportunities, we're trying to be agile about it, which means if those opportunities don't play out in the way we're expecting, because the cycle just doesn't mature or materialize in that fashion, we've got to be disciplined enough to dial them back. And that's what you've seen over the past year plus is that we've been investing in the business where we didn't see the upside that we anticipated.

We dialed back that spend, right? And that's the type of iterative process, if you will, Glenn, that we're putting in place to ensure that on the other side of this, we're still positioned to capture growth. Investment Banking, for example. We have invested in healthcare, in technology, building out to prepare ourselves for when that market rebounds. We feel good about that. We've done similar things in the way of our Wealth business. We're investing heavily in our TTS franchise to ensure we can remain competitive there. So, it's that type of discipline that's required. It is sometimes a trade-off, but it's one that we've been very focused on being smart about.

Yeah, sure. Do you want me to -- sure.

Yeah. And I'll jump in, to let's maybe start with TTS. When we think about the performance of TTS, which as we say, the growth this year up 19% ex-Argentina came from a combination of both rates and the strong business actions we've taken. And you can see that in the different drivers. Cross border was up 23%, Commercial Cards up 8%. In terms of the growth prospects, we've generated 22% in average revenue growth from 21% to 23%, well ahead of the Investor Day guidance we had of high single-digit. That was not just because of the rate cycle, it obviously helped. And we certainly expect to grow revenues at mid single-digit now as we lack the prior periods that benefited from those rates increases, and that's going to come from a few different areas:

One, the focus on our fee strategy, where we're capitalizing on strong client engagement, market-leading client solutions, and we're delivering on a lot of the different growth initiatives that we've been investing in, across all our client segments. We'll continue optimizing our deposit book and bringing in high quality deposits. And in a lower rate environment, GDP is typically higher, so you'd expect to see some higher growth in our capital-efficient payment volumes.

You'll see us continuing to acquire new clients and deepen relationships with existing clients. And I'd point to our confidence here, 27% increase in our new client acquisition this year, and a sustained win loss ratio of 82% on new deals, and that was across different client segments. And revenues from these clients just continues to ramp-up as we expand across the different geographies and product suites with them. And you'll also continue to see us investing in the infrastructure and platforms we've been doing, launching new innovative products, and we're seeing momentum from some of the things we've recently done, Citi Token Services, Payment Express, 24/7 clearing, etc.

So I think the main takeaway from TTS is that we'll continue to invest in it. We expect to see strong client momentum. We've been getting consistently good client feedback regarding our capabilities, so we expect to see good global growth, that will certainly help as the rate cycle comes down, and it is a crown jewel for a reason.

And then, just quickly on Securities Services, I think, where we're seeing, we mentioned we've got a number of marquee wins there across all the client segments. That pipeline is both investors and issuers. And one of the core strategies that Ockham [Phonetic] put in place was to grow share with the U.S.-based asset managers. We had a very low, we were at 2.6% share in 2020. We're now at 4.3%. And a lot of the growth in the pipeline has been coming not only from our global network names, but also from the marquee players in the U.S. asset manager space. And I think that's our ability to connect our capabilities that gives these players huge efficiencies for our clients.

Mark, anything I've missed there? You know, I love this business.

As you should, rightfully so. High returning business, great growth prospects. To answer one of your questions, Glenn, about half of the NII growth we could attribute to interest rates, and about half, I'd say, is business action. So us working with the clients to drive that momentum. And then, if you think about the non-interest revenue for services, they're up about 20% in the quarter year-over-year, if you exclude the impact of the Argentina devaluation, and up 7% on a full-year basis. And so, good momentum in the non interest revenue growth as well.

Good morning.

Sure. So look, John, obviously the Basel III proposal is still out there and under discussion. We've been very vocal about the potential impact of that. We've also been very disciplined about how we've been managing our capital. We've built that over 30 basis points over the course of the year. You've seen us actively manage that through the year. We're going to continue to do that. We obviously generate earnings that contribute to that.

We want to continue to drive growth across the business. We're trading at a 0.5 times book. Where we can, we want to buy back as much as we can in shares, and we tried to be disciplined about that over the past couple of quarters doing that as a modest level. You heard me say, we're going to do that again this quarter at a modest level, but we're going to be -- we have to be thoughtful about what those headwinds might look like, and we're actively working what mitigation actions we'd have to put in place should it turn out closer to the way the current proposal sits.

So, it's an ongoing active management that tries to balance servicing our client needs with obviously holding a responsible amount of capital in light of the uncertainty that's out there, and with an eye towards buybacks where we can do that.

Yeah, to be clear, we're going to continue to spend whatever we need to spend on the transformation and on risk and controls. And so, we did see a tick up this year. We've got a plan for 2024, and if we've got to spend a bit more than what we spent this year, we're going to spend more. That's what the plan calls for, and so that's what we'll do. That's inside of the number that I've given you for guidance. Right?

And so, that is -- that's important for us. I think it will drive obviously operational improvement and saves down the line. It is a part of the $2 billion to $2.5 billion, but that is the early stage, if you will, of the transformation spend paying back. I think, as we talked about at Investor Day, frankly, we will continue to see expense benefits beyond the medium-term from some of this transformation investment that we've been making. And so, I would think of the medium-term as the start of the benefits that we'll see from the investments we've been making in transformation and risk and controls.

Yeah, I think Mark, you're spot on. So we'll continue making the investments we need to in the transformation. It's a multi-year journey as we've always been clear around this, ultimately with benefits for the shareholders. And more of the expense saves that we've been talking about are, I'd separate out transformation from the operating expense base of our businesses which we want to make sure is as productive and as effective as possible.

And the types of benefits we're seeing. This is second year in a row that we've retired 6% of our legacy platform base, and you've heard me talking about moving 20 of our cash equity platforms onto one; six reporting ledgers onto one; 11 sanctioned platforms onto one. So we start seeing some of the benefits of those come in.

Other things. We automated independent price verification for 90% of our prioritized fixed income and equity securities. That's reduced manual controls. That's improved valuation consistency. That'-s also had an impact on the efficiency of the business. We've loaded 98% of our prioritized wholesale and consumer data into two authorized repositories that will also begin to start having some benefits for us.

So there is a cumulative effect that is beginning to build now from all the work we've done. But it will take some time to really kick into the, as Mark said, when you really feel it is a few years out, but we'll keep giving you the proof points of things as we're going. So it's not just a trust us, this is coming, you'll begin to see it build.

I think the thing I'd point out to you is a couple of things. One, obviously, we're forecasting revenue growth over this period of time. And so, it's going to be volume-related expenses associated with that. The second thing I'd point out, as I just mentioned to the prior question, is that we're continuing to invest in risk and controls and in the transformation over this period of time. And so, what you see is there's an increase in expenses associated with at least those two things, and that's offset by the savings that we're starting to generate, particularly from the org simplification that that Jane has talked about, as well as from the stranded cost reduction that will continue to play out, as well as from some of the rightsizing of businesses that we've referenced in some of the prepared remarks.

And so, important to think about their headwinds and tailwinds that kind of net down to this $2 billion to $2.5 billion. And then, the final point that I'd make is if I look at this medium-term number of $51 billion to $53 billion, that still has Mexico in it. In one of the other pages we point to expenses around Mexico, but because of where we are, or will be in the IPO process, that's still going to be part of this expense base. And so, you can't lose sight of that.

As you know, it's a tough business to forecast, certainly for a full-year and in some instances for a quarter. And so, we basically kind of back that out, but we've assumed markets kind of flat to modestly down, but we've backed it out, and it's roughly flat.

Not of the 81 -- not of the 80 to 81, but you see the guidance of NIR ex-Markets and NII ex-Markets. In the 80 to 81, we've assumed it roughly flat.

Good morning, Ebrahim.

It's Jane, obviously. I want to just jump in on one bit, which is we are committed and we're very confident around the 4% to 5% revenue growth rate. So there isn't any backing away from that number, and that's in various macro environments, etc. And as we look across the different businesses and the projections we have, we're confident around that.

Obviously, if there's a very adverse macroenvironment, etc., we've got other levers we can take. But Mark, let me pass it up to you.

Yeah, and I -- by no means was I trying to suggest that we weren't confident in the forecast for the top line. If you think about the strategy and the strength of those five core businesses, we've got a lot of conviction around that. With that said, as you point out, James, under a circumstance where that doesn't play out, there are obviously volume-related incentive comp expenses and the like that would naturally come down. We'd ensure that they came down with the revenue decline or shortfall, and then we'd recalibrate other spend, other investments. A spend not related to risk and controls and transformation, but other investments across the platform. We'd recalibrate accordingly.

The short answer is, no. If you think about our markets business, we have four businesses, each of which are around 4 billion or so in size. You have our global FX network, where we're typically number one in any year just given the strength and particularly the corporate client base, we sit off.

Rates typically top three. Together, these are two of the largest macro pools within FIC. In terms of the spread products, we've been putting our financing and securitization business as part of our simplification, fully within markets so that we've created a unified scaled spreads product business. And then, finally equities, where we're focused on improving our prime offering building balances. We still have a way to go obviously in that prime balances. We're pleased they were nicely up this year, driven by client momentum. And we're a leading equities derivatives franchise. So you do have these four core businesses. And I go back to our big point of differentiation and why we feel we're well positioned.

We have a very differentiated corporate client base and very strong partnerships between our core markets franchise, TTS and Banking and that, and Securities Services, and that helps us in FX, in commodities, and in rates around the world. So it's -- Markets is important, both in terms of its leadership, but also how it fits into the strengths that we have from this Simplicity of those five core interconnected businesses. We've demonstrated solid returns in the past. I think, a lot of the actions we've been taking will help drive returns in the future. And you should be getting confidence when you see the discipline we're putting onto RWA, 5.3%, getting close to that target. We said Investor Day, we're moving that up to 6%.

The exits we've got of non-strategic businesses shows our focus on efficiency. And we've also been doing some good investments in our technology. That's getting us into a good place there. So I think, don't be concerned about this shrinking. We're just making sure that it really plays to our strengths and we optimize the returns.

Hey.

Yeah, I think what I pointed to is in the range of the 80 to 81, we're assuming three to six cuts, right? You got a range there. And the reason I describe it that like that, is that if you think about our IRE as we've shown it in the queues before we're positioned such that with 100 basis point move, parallel shift in rate across the curve. The U.S. dollar impact would only be a couple of hundred million dollars, all right, and so -- to the negative, obviously, but it's a couple of hundred million dollars.

And so, as we think about that forecast, and as I mentioned, NII being down a bit, that covers kind of three to six cuts over the course of 2024, likely backloaded, but that's what's in there.

Yeah, well, we've also got areas which are growing, so that does help too. We have a diversified portfolio here. I think, we're very mindful of that there is a human impact of the decisions that we're making. We're trying to be as transparent with our people as we are with our investors about what we need to do, why we're doing it, what to expect, and laying that out so people understand the logic behind the decisions, and then they understand what the decisions are as quickly as they can. I think, that's the most humane way to do this.

Erika, it's a great question. It's one I ask myself every morning when I get up. Because given where we trade, the value for our shareholders of buybacks is enormous, and Mark and I are very committed to doing so. We also know that we're building our credibility and I don't want to say things that we're not going to deliver against or that we're going to have to change. I think, it's one of the values that we're really trying to adhere to very strongly. And with the NPR, I think we'll get a better sense about this soon.

The comment [Phonetic] period just got extended and we want to see what that is. I think, you've all heard us at the Senate Banking hearings with our concerns about it. I very much hope that it is either completely revised or very materially so it doesn't have the negative impact on the economy, in the U.S. Banking system competitiveness, the move for more business, the shadow banks, which I think has got to a point, which is not healthy. So we're going to wait and see before -- where that comes out before we give it to you. But I would be asking exactly the same question in your shoes as well.

Thank you.

Yeah. And actually I also want to kind of take a bigger picture answer to that before I turn it to Mark, because I would have thought there is a question that is on everybody's minds, particularly given the firm's overall low level of returns and our headline numbers this quarter, about what we've been doing with Russia and Argentina. There's sort of a bigger strategic question behind it, and then we'll get to your specifics on the Russia front.

If you think about Citi, we have a differentiated global business model, and that means we're committed to the countries in which our multinational clients operate over the long run. So, that means we hold long-term capital in those countries upon which we generate solid returns through the cycle. I think, we just point to our leading services, and FX businesses are the heart of that network, and they're generating double digits, as you can see. With that footprint comes a set of risks, I think of them in terms of credit, currency, transferability of capital, and we've proven our ability to manage those risks consistently over a long period of time.

And with respect to the Q4, currency and transfer items. While the timing was unknown and we've highlighted those risks in our disclosures for a couple of years, I'd say Russia is rather unique. It's a war, and for us, a highly unusual liquidation. We've navigated it very well. We've executed our wind down in an orderly way with very low losses for our clients and very low losses for us.

Our remaining net assets are now 100% reserved against. And I think similarly, if I just touch on Argentina for a minute, because I'm sure folks have got a few questions on that. Similarly, over the last several years, we derisked our business model there. We don't have a consumer bank, so we've really reduced our emerging market exposures to just our institutional presence, focused on the multinational clients. You've heard us talk about that and select high-grade local clients. Just look at Argentina. It's a very good business for us. Over the cycle, and even after the impacts of Q4, we had less than $5 million in credit losses in Argentina over a 10-year period. That's remarkable, $5 million over 10 years.

In terms of the currency risk, we all have to book revenues, the official rate versus the parallel market rate. We were able to partially but not fully hedge the exposure, but we would certainly always take economic decisions on the business we do and did, mindful of likely devaluations and capital controls. And the reserve is a reserve. It centers on the ability to convert and transfer capital as per U.S. Banking rules. So, I just want to put part of things of this quarter into that context. We have a global business model. It's heavily focused on high-grade multinational clients. Our track record for managing the various risks associated with our global network has been very strong, and I think you're seeing us with a very conservative and reserve profile.

Mark, what would you add?

Yeah, very quickly on the Russia point.As you know, and as the slide points out, we've continued to bring our exposure down there. It's down to $6.5 billion. It's down 13% from the previous year and a third from 2021. We brought down the consumer loans the consumer deposits in a significant way there. And essentially, what's left is that we have a custody business and we are holding corporate dividends that are our clients proceeds. We're unable to pay those out by law, by regulation, and so we have to hold those. And that's what's being referenced in the slide where we say unremittable Russia corporate dividends. And so that is not a risk of loss for us, but we're unable to kind of clear those because of the state of play in Russia at this stage.

Sure there's a step upcoming. We give a forecast on '23, as you point out, to what the full year estimate for NCLs will be for both Branded and for Retail Services. What I'd point out is, you can see actually on the slide how there was a dip in loss rates during the COVID period. And so to some extent, what we're seeing is kind of a catch up of those, as those portfolios go through a longer maturation than what you'd normally see in a Cards portfolio.

On top of that, we've been originating new card. You've noticed our acquisitions have grown, so we obviously have new card loans, and those are going through a much more normal maturation period. And so, as we look at kind of the early buckets and the delinquencies that are playing out, we've got a pretty good sense for when we would expect those to peak and at what level, and we think they'll peak inside of '24. So that's captured in that average forecast that we've given.

We haven't made material changes to our underwriting. However, there is mix evolution that happens. Transactors. We have a number of transactors that have kind of come on to our portfolio and are in the mix of our Branded portfolio as well. And so anyway, those are the drivers that give us confidence and inform the trajectory that we're talking about here.

Yeah, again, I mean, when I think about our interest rate exposure, and for U.S. dollar in particular, we showed it in our last Q, we'll show it in this Q, for a 100-basis-point move and a parallel shift, we're looking at probably a negative $1.6 billion or so. But important to point out that the U.S. dollar component of that is only a couple hundred million dollars.

Similarly, if rates moved in the other way, positive of 100 basis points, there'd be a small movement as it relates to U.S. dollar exposure. So our U.S. dollar exposure is relatively neutral. Again, assuming a static balance sheet, a parallel shift in the curve, and so we're kind of neutral relative to rates moving in either direction, and therefore, the impact there.

Yeah, we certainly had a much more constructive market environment at the end of '23. Interest rates spread, some volatility at low to the year, equity prices at high. And I think we view this as a helpful foundation for activity to accelerate in '24, assuming the tailwinds persist. And speaking of our own pipeline, the breadth, the depth, the quality of it's very sound, it's higher than it was pre-COVID.

So when markets are constructive, we expect to move these opportunities forward and we're hearing a lot more confidence from the CEOs, CFOs around this. And when we're looking at our own side, as you know, we've been investing in some higher growth areas so we get a good balance between our traditionally strong sectors as well as high-growth areas. And we've been seeing some very good momentum in healthcare and technology, as well as areas of traditional strengths, which is energy and industrial.

And I think we feel very confident in the recovery in DCM, the beginnings of one in lev fin. And so cautiously optimistic here. And I'm not -- I wouldn't say that it's going to accelerate enormously and with incredible speed, but I think we're feeling much better about the foundation.

Mark, anything you'd add?

No, I completely agree.

Yeah.

Sorry, I didn't hear what it was. I think the phone line cut out. The revenue in -- attrition?

Okay.

No, no. We haven't. I think a lot of the moves that we've made from the organization simplification, so the 5,000 or so roles we talked about, they're mainly managerial roles, and they've mainly impacted the functions and the geographies, not nearly so much the revenue from revenue generators. And the other pieces with the client organization, we're actually putting much more time into the hands of our people to drive revenue forward.

So I think what we're looking at here is getting rid of areas of bureaucracy and where we've been too complicated, where we can drive efficiency whilst preserving our frontline and encouraging them to be as revenue productive and delivering the full force of the firm to the client. So I'd like to see the opposite, actually.

I think what I'd say is that you should expect it in the first quarter we'd likely see an uptick in our total expenses relative to the fourth, in part because, as Jane has mentioned, we anticipate that they'll be more to the org simplification, and therefore, dollars associated with that in Q1, and then from there, I would expect that you can see a downward trend through the fourth quarter.

Yeah.

Hi, Vivek.

Modest declines outside, but yes, declines outside as well. But not nearly at the magnitude of what we're talking about in the U.S.

So let me just be clear about where the ones that we've just done and that we're working on through the organization simplification. So when I think about that effort, it will close at the end of the first quarter, as we said. We're expecting to get about $1 billion of run rate save from the org simplification work alone. That constitutes about 5,000 heads.

We're just about to, at the end of this month, finish phase three, which will mean the first four layers of the organization have been addressed. That's been a net reduction of about 1,500 managers out of a total of 12,000 roles. So it's about 13%. And these are mainly manager roles, as I talked about earlier.

Then when we think about where are other expense opportunities on top of this, as Mark was talking about earlier. The stranded costs, we'll be completing the elimination of the stranded costs from the divestitures. We'll be continuing, and you've seen us being doing that, exiting marginal businesses and hobbies and the like, and being very disciplined about that.

We've got some businesses where we feel we need to right-size the core expense base. Andy Sieg is going to be kicking off that in Wealth, and you will begin to see some of the impact of that in the first quarter. He's off to a strong start. And then we've got other areas where we'll be creating more utilities. We've got -- still got different fragmented activities across the firm that the organization simplification has highlighted. We'll be aggregating those, creating utilities, or consolidating some of those different functions.

And that is on -- before we get to -- beginning to get benefits from the transformation where there will be efficiencies that come through. We'll still have areas that we're investing. These are going to be, as we talked about, core business investments. It's going to be expense growth still in the top -- in -- from volume growth that we've got, and we will be investing in our transformation.

And all of this is happening over the medium-term to get us to the 11% to 12% RoTCE target we talked about. So that 20,000 is -- it's the number that we estimate of the headcount. I don't love thinking headcount. I like thinking about expenses. I think it's a more meaningful number. So as Mark laid out in his presentation, we've got a net expense save that we're expecting to achieve from the medium-term. And these are the rafts of different areas that will be contributing to it, and we're working hard at it.

So let's see. So obviously, the proposal's out there, and we've factored in what's knowable as it relates to that. We haven't given guidance externally on what that impact is, but we do believe there offsets and mitigants that, over time, we'll be able to kind of bring into play. And so a longwinded way of saying our revenue forecast does assume some basic level of late fee adjustment.

I mean, there are a lot of factors in there. There's obviously -- as well the mix as it relates to what we have in the U.S. versus outside of the U.S. So it's -- there are a number of factors there, and probably too much to kind of take you through on the call here. But we're happy to kind of follow-up with you offline and take it through it.

Yeah, it's [Speech Overlap]

2026.

Yeah.

By '26, yeah.

Thank you, Mike.

Thank you, everyone, for joining the call. If you have any follow-up questions, please contact IR. Have a great day. Thank you.