Mark Mason
Chief Financial Officer at Citigroup
Thank you, Jane, and good morning, everyone. I'm going to start with the firm-wide financial results focusing on year-over-year comparisons for the third quarter, unless I indicate otherwise, and spend a little more time on expenses, credit, and capital. Then I will turn to the results of each segment and end with full year 2022 guidance.
On Slide 4, we show financial results for the full firm. In the third quarter, we reported net income of $3.5 billion, and EPS of $1.63 with an RoTCE of 8.2% or an $18.5 billion of revenues. Embedded in these results, our pre-tax divestiture-related impacts of approximately $520 million, largely driven by a gain on the sale of the Philippines consumer business. Excluding divestiture-related impacts, EPS and RoTCE would have been $1.50 and 7.5%, respectively. In the quarter, total revenues increased 6% on a reported basis excluding divestiture-related impacts, revenues were down 1% as growth in net interest income was more than offset by lower non-interest revenues.
Net interest income grew 18% driven by the impact of higher interest rates across the firm, and strong loan growth in PBWM. Non-interest revenues were down 12% on a reported basis, and 28% excluding divestiture-related impacts, largely reflecting declines in Investment Banking, Markets, and Investment Revenues in Wealth. Total expenses of $12.7 billion increased 8% and 7% excluding divestiture-related impacts largely driven by transformation, inflation, and other risk and control initiatives. Cost of credit was $1.4 billion, driven by net credit losses of approximately $900 million, and an ACL build of approximately $500 million, primarily driven by loan growth in PBWM. At the end of the quarter, we had $18.7 billion in total reserves, with a reserve-to-funded loan ratio of approximately 2.5%.
On Slide 5, we show net interest income, loans, and deposits. In the third quarter, total net interest income increased by approximately $600 million on a sequential basis, and approximately $1.9 billion on a year-over-year basis across the firm, driven by higher interest rates, management of deposit re-pricing and loan growth in PBWM. Average loans were down by approximately 2%, largely driven by the impact of foreign exchange translation, and lower balances in Legacy Franchises, excluding FX, loans were largely flat, and average deposits were down by approximately 2% largely driven by declines in Legacy Franchises and the impact of foreign exchange translation, partially offset by the issuance of institutional CDs as we continue to diversify the funding profile of the bank, excluding FX deposits were up roughly 1%. And sequentially, our net interest margin increased by 7 basis points.
On Slide 6, we show an expense walk for the third quarter with the key underlying drivers. As I mentioned earlier, expenses increased by 8% and 7% excluding the impact of divestitures, 2% of the increase was driven by transformation investments with about two-thirds related to the risk, controls, data, and finance programs, and approximately 25% of the investments in those programs are related to technology. As of today, we have over 10,000 people dedicated to the transformation. About 1% of the expense increase was driven by business-led investments as we continue to hire commercial and investment bankers as well as client advisers in wealth, and we continue to invest in the client experience as well as front-office onboarding and platforms. 1% was due to higher volume-related expenses across both PBWM and ICG.
And approximately 3% was driven by other risk and control investments and inflation, partially offset by productivity savings and the impact of foreign exchange translation. Across all these buckets, we continue to invest in technology, including systems and hiring people, resulting in our technology-related spend of approximately 16% for the quarter.
On Slide 7, we show key consumer and corporate credit metrics. Over the last several years, we have been disciplined with our loan growth and consistent with our risk appetite framework. This framework includes credit risk limits that consider concentrations, including country, industry, credit rating and in the case of consumer FICO scores. And importantly, these limits apply across the firm in aggregate. And we continuously analyze our portfolios and concentrations under a range of stress scenarios.
As a result, we feel very good about our asset quality and reserve levels. As I mentioned earlier, our reserves to funded loan ratio was approximately 2.5%. And within that, PBWM and U.S. cards is 3.7% and 7.5%, respectively, both right around day one CECL levels. In PBWM, the majority of our card portfolios skew towards higher FICO customers. And while we have started to see signs of normalization in both portfolios, NCL rates continue to be less than half of pre-COVID levels. In our ICG portfolio, of our total exposure, over 80% is investment grade, and non-accrual loans remain low and are in line with pre-pandemic levels at about 40 basis points of total loans. So we are well reserved for a variety of scenarios, and we continuously evaluate our scenarios to reflect the evolving macro environment.
On Slide 8, we show our summary balance sheet and key capital and liquidity metrics. We maintained a very strong balance sheet of our $2.4 trillion of assets about 23% or $557 billion are high-quality liquid assets, or HQLA, and we maintained total liquidity resources of approximately $967 billion. The combination of earnings generation, capital from exits and RWA optimization drove our CET1 ratio up by about 25 basis points to approximately 12.2% on a standardized basis, which remains our binding constraint. And our tangible book value per share was $80.34, up 2% from a year ago.
On Slide 9, we show a sequential CET1 walk to provide more detail on the drivers this quarter and our target over the next few quarters. First, we generated $3.2 billion of net income to common which added 27 basis points. Second, we returned $1 billion in the form of common dividends, which drove a reduction of about 8 basis points. Third, the interest rate impact on AOCI through our AFS investment portfolio drove a 5 basis point reduction. Fourth, changes in the DTA drove a 3 basis point reduction. And finally, the remaining 14 basis point increase was largely driven by net RWA optimization.
In light of our increasing regulatory capital requirement, we ended the quarter with a 12.2% CET1 ratio, 25 basis points higher than last quarter. Importantly, 12.2% is above our current regulatory requirement of 11.5% as of October 1 and above 12%, which will be our regulatory requirement as of January 1 of next year. As we said last quarter, we continue to gradually build to a CET1 target of approximately 13% by mid-year 2023, which includes the current 4% SCB and a 100 basis point management buffer.
On Slide 10, we show the results for our Institutional Clients Group, revenues were down 5%, as strong growth in services was more than offset by lower revenues across markets and banking. Expenses increased 10% driven by transformation, business-led investments and volume-related expenses, partially offset by productivity and foreign exchange translation. Foster Credit was driven by a reserve build of $86 million. While deterioration in certain macro variables did lead to a build, it was mostly offset by the release of a COVID-19 related uncertainty reserve and a release related to direct exposures in Russia. This resulted in net income of approximately $2.2 billion, down 30%. Average loans were up 1%, driven by 9% growth in TTS loans, partially offset by the impact of foreign exchange translation. Average deposits were down 2%, also largely driven by foreign exchange translation. And ICG delivered an RoTCE of 9%.
On Slide 11, we show revenue performance by business and the key drivers we laid out at Investor Day, which we will show you each quarter. In services, we continue to see a very strong new client pipeline and deepening with our existing clients and expect that momentum to continue. In Treasury and Trade Solutions, revenues were up 40%, driven by 61% growth in net interest income as well as 8% growth in NIR across all client segments. We continue to see healthy underlying drivers in TTS that indicate consistently strong client activity, with U.S. dollar clearing volumes up 2%, cross-border flows up 10%; commercial card volumes up roughly 50% and average loans up 9%.
So while the rate environment drove about 40% of the growth this quarter, business actions drove the remaining 60%. This includes continuing to manage deposit repricing and deepening with existing clients and significant new client wins across all client segments. Through the first half of the year, based on the industry data that we see, we estimate that we gained over 60 basis points of share with large corporate clients. And client wins are up approximately 20% across all segments, including wins with financial institutions, which are up almost 50%.
These include marquee transactions where we are serving as the client's primary operating bank. In addition, [Technical Issues] product in the U.S. and Asia, which allows clients to connect their liquidity and funding to their operating flows seven days a week. In Securities Services, revenues grew 15% as net interest income grew 73%, driven by higher interest rates across currencies, partly offset by a 6% decrease in non-interest revenue due to the impact of market valuations. We continue to be pleased with the execution in Security Services, as we onboarded approximately $1 trillion of assets under custody and administration, so far this year from significant client wins, and we feel very good about the pipeline of new deals. And we estimate that we have gained about 60 basis points of share in security services through the first half of this year, including in our home market.
As a reminder, the services businesses are central to our strategy and are two of our higher returning businesses with strong linkages across the firm. Markets revenues were down 7%, largely driven by spread products, equities and RWA actions as we continue to focus on returns. Fixed Income Markets revenues were up 1%, as strength in rates and FX was largely offset by continued headwinds in spread products. And through the first half of the year, we gained approximately 40 basis points of share. Equity Markets revenues were down 25%, primarily reflecting reduced client activity in equity derivatives relative to a very strong quarter last year. The actions we took to optimize RWA in markets are in line with the strategy we discussed at Investor Day, and we are making solid progress on our revenue to RWA targets so far this year.
And finally, banking revenues, excluding gains and losses on loan hedges were down 49%, driven by investment banking as heightened macro uncertainty and volatility continue to impact client activity. Also embedded in the results is an impact of approximately $110 million related to marks on loan commitments and losses on loan sales. So overall, while the market environment remains challenging, we feel good about the progress we are making as we continue to deepen existing client relationships, as well as acquire new clients.
Now turning to Slide 12. We show the results for our Personal Banking and Wealth Management business. Revenues were up 6% as net interest income growth was partially offset by a decline in non-interest revenue, driven by lower investment fee revenue in wealth, and higher partner payments in retail services. Expenses were up 13%, driven by transformation, other risk and control initiatives, business-led investments and volume-driven expenses, partially offset by productivity savings.
Cost of credit was $1.1 billion, which included a reserve build primarily driven by card volume growth. NCLs were 13% higher year-over-year from near historically low levels, reflecting normalization, particularly in retail services. Overall, we continue to see strong credit performance across portfolios. Average loans grew 5%, driven by strong growth across branded cards, retail services and retail banking. Average deposits grew 1%, driven by growth across retail and wealth, partially offset by foreign exchange translation. And PBWM delivered an RoTCE of 9.7%.
On Slide 13, we show PBWM revenues by products, as well as key business drivers and metrics. Branded cards revenues were up 10%, driven by higher net interest income. We continue to see strong underlying drivers with new account acquisitions up 10%, card spend volumes up 14%, and average loans up 12%. Retail services revenues were up 12%, also driven by higher net interest income, partially offset by higher partner payments. So despite payment rates remaining elevated, the investments we've been making contributed to growth in interest-earning balances of 9% in branded cards and 7% in retail services, and we expect to continue to grow these balances in the fourth quarter.
Retail banking revenues were up 2%, primarily driven by interest rates and deposit growth. Wealth revenues were down 2% as investment fee headwinds, particularly in Asia more than offset net interest income growth. Excluding Asia, revenues were up 4%. Client advisers were up 5%, and we are seeing net new investment inflows and strong new client acquisitions across our wealth business with new clients in ultra-high net worth and wealth at work of 7% and 27% respectively for the quarter. And we're also leveraging our retail net worth, which has driven almost 50,000 wealth referrals so far this year. While the environment continues to remain challenging, we are seeing strong underlying business drivers as we execute against our strategy.
On Slide 14, we show results for legacy franchise. Revenues increased 66%, primarily driven by the Philippines gain on sale in the quarter and the absence of the Australia loss on sale in the prior year period. Excluding these items, revenues were down about 12%, largely due to the loss of revenues from the Australia and Philippines closing, as well as the impact of the Korea wind down. Expenses increased 6%, driven by divestiture impacts in Asia and Mexico. Loans and deposits decreased as a result of the reclassification of signed exits to other assets and other liabilities, the closing of the Philippine sale and the impact of the Korea wind down.
On Slide 15, we show results for Corporate/Other. Revenues increased, largely driven by higher net revenue from the investment portfolio, partially offset by the mark-to-market on certain derivative transactions, and expenses were down.
On Slide 16, I'll briefly touch on our full year 2022 outlook. With one quarter remaining in the year, we continue to expect full year revenues to be up in the low single-digit range, excluding divestiture-related impacts. And within that, we continue to see a shift with higher net interest income offset by lower non-interest revenue. So, for the fourth quarter, we expect net interest income, excluding markets to be up in the range of $1.5 billion to $1.8 billion year-over-year. Clearly, where we land within that range will be a function of a number of factors, including rates, loans and deposit volumes, deposit betas and currency impacts.
Regarding full year expenses, we continue to expect expenses to grow by 7% to 8%, excluding divestiture-related impacts. In terms of cost of credit, it will be a function of the evolution of the macro environment, normalization that we continue to expect in the cards businesses and loan growth. And keep in mind that loan growth tends to be higher in the fourth quarter versus the third, given typical holiday spending.
Before we move to Q&A, I'd like to end with a few key points. We continue to execute on the strategy that we laid out at Investor Day. We are seeing solid momentum in the underlying drivers of the majority of our businesses. And as we said at Investor Day, the financial path will not be linear, but we are confident we can achieve our medium-term targets in a variety of scenarios.
And with that, Jane, and I would be happy to take your questions.
