Mark Mason
Chief Financial Officer at Citigroup
Thanks, Jane, and good morning, everyone. I'm going to start with the firmwide financial results, focusing on year-over-year comparisons for the second quarter, unless I indicate otherwise, and then spend a little more time on the business.
On Slide 6, we show financial results for the full firm. For the quarter, we reported net income of approximately $3.2 billion, EPS of a $0.52, and an ROTCE of 7.2% on $20.1 billion of revenue. Total revenues were up 4%, driven by growth across all businesses as well as an approximate $400 million dollar gain related to the Visa B exchange offer. A significant portion of this gain is reflected in equity markets, with the remainder reflected in all other. Expenses were $13.4 billion, down 2% and 6% on a sequential basis. The combination of revenue growth and expense decline drove positive operating leverage for the firm, and the majority of our businesses.
Cost of credit was $2.5 billion dollars, primarily driven by higher card net credit losses, which were partially offset by ACL releases and all business except USPB, where we built for loan growth. At the end of the quarter, we had nearly $22 billion of total reserves, with a reserve to funded loan ratio of approximately 2.7%.
On Slide 7, we show the expense trend over the past five quarters. This quarter, we reported expenses of $13.4 billion, down 2% and 6% sequentially, which includes the $136 million dollars civil money penalties imposed by the Fed and OCC earlier this week. The decrease in expenses was primarily driven by savings associated with our organizational simplification, stranded cost reduction, and lower repositioning cost, partially offset by continued investment in transformation and the Fed and the OCC penalties. As we said over the past few months, we will continue to invest in the transformation and technology to modernize our operations and risk and control infrastructure. We expect these investments to offset some of our saves and headcount reduction going forward. However, based on what we know today, we will likely be at the higher end of the expense guidance range, excluding the FDIC special assessment and the civil money penalties. With that said, we will, of course, continue to look for opportunities to absorb the civil money penalties.
Before going into the balance sheet and the business results for the quarter, I'd like to also give more color on the transformation and address what the Fed and OCC announced Wednesday. We've made good progress on our transformation in certain areas over the last few years. And I want to highlight some of those areas before discussing the announcement. First, wholesale credit and loan operations, where we implemented a consistent end-to-end operating model, and consolidated multiple systems with enhanced technology. This has not only reduced risk, but enhanced operating efficiency and the client experience.
We've also made improvements in risk and compliance as we enhanced our risk assessments and technology capabilities to increase automation for monitoring. And in data, while there's a lot more to do, we stood up a data governance process and streamlined our data architecture to ultimately facilitate straight-through processing. Overall, we've improved risk management and consolidated and upgraded systems and platforms to improve our resiliency. These efforts represent meaningful examples of how we're making progress against our transformation milestones.
That said, we have fallen short in data quality management, particularly related to regulatory reporting, which we've acknowledged publicly since the beginning of the year. As such, we've begun to put additional investments and resources in place to not only address data quality management related to regulatory reporting and data governance, but also stress-testing capabilities, including DFAST and resolution recovery. We also reprioritized our efforts to ensure we're focused on data that impacts these reports first. We take this feedback from our regulators very seriously, and we're committed to allocating all the resources necessary to meet their expectations.
Now, turning back to the quarterly results. On Slide 9, we show net interest income, deposits, and loans, where I'll speak to sequential variance. In the second quarter, net interest income was roughly flat. Excluding markets, net interest income was down 3%, largely driven by the impact of foreign exchange translation, seasonally lower revolving card balances, and lower interest rates in Argentina, partially offset by higher deposit spreads in wealth. Average loans were roughly flat as growth in cards and Mexico consumer was largely offset by slight declines across businesses. And average deposits decreased by 1%, largely driven by seasonal outflows and transfers to investments in wealth, as well as nonoperational outflow in TTS.
On Slide 10, we show key consumer and corporate credit metrics, which reflect our disciplined risk appetite framework. Across our card portfolios, approximately 86% of our card loans are to consumers with FICO scores of 660 or higher. And while we continue to see an overall resilient U.S. consumer, we also continue to see a divergence in performance and behavior across FICO and income band.
When we look across our consumer clients, only the highest income quartile has more savings than they did at the beginning of 2019. And it is the over 740 FICO score customers that are driving the spend growth and maintaining high payment rates. Lower FICO band customers are seeing sharper drops in payment rates and borrowing more as they are more acutely impacted by high inflation and interest rates. That said, as we will discuss later, we're seeing signs of stabilization in delinquency performance across our cards portfolio. And we've taken this all into account in our reserving, and we remain well-reserved with a reserve to funded loan ratio of 8.1% for our total card portfolio.
Our corporate portfolio is largely investment-grade, at approximately 82% as of the second quarter. And we saw a nearly $500 million sequential decrease in corporate, nonaccrual loans, largely driven by upgrades and repayments. Additionally, this quarter, we saw an improvement in our macro assumptions driven by HPI, oil prices, and equity market valuation. And our credit loss reserves continues to incorporate a scenario weighted average unemployment rate of nearly 5% and a downside unemployment rate of nearly 7%. As such, we feel very comfortable with the nearly $22 billion of reserves that we have in the current environment.
Turning to Slide 11. I'd like to take a moment to highlight the strength of our balance sheet, capital, and liquidity. It is this strength that allows us to support clients through periods of uncertainty and volatility. Our balance sheet is a reflection of our risk appetite, strategy, and diversified business model. Our $1.3 trillion deposit base is well-diversified across regions, industries, customers, and account types. The majority of our deposits are corporate at $807 billion and span 90 countries. And as you heard at the Services Investor Day, most of these deposits are held in operating accounts that are crucial to how our clients fund their daily operations around the world, making them operational in nature and therefore very stable.
The majority of our remaining deposits, about $404 billion, are well-diversified across the private bank, Citigold, retail, and Wealth at Work offering, as well as across regions and products. Of our total deposits, 68% are U.S. dollar denominated, with the remainder spanning over 60 currencies. Our asset mix also reflects our strong risk appetite framework. Our $688 billion Loan portfolio is well-diversified across consumer and corporate loans. And about one-third of our balance sheet is held in cash and high-quality, short-duration investment securities, that contribute to our approximately $900 billion of available liquidity resources. We continue to feel very good about the strength of our balance sheet and the quality of our assets and liabilities, which position us to be a source of strength for the industry, and importantly, for our clients. On Slide 12, we show a sequential walk to provide more detail on the drivers of our CET1 ratio this quarter. We ended the quarter with a preliminary 13.6% CET1 capital ratio approximately. 130 basis points, or approximately $15 billion above our current regulatory capital requirement of 12.3%. We expect our regulatory capital requirement to decrease to 12.1%, as of October 1, which incorporates the reduction in our stress capital buffer from 4.3% to the indicative SCB of 4.1% we announced a couple of weeks ago. We were pleased to see the improvement in our defas results and the corresponding reduction in our SCB. That said, even with the reduction, our capital requirement does not yet fully reflect our simplification efforts. The benefits of our transformation or the full execution of our strategy, all of which we expect to reduce our capital requirements over time. And as a reminder, we announced an increase to our common dividend from $0.53 per share to share following the SCB result. And as Jane mentioned earlier, we plan on doing $1 billion of buybacks this quarter. So now turning to Slide 13, before I get into the businesses, as a reminder, in the fourth quarter of last year, we implemented a revenue sharing arrangement within banking and between banking, services, and markets, to reflect the benefit the businesses get from our relationship-based lending. The impact of revenue sharing is included in the all other line for each business in our financial supplement. In services, revenues were up 3% this quarter, reflecting continued underlying momentum across both TTS and security services. Net interest income was down 1%, largely driven by lower earnings on our net investment in Argentina, partially offset by the benefit of higher U.S. and non-U.S. interest rates relative to the prior-year period. Non-interest revenue increased 11%, driven by continued strength across underlying fee drivers, as well as a smaller impact from currency devaluation in Argentina. The underlying growth in both businesses is a result of our continued investment in product innovation, client experience, and platform modernization that we highlighted during our Services Investor Day last month. Expenses increased 9%, largely driven by an Argentina-related transaction tax expense, a legal settlement expense, and continued investments in product innovation and technology. Cost of credit was a benefit of $27 million, driven by an ACL release in the quarter. Average loans were up 3%, primarily driven by continued demand for export and agency finance, particularly in Asia, as well as working capital loans to corporate and commercial clients in Latin America and Asia. Average deposits were down 1%, driven by non-operating deposit outflows. At the same time, we continue to see good operating deposit inflows. Net income was approximately $1.5 billion and services continues to deliver a high ROTCE, coming in at 23.8% for the quarter. On Slide 14, we show the results for markets for the second quarter. Markets revenues were up 6%, fixed income revenues decreased 3%, driven by rates and currencies, which were down 11% on the back of lower volatility and tighter spread. This was partially offset by strength in spread products and other fixed income, which was up 20%, primarily driven by continued loan growth and higher securitization and underwriting fees. In addition to a benefit from the Visa B exchange offer, we continue to see good underlying momentum in equity, primarily driven by equity derivatives, and we continue to make progress in prime, with balances up approximately 18%. Expenses decreased 1%, driven by productivity savings, partially offset by higher volume-related expenses. Cost of credit was a benefit of $11 million as an ACL release more than offset net credit loss. Average loans increased 11%, largely driven by asset-backed lending and spread product, average trading assets increased 12%, largely driven by client demand for treasuries and mortgage-backed security. Markets generated positive operating leverage and delivered net income of approximately $1.4 billion, with an ROTCE of 10.7% for the quarter. On Slide 15, we show the results for banking for the second quarter. Banking revenues increased 38% driven by growth in investment banking and corporate lending. Investment banking revenues increased 60%, driven by strength across capital markets and advisory given favorable market conditions. DCM continued to benefit from strong issuance activities, mainly in investment grade as issuers continued to de-risk funding plans in advance of what could be a more volatile second half in the context of a number of important global elections as well as the macro environment. In ECM, excluding China A shares, we're seeing a pickup in IPO activity, led by the U.S., as well as continued convertible issuance as issuers take advantage of strong equity market performance and expectations for rates to be higher for longer. And in advisory, we're seeing revenues from the relatively low-announced activity in 2023 coming to fruition as those transactions close. Both year-to-date and in the quarter, we gained share across DCM, ECM, and advisory, particularly in technology, where we've been investing. Corporate lending revenues, excluding mark-to-market on loan hedges, increased 7%, largely driven by higher revenue share. We generated positive operating leverage again this quarter as expenses decreased 10%, primarily driven by actions taken to rightsize the expense base. Cost of credit was a benefit of $32 million, driven by an ACL release, reflecting an improvement in the macroeconomic outlook, partially offset by net credit loss. Average loans decreased 4% as we maintained strict discipline around returns combined with lower overall demand for credit. Net income was $406 million and ROTCE was 7.5% for the quarter. On Slide 16, we show the results for wealth for the second quarter. Wealth revenues increased 2%, driven by a 13% increase in NIR from higher investment fee revenues, partially offset by a 4% decrease in NII from higher mortgage funding costs. We continue to see good momentum in non-interest revenue, as we benefited from double-digit client investment asset growth both in North America and Internationally, driven by net-new client investment assets as well as market valuation. Expenses were down 4%, driven by the initial benefit of expense reductions as we rightsize the workforce and expense base. Cost of credit was a benefit of $9 million, as an ACL release more than offset net credit loss. Preliminary end-of-period client balances increased 9%, driven by higher client investment assets as well as higher deposits. Average loans were flat as we continue to optimize capital usage. Average deposits increased 2%, largely reflecting the transfer of relationships and associated deposits from USPB, partially offset by a shift in deposits to higher-yielding investments on Citi's platform. Client investment assets were up 15%, driven by net-new investment asset flows, and the benefit of higher market valuation. Wealth generated positive operating leverage this quarter and delivered net income of $210 million with an ROTCE of 6.4% for the quarter. On Slide 17, we show the results for U.S. personal banking for the second quarter. U.S. personal banking revenues increased 6%, driven by NII growth of 5% and lower partner payment. Branded cards revenues increased 8%, driven by interest-earning balance growth of 9%, as payment rates continue to moderate. And we continue to see growth in spend volumes of 3%, primarily driven by customers with FICO scores of 740 or higher. Retail services revenues increased 6%, primarily driven by lower payments from Citi to our partners due to higher net credit losses. And interest-earning balances grew 8%. Retail banking revenues increased 3%, driven by higher deposit spread as well as mortgage and installment loan growth. USPB also generated positive operating leverage this quarter, with expenses down 2%, driven by lower technology and compensation costs, Partially offset by higher volume-related expenses. Cost of credit increased to $2.3 billion, largely driven by higher-end CLs of $1.9 billion, and an ACL build of approximately $400 million, reflecting volume growth in the quarter. But let me remind you of the three things driving our NCLs this quarter. First, card loan vintages that were originated over the last few years are all maturing at the same time. These vintages were delayed in their maturation due to the unprecedented levels of government stimulus during the pandemic. Second, we continue to see seasonally higher NCLs in the second quarter. Third, certain pockets of customers continue to be impacted by persistent inflation and higher interest rates, resulting in higher losses. However, across both portfolios, we are seeing signs of stabilization and delinquency performance. But we will continue to watch the impact of persistent inflation and high interest rates as the year progresses. Despite these factors, we still expect branded cards to be in the 3.5% to 4% NCL range for the full year and retail services to be at the high end of the range of 5.75% to 6.25%. Average deposits decreased 18%, as the transfer of relationships and the associated deposits to our wealth business more than offset the underlying growth. Net income was $121 million in ROTCE for the quarter was 1.9%. As we've said before, we will continue to take actions to manage through the regulator headwind, lap the credit cycle, and grow revenue while improving the overall operating efficiency of the business, to ultimately get to a high-teens return over the medium term. On Slide 18, we show results for all other on a managed basis, which includes corporate other and legacy franchises, and excludes divestiture-related items. Revenues decreased 22%, primarily driven by the closed exits and wind-downs and higher funding costs, partially offset by growth in Mexico, as well as the impact from the Visa B exchange offer. And expenses decreased 7%, primarily driven by closed exits and wind-downs. Slide 19 shows our full-year 2024 outlook and medium--term guidance, both of which remain unchanged. We continue to remain laser-focused on executing on our transformation and enhancing the business' performance. And while we recognize there's a lot more to do on transformation, we are pleased with the progress that we're making towards our 2024 and medium-term targets, and remain committed to these targets. With that, Jane and I will be happy to take your questions.
