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 spend a little more time on expenses and capital. Then I will turn to the results of each segment.
On Slide 4, we show financial results for the full firm. In the second quarter, we reported net income of approximately $2.9 billion and an EPS of $1.33, and an ROTCE of 6.4% on $19.4 billion of revenues. Embedded in these results are after-tax divestiture-related impacts of approximately $92 million. Excluding these items, EPS was $1.37 with an ROTCE of 6.6%.
In the quarter, total revenues decreased by 1% both on a reported basis and excluding divestiture-related impacts as strength across services, US Personal Banking, and revenue from the investment portfolio was more than offset by declines in markets, investment banking, and wealth, as well as the revenue reduction from the closed exits and wind downs.
Our results include expenses of $13.6 billion, up 9% both on a reported basis and excluding divestiture-related costs. Cost of credit was approximately $1.8 billion, primarily driven by the continued normalization in cards net credit losses and ACL builds, largely related to growth in card balances.
Our effective tax rate this quarter was 27%, primarily driven by the geographic mix of our pretax earnings in the quarter. Excluding current quarter divestiture-related impacts, our effective tax rate was 26%. At the end of the quarter, we had over $20 billion in total reserves, with a reserve-to-funded loans ratio of approximately 2.7%, and through the first half of 2023, we reported an ROTCE of 8.7%.
On Slide 5, we show the quarter-over-quarter and year-over-year expense variance for the second quarter. Expenses were up 9%, driven by a number of factors, including investment in risk and controls, business-led and enterprise-led investments, volume growth, and macro factors, including inflation as well as severance. And all of this was partially offset by productivity savings and expense reductions from the exits and wind-downs.
Severance in the quarter was approximately $200 million and $450 million year-to-date as we took further actions across investment banking, markets, and functions. We're investing in the execution of our transformation and continue to see a shift in our investments from third-party consulting to technology and full-time employees. And as we said last quarter, our transformation and technology investments span across the following themes, platform, and process simplification, security and infrastructure modernization, client experience enhancements, and data improvements. And across these themes, technology spend was $3 billion in the quarter, up 13%, primarily driven by change the bank spend. Despite the higher expense base sequentially, we remain in line with our full-year guidance of roughly $54 billion, excluding divestiture-related impacts and the FDIC special assessment.
On Slide 6, we show net interest income, deposits, and loans where I'll speak to sequential variances. In the second quarter, net interest income increased by approximately $550 million, largely driven by dividends. The increase in net interest income ex-markets was largely driven by higher rates and cards growth, partially offset by the mix shift that we've seen to higher rate deposit products within PBWM. Average loans were flat as growth in PBWM was offset by the wind-down markets and a decline in ICG as we continue to optimize the loan portfolio, including a further reduction in subscription credit facilities.
Average deposits were down 2%, largely driven by TTS, as we saw some non-operational outflow, as expected in light of quantitative tightening. However, underlying this, we did see strong growth in operating accounts as we continue to win new clients and deepen with existing ones, and our net interest margin increased 7 basis points.
On Slide 7, we show key consumer and corporate credit metrics. We are well reserved for the current environment with over $20 billion of total reserves. Our reserves to funded loans ratio is approximately 2.7%, and within that at US cards is 7.9%. In PBWM, 44% of our lending exposures are in US cards, and of that exposure 80% is to customers with FICOs of 680 or higher. And NCL rates are still below pre-COVID levels and are normalizing in line with our expectations. The remaining 56% of our PBWM lending exposure is largely in wealth, predominantly in mortgages and margin lending.
In our ICG portfolio, of our total exposure, approximately 85% is investment grade. Of the international exposure, approximately 90% is investment grade or exposure to multinational clients or their subsidiaries. And corporate nonaccrual loans remain low at about 44 basis points of total loans. As you can see on the page, we break out our commercial real estate lending exposures across ICG and PBWM, which totaled $66 billion, of which 90% is investment grade. So, while the macro and geopolitical environment remains uncertain, we feel very good about our asset quality, exposures, and reserve levels, and we continuously review and stress the portfolio under a range of scenarios.
On Slide 8, we show our summary balance sheet and key capital and liquidity metrics. We maintain a very strong $2.4 trillion balance sheet, which is funded in part by a well-diversified $1.3 trillion deposit base across regions, industries, customers, and account types, which is deployed into high-quality diversified assets.
Our balance sheet reflects our strategy and well-diversified business model. We leverage our unique assets and capabilities to serve corporates, financial institutions, investors, and individuals with global needs. The majority of our deposits, $818 billion, are institutional and operational in nature and span across 90 countries. These institutional deposits are complemented by $427 billion of US retail consumer and global wealth deposits as you can see on the bottom right side of the page. We have approximately $584 billion of HQLA and approximately $661 billion of loans, and we maintain total liquidity resources of just under $1 trillion. Our LCR was relatively stable at 119%, and our net stable funding ratio was greater than 100%. We ended the quarter with a 13.3% CET1 ratio and our tangible book value per share was $85.34, up 6% from a year ago.
On Slide 9, we show a sequential CET1 walk to provide more details on the drivers this quarter. Starting from the end of the first quarter, first, we generated $2.6 billion of net income to common, which added 22 basis points. Second, we returned $2 billion in the form of common dividends and share repurchases, which drove a reduction of about 18 basis points. And finally, the remaining 14 basis point decrease was primarily driven by RWA growth as we continued to grow card balances partially offset by optimizing RWA in markets and corporate lending. We ended the quarter with a 13.3% CET1 capital ratio, which includes 100 basis point internal management buffer. We expect our regulatory capital requirement to be 12.3% in October of 2023, which incorporates the increase in our stress capital buffer from 4% to the preliminary SCB of 4.3% we announced a couple of weeks ago. And we will continue our dialogue with the Fed to better understand the differences between their modeled results and ours, specifically in noninterest revenue. That said, our strategy is designed to further diversify our business mix to have a more consistent, predictable and repeatable revenue stream, as well as reduce risk and simplify our firm by exiting 14 international consumer markets. The strategy and the simplification coupled with the benefits of our transformation investments, will allow us to improve RWA and capital over time. The continued optimization of our balance sheet should not only help SCB but reduce RWA. This will offset some of the anticipated headwinds in capital requirements and RWA, and we will continue to reassess how and where we deploy capital, and we will continue to reassess the appropriate level of our management buffer over time.
On Slide 10 we show the results for our Institutional Clients Group for the second quarter. Revenues were down 9% this quarter, as growth in services was more than offset by markets in banking. Expenses increased 13%, primarily driven by continued investments in TTS and risk and controls, as well as approximately $120 million of severance in investment banking and markets, partially offset by productivity savings.
Cost of credit was $58 million, as net credit losses were partially offset by an ACL release. This resulted in net income of approximately $2.2 billion, down 45%, primarily driven by lower revenues and higher expenses. ICG delivered an ROTCE of 9.2% for the quarter and 11.4% through the first half of 2023. Average loans were down 6%, reflecting discipline around our strategy and returns. Average deposits were up 1% as we continued to acquire new clients and deepen relationships with existing ones.
On Slide 11, we show revenue performance by business and the key drivers we laid out at Investor Day. In Treasury and Trade Solutions, revenues were up 15%, driven by 18% growth in net interest income and 8% in noninterest revenue. It's also worth noting that TTS revenues were up 20% on an ex-FX basis. We continue to see healthy underlying drivers in TTS that indicate consistently strong client activity, with US dollar clearing volumes up 6% both in the quarter and through the first half, cross border flows up 11%, outpacing global GDP growth, again both in the quarter and through the first half, and commercial card volumes up roughly 15%, led by spend and travel.
In fact, similar to the last few quarters, client wins are up approximately 41% across all client segments. These include marquee transactions where we are serving as the client's primary operating bank. In Security Services revenues were also up 15%, driven by higher net interest income across currencies. We are pleased with the progress in Security Services as we continue to onboard assets under custody and administration, which are up approximately 11% or $2.4 trillion, and we feel very good about the pipeline of new deals in Security Services. As a reminder, the services businesses are central to our strategy and are two of our higher-returning businesses with strong synergies across the firm.
Markets revenues were down 13%, driven by both fixed income and equities relative to an exceptional quarter last year coupled with low volatility this quarter. Fixed income revenues were down 13%, as strength in our rates franchise was more than offset by a decline in currencies and commodities. Equities revenues were down 10%, primarily reflecting a decline in equity derivatives. But consistent with our strategy, we continued to grow prime balances, driven by client wins. Corporate client flows remained strong and stable, and we continued to make solid progress on our revenue to RWA target.
And finally, banking revenues, excluding gains and losses on loan hedges, were down 22%, driven by investment banking, as heightened macro uncertainty continued to impact client activity as well as lower revenues in corporate lending. While we continue to have a strong pipeline and are seeing green shoots of activity, we recognize there's more work to do in ECM and M&A. That said, we believe the investments that we've made in healthcare and technology coverage will benefit us over time. So overall, while the market environment remains challenging and there's more work to be done, we're making progress against our strategy in ICG.
Now, turning to Slide 12, we show the results for our Personal Banking and Wealth Management business. Revenues were up 6%, driven by net interest income growth of 7%, partially offset by a 6% decline in noninterest revenue, driven by lower investment product revenues in wealth. Expenses were up 5%, predominantly driven by risk and control investments. Foster credit was $1.6 billion, driven by higher net credit losses as we continued to see normalization in our card portfolios and a reserve build of approximately $335 million, primarily driven by card balance growth. Average loans increased 7%, driven by cards, mortgages, and installment lending. Average deposits decreased 1%, largely reflecting our wealth clients putting cash to work in fixed-income investments on our platform. And PBWM delivered an ROTCE of 5.5% both for this quarter and through the first half of 2023, largely reflecting the challenging environment for wealth and higher credit costs.
On Slide 13, we show PBWM revenues by-products as well as key business drivers and metrics. Branded cards revenues were up 8%, primarily driven by higher net interest income. We continue to see strong underlying drivers, with new account acquisitions up 6%, card spend volumes up 4%, and average loans up 14%. Retail services revenues were up 27%, driven by higher net interest income and lower partner payments.
For both card portfolios, we continue to see payment rates decline and that combined with the investments that we've been making contributed to growth in interest-earning balances of 17% in branded cards and 12% in retail services. Retail banking revenues decreased 9%, reflecting the transfer of relationships and the associated deposits to our wealth business. In fact, consistent with our strategy, we continued to leverage our retail network to drive 25,000 wealth referrals a year to date through May, up 18% year-over-year. Wealth revenues were down 5%, driven by continued investment fee headwinds and higher deposit costs, particularly in the private bank. However, wealth at work revenues were up over 30%, driven by strong lending results, primarily in mortgages. Client advisors were down 1%, reflecting the repacing of strategic hiring. And new client acquisitions were up nearly 40% in the private bank and approximately 60% in wealth at work in the second quarter. While there's clearly more work to do in wealth, we are seeing good momentum in the underlying drivers.
On Slide 14, we show results for legacy franchises. Revenues were down 1%, as the benefit of higher rates and volumes in Mexico was more than offset by the reductions from closed consumer exits and wind-downs. It's worth noting that Mexico's revenues were up 22% and 10% ex-FX. Expenses decreased 2%, primarily driven by closed consumer exits and wind-downs. Excluding divestiture-related impacts, expenses decreased 8%.
On Slide 15, we show results for corporate other for the second quarter. Revenues increased, largely driven by higher net revenue from the investment portfolio. Expenses also increased, driven by inflation and severance.
On Slide 16, I'll briefly touch on our third quarter and full year 2023 outlook. We are maintaining our full year revenue guidance of $78 billion to $79 billion, excluding 2023 divestiture related impacts although the mix has shifted somewhat. We are increasing our net interest income guidance from $45 billion to slightly above $46 billion for the full year, excluding markets offset by lower noninterest revenue, largely driven by investment banking and wealth. We're also maintaining our expense guidance of roughly $54 billion, excluding 2023 divestiture-related impacts and the FDIC special assessment. Net credit losses in cards should continue to normalize in the remainder of the year, with both portfolios reaching normalized levels by year-end. And we now expect the full year tax rate to be approximately 25%, excluding discrete items and divestiture related impacts.
As it relates to the third quarter, we expect continued momentum with clients, including fees and benefits from US and no-US rates on NII. We also anticipate a sequential increase in expenses, driven by continued investments in transformation and risk and controls. Net credit losses in cards should continue to normalize in line with expectations. And our effective tax rate for the quarter should be approximately 25%, excluding discrete items and divestiture related impacts. And as it relates to buybacks, we will continue to make that decision on a quarter-by-quarter basis.
Before we move to Q&A, I'd like to end with a few points. We continue to execute on the strategy to simplify our firm, improve our revenue mix and bring both expenses and capital down over time. We're 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 remain focused on achieving our medium-term ROTCE target.
And with that, Jane and I would be happy to take your questions.
