Mark Mason
Chief Financial Officer at Citigroup
Thanks, 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 then spend a little more time on the businesses.
On Slide 4, we show financial results for the full firm. In the third quarter, we reported net income of approximately $3.5 billion, EPS of $1.63, and an RoTCE of 7.7% on $20.1 billion of revenues. Embedded in these results are divestiture-related impacts of approximately $214 million after tax, primarily driven by the Taiwan consumer business sale. Excluding these items, EPS was $1.52, with an RoTCE of 7.2%.
In the quarter, total revenues increased by 9% on a reported basis and 10% excluding divestiture-related impacts, driven by strength across services, cards and markets as well as modest growth in banking, partially offset by the revenue reduction from the closed exits and wind-downs. Our results include expenses of $13.5 billion, up 6% on a reported basis and $13.4 billion excluding divestiture-related costs, also up 6%.
Cost of credit was approximately $1.8 billion, up 35%, primarily driven by the continued normalization in card net credit losses and volume growth. At the end of the quarter, we had over $20 billion in total reserves with a reserve-to-funded loan ratio of approximately 2.7%. And year-to-date, we reported an RoTCE of 8.3%.
On Slide 5, we show expense drivers for the third quarter as well as our key investment themes. Expenses were up 6% and our level of expenses continue to be driven by a number of factors, including investments in transformation, as well as risk and controls, business-led and enterprise-led investments, macro factors including inflation and FX, severance, which was approximately $190 million in the quarter, and roughly $640 million on a year-to-date basis. This included actions across banking, markets, wealth and the functions. And all of this was partially offset by productivity savings and expense reductions from the closed exits and wind-downs. And our technology spend across the firm was $3 billion in the quarter, up 8%, largely driven by investments in product development, platform enhancements, and improving the client experience.
Also driving the increase is continued investment in technology for the transformation as we address the consent orders and modernize the firm. As we said last quarter, our transformation and technology investments span the following themes: platform and process simplification, security and infrastructure modernization, client experience enhancements, and data improvements. And 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 will speak to sequential variances. In the third quarter, net interest income decreased by $72 million. Excluding markets, net interest income increased $332 million, primarily driven by growth in PBWM as we continue to see loan growth and higher loan spreads, a pickup in services driven by higher deposit spreads as a result of higher interest rates and active beta management, partially offset by reductions from closed exits and wind-downs.
Average loans were up 1%, largely driven by growth in U.S. Personal Banking across Cards and Retail Banking as well as TTS. Average deposits were down 2%, largely driven by Services, as we saw non-operational deposit outflows as expected in light of quantitative tightening. And our net interest margin increased 1 basis point.
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 loan ratio was nearly 2.7%, and within that U.S. cards is 7.8%. In PBWM, 45% of our loans are in U.S. cards, and of that exposure, 80% is to customers with FICO scores of 680 or higher. And both Branded Cards and Retail Services NCL rates are still below pre-COVID levels, but are normalizing in line with our expectations. The remaining 55% of our PBWM loans are 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. Corporate non-accrual loans increased by $490 million, but remain low at 68 basis points of total corporate loans. And we ended the quarter with a reserve to funded loan ratio of approximately 1%.
As you can see on the page, we break out our commercial real estate lending exposures across ICG and PBWM, which totals approximately $65 billion, of which 86% is investment grade, with a total reserve to funded loan ratio of 1.4%. To give you a sense of the macro scenario that underpin our over $20 billion of reserves, our current scenario weighted average unemployment rate is approximately 5%, which includes a downside scenario, with an average unemployment rate of roughly 7%. 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, $782 billion, are institutional and operational in nature and span across 90 countries. These institutional deposits are complemented by $416 billion of U.S. Personal Banking and global wealth deposits. We have approximately $569 billion of HQLA and approximately $666 billion of loans and we maintain total liquidity resources of $937 billion.
Our LCR was 117%. We ended the quarter with a 13.5% CET1 ratio based on standardized RWA, which is our binding constraint. Although not binding, our advanced RWA did increase this quarter, largely driven by business activity. And our tangible book value per share was $86.90, up 8% 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 second quarter, first, we generated $3.2 billion of net income to common, which added 28 basis points; second, we returned $1.5 billion in the form of common dividends and share repurchases, which drove a reduction of about 13 basis points; and finally, the remaining 2 basis points increase was primarily driven by lower DTA deductions and a net reduction in RWA. We ended the quarter with a 13.5% CET1 capital ratio, approximately a 120 basis points or $14 billion above our current regulatory capital requirement of 12.3% as of October 1st.
Before we move on, I'd like to spend a minute on capital. We continue to optimize our RWA and capital, which we expect to be a tailwind over-time. Contributing to this is the execution of our strategy, such as further diversifying our business mix and simplifying our business model, including exiting our 14 international consumer markets. Our investments in the transformation will continue to enhance our data analytics and stress testing capabilities, enabling continued capital optimization. And of course, in light of the evolving regulatory environment, we're also looking at other mitigating actions. But those will largely depend on how the final capital rules play-out. These actions could include exiting or restructuring certain products, divesting certain equity investments, and re-evaluating both how we deploy capital and our management buffer. We've consistently demonstrated our ability to manage our RWA and capital levels through various macro environment and the evolving regulatory landscape, and we'll continue to do so.
On Slide 10, we show the results for our Institutional Clients Group for the third quarter. Revenues were up 12% this quarter, driven by double-digit growth across services, markets and banking. In the quarter, normal course foreign currency translation impacts drove a net revenue headwind in ICG. On an ex-FX basis, ICG revenues would have been up 15%. Additionally, there was an approximately $180 million negative impact from the currency devaluation in Argentina on our net investment in the country, mainly across TTS, markets and security services.
Expenses increased 10%, primarily driven by continued investments in risk and controls and volume-related expenses, partially offset by productivity savings. Cost of credit was $196 million, including $51 million of net credit loss. This resulted in net income of approximately $2.4 billion, up 12% driven by higher revenues, partially offset by higher expenses and higher cost of credit.
Average loans were down 4% as we were very deliberate about how we deployed resources across the businesses, including the reduction in subscription credit facilities. Average deposits were flat as new client acquisition and deepening of relationships with existing clients were offset by non-operational deposit outflows. ICG delivered an RoTCE of 10% for the quarter and 11% year-to-date.
On Slide 11, we show revenue performance by business and the key drivers we laid out at Investor Day. In Treasury and Trade Solutions, we recorded our highest revenue quarter in the last decade. Revenues were up 12%, driven by 17% growth in net interest income. Non-interest revenues were up 1%, and on an ex-FX basis, non-interest revenues would have been up 8%. We continue to see healthy underlying drivers in TTS that indicate consistently strong client activity with cross-border flows up 16%, outpacing global GDP growth and year-to-date, cross-border flows were up 12%. U.S. dollar clearing volumes are up 6% both year-over-year in the quarter and year-to-date. And commercial card volumes were up 8% year-over-year, driven by growth in business-to-business payments and travel and entertainment spends. And year-to-date, commercial card volumes were up 20%.
In fact, similar to the last few quarters, client wins are up approximately 40% across all client segments. These include marquee mandates, where we are serving as the client's primary operating bank. We continue to make good progress on our commercial client strategy, as year-to-date wins more than doubled, driven by expansion into new markets and growth in multiproduct mandates from clients with cross-border needs.
In Securities Services, revenues were up 16%, driven by higher net interest income across currencies. Non-interest revenues were up 3%. We're very pleased with the progress we're seeing in Security Services as we continue to onboard assets under custody and administration which are up approximately 10% or $2.1 trillion.
Markets revenues were up 10%, driven by fixed income. Fixed income revenues were up 14%, largely driven by strength in our rates and currency franchise. While volatility remains subdued versus a year ago, we did see overall volatility tick higher relative to the beginning of the quarter. Equities revenues were down 3%, driven by a decline in equity derivatives, partially offset by growth in cash and prime. And we continue to make solid progress on our revenue to RWA target.
And finally, banking revenues, excluding gains and losses on loan hedges were up 17%, driven by investment banking, which increased 34% on a reported basis and 12% excluding marks. Here too, we saw a pickup in activity in the last couple of weeks of the quarter, particularly in DCM, but also in M&A as we closed a few deals earlier than expected. So overall, while the market environment remains challenging, and there's more work to be done, we're making solid progress against our strategy in these businesses.
Now turning to Slide 12, we show the results for our Personal Banking and Wealth Management business. Revenues were up 10%, driven by net interest income growth of 9% and a 20% increase in non-interest revenue, primarily due to lower partner payments in retail services and higher investment product revenues in wealth. Expenses were up 5%, predominantly driven by risk and control investments and severance, partially offset by productivity savings. Cost of credit was $1.5 billion, driven by higher net credit losses as we continue to see normalization in our card portfolios. Average loans increased 7% driven by cards, mortgages and installment lending. Average deposits decreased 2%, largely reflecting our clients putting cash to work in investments on our platform. And PBWM delivered an RoTCE of 8.8% and 6.6% on a year-to-date basis.
On Slide 13, we show PBWM revenues by product as well as key business drivers and metrics. This quarter was our fifth consecutive quarter of double-digit growth in Personal Banking, driven by cards. Branded cards revenues were up 12%, primarily driven by higher net interest income. We continue to see strong underlying drivers with new account acquisitions up 5%, card spend volumes up 4%, and average loans up 12%. Retail services revenues were up 21%, driven by higher net interest income and lower partner payments on the heels of higher net credit losses.
In the card portfolios, we continue to see the investments we've been making as well as lower payment rates contribute to growth in interest-earning balances of 15% in Branded Cards and 12% in Retail Services. Retail banking revenues decreased 3%, driven by the transfer of relationships and the associated deposits to our wealth business, partially offset by higher deposit spreads. Wealth revenues were up 2%, driven by higher investment fees across all regions and segments. The benefit from relationships transferred from retail banking and higher lending revenue. We also saw strong net new inflows across all regions. And year-to-date, new client acquisitions were up almost 30% in the private bank and over 60% in Wealth at Work. Overall, we are pleased with the progress we are making across these businesses.
On Slide 14, we show results for Legacy Franchises. Revenues were down 13%, largely driven by the difference in one-time gain on sale impacts in the Asia consumer businesses as well as the reductions from closed consumer exits and wind-downs, partially offset by higher revenue in Mexico. It's worth noting that Mexico's revenues were up 32%, primarily driven by Mexican peso appreciation, higher interest rates, and volume growth. Ex-FX, Mexico revenues were up 16%. Expenses decreased 3%, primarily driven by closed consumer exits and wind-downs, partially offset by separation costs in Mexico and Mexican peso appreciation. And expenses in Mexico were up 27% and but ex-FX expenses were up 11%.
On Slide 15, we show results for Corporate/Other. Revenues increased, largely driven by the absence of mark-to-market impacts on certain derivative transactions in the prior year. And expenses decreased, largely driven by lower consulting fees.
On Slide 16, I'll briefly touch on our full year 2023 outlook. With one quarter remaining in the year, we continue to expect full year revenues of $78 billion to $79 billion, excluding 2023 divestiture-related impacts. Having said that, based on what we've seen play out year-to-date in terms of U.S. and non-U.S. rates and lagging non-U.S. betas, we now expect net interest income to be slightly above $47.5 billion for the full year, excluding markets. And we are maintaining our expense guidance of roughly $54 billion, excluding 2023 divestiture-related impact and the FDIC special assessment. Net credit losses in cards should continue to normalize with both portfolios reaching pre-COVID levels by year-end. And as it relates to buybacks, we expect to do a modest level of buybacks in the fourth quarter.
Before we move to Q&A, I'd like to end with a few points. We're executing on our strategy and delivering topline revenue growth of 5% year-to-date. We continue to invest for the long-term with discipline while remaining on track to deliver our expense guidance. We're focused on simplifying our organizational and management structure, which will further support our speed of execution. We're managing our capital in a disciplined way in light of regulatory headwinds, while continuing to optimize and return capital to shareholders. And we remain confident in our ability to achieve our RoTCE target of 11% to 12% in the medium term. And again, we look forward to hosting a more expansive fourth quarter earnings call, where we plan to share additional details related to the organizational simplification, including expected related severance and expense saves as well as our outlook for 2024.
With that, Jane and I would be happy to take your questions.
