All right. Fireside chat with John Gerspach who is the CFO of Citigroup. John has been with Citigroup since 1990 and was appointed CFO. We were just chatting in 2009 and as some of you may know today is the day in 2009 that the S&P bottomed at 666, and has obviously soared up since that time, not to say that this will be a day of infamy, but....
Let's not go back to 2009..
No, that’s true, those are different times. And in fact, it’s just the opposite as you know John that everything seems to be going very well with the economy in the US particularly with the tax reform. And maybe we could start off, in your Investment Day you laid out some guidelines and since then we had tax reform.
And possibly you can just remind us what some of the profitability and return targets will look like now that the tax reform is in place..
Yeah. Sure, thanks Gerard. So, may remember when we did the earnings release we talked about some of the impacts on tax reform. And since then, we’ve upped the impact of tax reform slightly when we filed our 10-K, 10 days ago.
So, tax reform cost us about $22.6 billion onetime non-cash charge, but obviously the impact on our capital was as much more modest and very manageable at about $6 billion.
So, the benefits of tax reform of course to us would mean that we’re going to have a lower tax, lower effective tax rate where we said is for 2018, we expect the 25% effective tax rate. And we’ve got line of sight to something lower than that, call it 24% over the course of next two years.
Now, against the Investor Day targets, if you take a look at some of the numbers that we’ve put out there for 2020, we had assumed 33% effective tax rate in those numbers. So, tax reform saves us about 900 basis points on an effective tax rate out to 2020.
We’ve talked about therefore tax reforms says it will lower, our tax expense improving our ROE by about 200 basis points and of course if you actually do the math on 900 basis points against some of the targets we’ve put out there for 2020, its actually on a straight numbers basis, probably something closer to a 300-basis point increase in ROE.
But, we want to leave ourselves some room to think in terms of how much of that benefit do we really want to reinvest in the business.
Are there additional market programs, are there additional product development programs, technology expenses that we want to move forward? So, there is a series of things that we’ll be looking at over the course of the next several months and we’ll give you further guidance.
But right now, I’d say the best thing is assume about 200 basis point increment over the numbers that we have put out. This year, we put out a very specific target 10.5% RoTCE is our target for 2018 and then 2020 at Investor Day we said about 11%, now we’re thinking more in terms of 13%..
And similar to other meetings and conversations, there are questions from the audience, please raise your hand. John, with these profitability targets, embedded in this is your efficiency ratio dropping down into the low 50% range by 2020.
What are the biggest drivers of that? And could it actually be accelerated?.
Good question. So, the drivers -- when we take a look at the efficiency ratio, I think what we demonstrated last year is a pretty good summation of how we intend to approach it, a combination of some revenue growth, additional efficiency saves covering investment expenses and then the continued wind down of legacy assets.
If you take a look at what we did last year, last year, we generated about 150 basis points improvement in our efficiency ratio and that we target about another 100 basis points this year. Last year, if you look, we had revenue growth in our core businesses of about 6%.
We continue to invest in those businesses but efficiency savings by and large offset the impact of those investments. And then we have the wind down of the legacy assets. So, when you look at it, it netted out to be about a 2% all-in revenue growth, because as you wind down legacy assets you certainly have a run-off in both revenue and expenses.
So, 2% all-in revenue growth and virtually flat expenses. This year, I am not saying we’re going to repeat exactly that, but again would be the same type of formula. Some revenue growth will continue to manage the expenses closely and we will continue to wind down the legacy assets.
And that is really the formula that we’ve put in place for the Investor Day looking forward. We had about a 4% compound growth rate in revenues.
And therein again, it’s -- continue to make those investments in the digital capabilities, continuing to build scale, continue to invest in cloud computing, all of these things that should then enable us to drive the efficiency ratios down to the mid-50s, low 50s..
When we look at the Investor Day you’ve mentioned also a CET1 target ratio of about 11.5%. You have also in the past talked about the binding constraint being the CCAR process in the capital.
Do you anticipate any changes to that targeted ratio with the new regulators coming in, any relief or should we still keep that 11.5% as kind of the target?.
I think the 11.5% is still the target for now. We certainly haven’t seen anything concrete coming out of the regulators at this point in time. We are hopeful that there will be some improvements made in the overall CCAR process but nothing just as yet. So, for now, the 11.5% is I think a good target..
Now that we’ve had some weeks to look at the CCAR scenarios that have been put out there.
Can you give us your take on what you guys are seeing in those scenarios and how it might impact you guys?.
Certainly, a little bit tougher than we had thought that we would be presented with, certainly a little bit tougher than what we would have hoped. But we are still on target to deliver the $60 billion worth of capital return to the shareholders that we talked about over three CCAR cycles.
So, at Investor Day we said over the ‘17, ‘18 and ‘19 CCAR cycles, we felt we have the capacity to deliver $60 billion worth of capital return to the shareholders. $19 billion got approved in the last CCAR cycle, so that leaves us around $40 billion yet to go. And we still think that we’ve got a pathway to get there.
The scenarios were a little tougher than we had thought they might be..
Yes, we agree..
And I don’t think we are alone, yes..
When you look at dividend and dividend pay-out issues, when you Mike and you have talked to the board, can you kind of talk to us as you get through the excess capital phases over the next two years or three years, what do you see reasonable dividend pay-out ratios being for Citigroup?.
Yeah. There is obviously at least a fed right now is still talking in terms of a 30% or so pay-out capital and good dividend. I don’t know how firm that’s going to be going forward. And so, we’ll see what happens.
But, I think the important thing when it comes to the fed is they have always said there is no as far as they have said to us, there is no cap on capital returns that’s going to be just based upon a firm’s ability to generate capital and what capital they need and how they perform in stress scenarios.
See you saw that last year we were able to actually return there is lot of people look at it as far as pay-out ratio on net income we were well above 100%. We were above 100% of the capital that we’ve generated last year. So, we think we’ve got ample room to continue to return capital.
When we take a look at dividends, I’d say that for us in the near-term what we’re focused on is having a dividend percentage equal to about 2% to 2.4%, so that’s kind of dividend yield that we would be targeting. And that’s kind of what we’re using as guidance right now..
Got you. When, speaking of the regulators, I don’t know if you had a chance yesterday but Vice Chairman Quarles was out talking about maybe changes to the Volker Rule in reporting. Can you give us your thoughts on just how you’re seeing the regulatory environment evolve as the administration has changed, new people have come in.
Are they more receptive in talking to you guys about making it more efficient and more optimal?.
Well, certainly what we’ve heard, I think what everyone has heard being said publicly is indicative of the fact that they would like to make some changes. Not necessarily large-scale changes, but even some of the things that Quarles was talking about yesterday in which others have talked about in the past would have a positive impact.
Again, it’s not as though they’re taking away regulation, but we’ve all mentioned over the last several years, does it really make sense to have five difference agencies administering adherence with the Volker rule, we got five different interpretations. For us, we’ve got three different agencies that regulate us on Volker.
So that’s three different sets of eyes, three different conversations, in some cases different data sets that you’ve got to provide that with. So, having one common definition, administered by maybe one agency per bank that would be Volker..
When we look at your capital markets business, your investment banking area, you guys have made really good strides in the last three years or four years or five years of taking market share.
What are you seeing on the horizon for that? Can you continue with that pattern, is it hiring more people to generate that market share gain in addition to the guys you haven’t out winning new business?.
Yeah. I’d say it’s a combination of factors Gerard. One, we -- going back to 2009, when we really thought there was a strategy of Citi, and we refined the strategy so that from an ICG point of view, we decided to focus just on large multi-national clients, just serving the needs of large multi-national clients.
That’s enabled us to really cut down our client list dramatically. Now we’ve cut down our client list from about 30,000 down to 12,000 at this point in time, 12,500. So, we have been able to focus on clients.
You combine that intense focus with doing some key hires and we invested in investment banking teams back in 2014, ‘15, it takes a while for that to come together.
But I think what you are seeing now is a result of that combination of deciding to focus on a very specific set of clients and then building up the capability that you need in order to do that. And it’s having the result that we thought it would have. And so, you’re starting to see those wallets share gains build and we had a nice run.
I am not going to say that we are going to get that same result every year but it’s working..
Geographically you are finding better opportunities whether its EMEA or Asia or US?.
Well, most of the investment banking activity is still in the US and Europe. Asia is wonderful. We are doing fine there. But where we are really gaining the wallet share is in the more traditional markets..
Got you. Moving on to markets in general, how was it going this quarter in terms of the more volatility, everybody is hopefully benefiting from the volatility in terms of versus last year.
But maybe you could give us some color on what you guys are seeing?.
Yes, I think definitely there certainly has been a pickup in volatility in the first quarter, and by and large that’s positive.
It's probably had, yes, some impacts on one product than others, and there still have been -- we still have seen some periods of time when the volatility has gotten a bit steep, it spiked, or it’s become particularly erratic that we’ve had some of our investor clients move to the side-lines.
But by and large I would say that the products that have benefited the most from the volatility this quarter would have been our FX product, and that’s at both the G10 markets as well as the emerging markets. So, we’ve had really good activity in FX and equities. Equities has done pretty well this quarter.
We have a shot at getting to $1 billion of revenues this quarter in equities. And volatility I would say has had less of a benefit on rates and spread products. So all-in-all, a good environment.
I would say that if you look at it, combination of our equities and fixed income, markets products, I would expect revenues to be up low to mid-single-digits this quarter over a fairly strong first quarter last year. And we had an especially strong March last year.
And then we’ve got good momentum continuing in TTS and private banking, corporate lending, security services. So even though investment banking may be down a bit this quarter compared to last year, still a lot of good momentum across the place..
You mentioned TTS which is a real kind of joy for you guys in moving money around the world. Rising rates traditionally have benefited I think that business.
Can you share with us some of the innovations, I think at your Investor Day, you guys identified that you’re moving, clients are moving more money through the iPads and iPhones and how important this technology?.
Well, technology is incredibly important. And we continue to invest in technology, I mean one of the things talking about some of the good things that from a revenue momentum in the first quarter, you will likely see and I guess I have a good revenue momentum we’ll do fine, we will still hit our target for efficiency ratio for the full year..
Right..
But the efficiency ratio will likely to be in the first quarter about flat to last year and that’s because with all of the positive momentum, we’re leaning in from an investment point of view..
Right..
And so, when you think in terms of TTS, TTS really is a technology business..
Okay..
And it’s been that way, I worked in our TTS business back in 2000-2001, when we first implemented CitiDirect. And that was a big investment program then and we continue to pile more money into that technology platform. As you said, we’re now expanding into where treasurers can move money just using mobile tablets.
So, we move $2 trillion last year just on tablets or mobile phones, smartphones..
Yeah. Right..
So, it’s great. The rates aspect of TTS is definitely there, but where we’re really gaining revenue is more on volumes, we continue to gain a wallet share when you measure that through swift volumes or some of the other things. And with TTS, we’ve also now introduced our corporate card and that is becoming a real revenue generating machine.
And we like that product a lot..
Speaking of cards, maybe you can kind of pivot into the consumer side of the business. You -- obviously, the big Costco acquisition is behind you now. What are you guys seeing in that business.
Is it still a promotional rate business that is very competitive? Or where do you see that going?.
Yeah. Good engagement when you think in terms of the US cards business, purchase sales I think we’ve had up like 10%, last year we grew receivables by about 6%.
Importantly even with the -- and we did make a pivot during the year to be a little bit more focused on some of the promotional balances, the interest-bearing balances in that book grew by about 4% last year.
And so that’s important because that means that the earlier vintages that we invested in bank in 2015, 2016 they are now generating the interest-bearing receivables that we thought. So, as people come out of the promotional period, we’re getting that flipping behaviour that we wanted. So, we like the way that that business is performing.
As I mentioned last year, we’ve talked about it in our third quarter earnings call, we have gone into the year expecting to be a bit more heavily invested in rewards products for last year. Did like the way the competitive environment was shaping out from a rewards point of view.
So, we shift it a little bit more into the value products which are much more leaning on promotional balances.
That gave us some revenue headwinds last year, those revenue headwinds will probably be there again this year, but importantly the underlying book is performing really well, we’re getting the promotional balances are moving into the revolving balances as we modelled. So, it will be okay.
But it probably delays the overall growth in that business by about a year..
And then any questions from the audience? Yes..
[Question Inaudible]..
I am sorry, whatever achieved in terms of price-to-book?.
[Question Inaudible]..
Right, right, right. No, I would say we’ve only seen big price-to-book and price-to-changeable book, investors, the value and it’s driven we believe not necessarily by growth but by profitability.
And there’s a great correlation as we all know between ROE and price-to-book and whether we all agree that cost of capital is around 10%, and that could be debated but the higher the ROE and if Citi can deliver and as John just mentioned on the profitability then the price-to-book will definitely increase.
When we take a look, we recognize that against peers’ situations right now, certainly against some of the larger peers, our ROE trails it and that’s why we are really focused on doing two things.
One is, continuing to improve that return that those profitability metrics on the base business and that includes the revenue growth, the continued expense discipline and credit discipline that I think you should see building in the business. But importantly that also means continuing to deal with our denominator.
And we have been running, we closed last year 12.4% CET1 ratio even after the write-offs of tax form. Our target is to run the place at 11.5%, which means that we have capital that should be returned to the shareholders and that’s why the annual CCAR cycle, as we go through the capital planning process is important.
And that’s why we’ve targeted over at least the next two CCAR cycles returning $40 billion to the shareholders. It’s capital that will generate, importantly it’s capital -- that level of capital return should enable us to get that CET1 ratio down from that 12.4% closer to that 11.5% and also therefore benefit our RoTCE by lowering the denominator.
So, we talk about it as both improving return on and the return of capital, and that’s how we think we get the price to book where it should be..
John, is there any possibility, if there -- we're not expecting great regulatory relief for the big guys. There will be some. But if there's better transparency in CCAR where both the regulators and the banks can come to some sort of understanding that the gaming of the system therefore doesn't happen.
Could you actually lower the targeted CET1 ratio to something, once you know there are no surprises in CCAR?.
Look, it's certainly is a possibility. We had that conversations a couple of minutes ago, where I said I think 11.5% is still the right target now. But there is a lot of things on the table that I think are ripe for discussion.
What’s the treatment of the GSIB buffer in CCAR? Are they going to implement in NASB, right? What happens in the future? One of the assumptions that’s in the CCAR process right now is the assumption that institutions will continue to buy back shares of stock even in a crisis period.
There is an assumption when the fed runs its severely adverse scenario that says that assets will grow during the crisis. It can be crisis when banks have actually grown their assets. But anyway, yeah. So, things like the -- if those things change than maybe the target can go down as well..
And looking at tax reform, obviously, the economy has picked up some momentum. Globally, it feels the OECD countries are all positively growing today. What are you guys seeing on commercial and corporate loan demand? Has it started to pick up yet? If not, is it later in the year possibly? Or....
I’d say that when you think about the globe, all right, right now, people have used the term synchronous growth and it’s real. It’s real. I was in Asia last week, and you can feel it in Asia, you can certainly feel it in client conversations in the states. So, I’d say that whole thing about the synchronous growth is a reality.
It is translating into loan growth in selected areas now, I’d say that when it comes to tax reform most companies, not all companies, but most companies are just working through that strategic planning process now.
Most times when you get something as significant as the US sale package that just got put through the tax reform you’ll got month where you’re thinking about what they’re talking about and how that might impact you. Tax reform happened fairly quickly, the reality of it crystallize in a matter of weeks not months.
And so, I don’t think it’s unusual for companies to take some period of time in order to make some very big decisions as to where they want to invest, how they want to invest. So, I do think you’re going to see a lot of that over the next six months..
Okay. When we look at the globalisation, obviously you guys have been in Mexico for some time.
Can you share with us, you are committed to Mexico, you’re investing in Mexico in the Banamex brand down with the city name?.
Citibanamex..
There you go, Citibanamex. What are the guys on the front lines telling you about their concerns of NAFTA changes or these tariffs now that we're hearing about.
I know it's real time on the tariffs, but what are your guys telling you about how they're feeling about what's going on?.
Look, we certainly hope that people stay at the table. I think it is constant threats about the US saying it’s going to withdraw from NAFTA. There is a lot of good in NAFTA and we would certainly hope that people would stay at the table and work it through.
There is a lot of constructive ideas that have been put forward, hopefully some of those come to fruition. To the extent that the US would adopt a much more protectionist view, that’s going to serve to add operations cost to the US manufacturing.
From a Mexico point of view to the extent that there is uncertainly lingers, it has a real possibility of reducing foreign investment into Mexico and that could certainly have a negative impact on the Mexico GDP. However.
If there something does happen and there’s less trade flow, Mexico’s labor is fairly competitive and I would think that also their competitive stance will be benefited by a reduction in the value of their currency. So, it will take them some time to re-establish some new trade corridors. But we have no doubt that they will be successful in that..
Yes, yes. Coming back to digitalization. Obviously, it's moving very quickly into the banking industry. Some of the smaller regional banks -- or not smaller, but regional banks, have taken a national approach to consumer lending through digitalization. Obviously, you have branded cards which is more than national, it's global.
Are there any thoughts about other products that can be marketed nationwide through a digital channel?.
Well when you think about all the capabilities that we are building now on our retail bank, so we are moving more and more things on to mobile devices. We’re coming up with new ways of serving our clients digitally. We’re coming up with new ways of on-boarding clients digitally.
So, I would say that we really are laying the groundwork for having a national digital bank at some point in time..
Right. Do you sense that, that's 3 years away? 5 years away? Or....
I think it’s something that is much closer than that. Again, you’d want to make sure you would not want to announce that we are now having a national digital bank until so you’re really sure that you could on-board and service your clients with great experience, with great service digitally. We’re close.
But yes, I am not making announcement right now but I would be really disappointed if it goes anything close to being three years away..
Yes. We were talking earlier about how strong the U.S. economy is, global economy. Is there any metrics that you watch carefully to see if things are starting to slow down? Or credit at your organization is starting to show a crack? What are the....
We take a look at both metrics that pertain specific to us as far as daily metrics on payment rates, delinquency statistics, purchase sales, all of that, all of which was really good and as well as drivers that you would think about as far as the larger economy..
It looks like we are out of time. So, John, thank you so much..
Yes, my pleasure..
I really appreciate it. And thank you everybody for joining us..