Citigroup Inc. (NYSE:C. PK) Third Quarter 2022 Results Conference Call October 14, 2022 11:00 a. m. m. ET
Participating companies
Jane Fraser – President and CEO
Mark Mason – Chief Financial Officer
Jen Landis – Director of Investor Relations at Citi
Conference Call Participants
Glenn Schorr – Evercore
John McDonald – Independent Research
Erika Najarián – UBS
Mike Mayo – Wells Fargo Values
Ebrahim Poonawala – Bank of America
Betsy Graseck – Morgan Stanley
Matt O’Connor – Deutsche Bank
Jim Mitchell – Seaport Global
Gerard Cassidy – RBC
Vivek Juneja – JPMorgan
Ken Usdin – Jefferies
Operator
Bonjour. Et welcome to Citi’s third quarter 2022 earnings call with CEO Jane Fraser; and Chief Financial Officer Mark Mason. Today’s call will be moderated by Jen Landis, Citi’s Director of Investor Relations.
We kindly ask that you book everything until the end of the formal comments, at which point you will get the commands for the response session. You, also as a reminder, this call is recorded today. [Operator Instructions]
Mrs Landis, possibly appropriate.
Jen Landis
Thank you, Operator. Hello and thank you all for joining us. I would like to remind you that today’s presentation, which can be downloaded from our citigroup. com website, may include forward-looking statements, which are based on management principles. existing expectations and are subject to uncertainties and adjustments in circumstances. The actual effects may differ materially from those statements as a result of factors, in addition to those described in our SEC filings.
With that, I’ll pass it on to Jane.
Jane Fraser
Thank you, Jen, and thank you all for joining us today. Well, we are still living in difficult times and overall I am satisfied with the way our Bank is functioning through them.
As you will soon hear from me, we continue to intensively execute our strategy and transformation as we described on Investor Day, while supporting our clients in this complex environment.
So, before we begin the quarter, let me highlight some observations about what we see in the world, given our unique perspective. The global macroeconomic outlook that we have shared with you over the past two quarters has been confirmed.
Evidence of a slowdown in global expansion is mounting and we now expect to enjoy continued country-level recessions starting this quarter. The severity and timing of those recessions depend on where you are in the world, persistently high inflation is leading to slowdown in customer demand for goods.
In the euro and UK arena, the shocks are the most severe. Client growth has deteriorated considerably and headline inflation is at a high of 10 percent. All eyes are on this winter’s weather forecast and powerArray
However, the U. S. economy remains relatively resilient. So while we’re seeing symptoms of an economic slowdown, consumers and businesses remain healthy, as evidenced by our very small net losses in accounts receivable. Persistently higher core inflation.
Now history suggests that it will be a lot and for a while. As a result, we may see a mild recession in the current part of 2023. We, the U. S. economy, are well placed to resist this, all other things are equivalent in the geopolitical arena.
Finally, in Asia, we address COVID-related lockdown measures in China, which have weighed more heavily than expected on economic activity, exacerbated by the lack of intensified macroeconomic stimulus.
Geopolitical threats and rates dominate discussions with our corporate clients around the world, and I would say we care more about overall market liquidity and counterparty threat than our threat of short-term credit. However, we plan conscientiously and are prepared for all environments.
In this context, today we report a net revenue source of $3500 million, EPS of $1. 63 and RoTCE of 8. 2%. We increased our revenue by 6%, adding a profit on the sale of our customer business in the Philippines. Correct performance in some areas, our effects may have been greater in some others.
Services had another very smart quarter. TTS saw its profits grow 40% year-over-year, with expansion in each and every business and fee. Key drivers of our strategy, such as portfolio engagement, advertising lending and cross-border transactions. , are moving strongly in the right direction and forward from our plan.
Securities services increased by 15%, even though assets in custody were affected by the fall in equity markets. We have incorporated over $1 trillion into AUC and AAU since the beginning of the year and are seeing smart momentum in the issuer in particular.
On the other hand, the market fell, with revenue declining by 7%. In constant revenue, we matched last year’s strong effects thanks to our long-standing strength in the exchange rate, offsetting a weaker quarter in spreads.
In equities, the relief in derivatives activity, which is a core component of our platform, resulted in a decline in revenue to last year’s exceptional functionality and we continue to optimize RWA’s end markets in line with our strategy.
The banking sector has been the activity hardest hit by the macroeconomic environment across the sector, with geopolitics and recession fears reducing transaction flows and appetite for mergers and acquisitions.
We continue to invest in building our groups for long-term expansion opportunities, adding healthcare, generation and energy, and I’m excited about the high-caliber bankers who are drawn to our platform and culture.
The Wealth Management environment has remained far from ideal. Our revenue only decreased and increased particularly outside of Asia. Our strategy to capture synergies from our business, such as wealth directory projects between advertising banking, retail banking and investment banking, is progressing well.
We’ve also continued to attract new consumers and grow the ranks of our visitor advisors, as you’ll see in our KPIs. However, we are slowing down the speed of some investments in this activity, given the environment.
U. S. Personal Banking The U. S. expansion trajectory is more so. Card Sales, A
As you can see from the presentation, our credit charge reflects the quality of our loan portfolio at ICG and PBWM. There have been no credit losses in ICG and NCL of customers in the U. S. UU. se remain well below pre-COVID levels. Growth, coupled with deteriorating macroeconomic assumptions, led to a modest ACL structure this quarter.
While our expenses are the best as we continue to invest in our business and transformation, we manage them greatly and stay on track to meet the full year’s goals.
As you know, transformation is a multi-year effort and we are committed to meeting the expectations of our regulators, given the paramount importance of protection and robustness. We continue to have constructive dialogues with them and update our implementation plans as appropriate.
Looking back, I am pleased with the progress we are making and the key drivers of the strategy we presented to you in March and defined on page three. We are seeing a smart push to achieve visitor synergies and attract skills to expand the franchise. In terms of simplification, we continue to make progress in divesting the businesses of our foreign customers and eliminating related fixed asset costs.
We completed the Philippines sale in the third quarter and are on track to complete the bahrain, Malaysia and Thailand sales in the fourth quarter. We also announced the end of our client’s UK franchise to move entirely to the Wealth franchise there. I would also like to point out that we are ahead of the curve in our plan to slow down Korean customers.
We continue to decrease our activities and exposure to Russia. To be clear, we aim to decrease our presence in this country. In August, we announced the slow closure of our banking operations to Americans and local businesses.
While we, our multinational clients in Russia, now inform you that we will discontinue almost all institutional banking services that we will offer until the end of the first quarter of next year. At this point, our only operations in Russia will be mandatory. to meet our remaining legal and regulatory obligations.
With respect to Capital, we returned $1 billion in non-unusual dividends to our shareholders consistent with the quarter, while redemptions are still suspended. We will continue to compare this resolution on a quarterly basis, as due to higher regulatory requirements, we are building our CET1 at approximately 13% through the middle of next year, including a control cushion of one hundred basis points. We ended the quarter with a CET1 index of 12. 2% as we actively monitor our use of RWA across all our lines of business. Finally, our tangible eBook price consistent with a consistent percentage above $80. 34.
Therefore, the end result is that while the environment is challenging and we expect it to remain so, we continue to relentlessly execute the strategy we presented to you on our Investor Day and make steady progress.
Now, I would like to pass the floor to Mark and then be delighted, as always, to answer his questions.
Marc Maçon
Thank you, Jane, and good morning, everyone. I’ll start with company-wide monetary effects, focusing on year-over-year comparisons for the third quarter, unless otherwise stated, and spend a little more time on expenses, credit, and capital. Next, we’ll move on to the effects of each segment and finish with forecasts for the 2022 total.
On the fourth slide, we show the monetary effects of the entire company. In the third quarter, we reported a net revenue source of $3500 million and EPS of $1. 63, with a RoTCE of 8. 2% over $18500 million in revenue. These effects come with pre-tax effects similar to the divestment of approximately $520 million, primarily due to a gain on the sale of the client’s business in the Philippines. Excluding the effects of divestment, EPS and RoTCE would have been $1. 50% and 7. 5%, respectively.
During the quarter, overall revenue increased up to 6% on a reported basis, disposal impacts and income decreased to 1%, as the expansion in the net interest income source was more than offset by the decrease in the non-interest income source.
The source of net interest income increased by 18%, reflecting higher interest rates on the expansion of corporate and solid loans in PBWM. The source of non-interest income decreased by 12% on a reported basis and by 28% of divestment impacts, largely reflecting declines in investment banking, markets and investment source of income in wealth management.
Total expenditures of $12. 7 billion up 8% and 7% excluding divestment impacts, primarily due to transformation, inflation, and other threats and initiatives.
Cost of credit $1. 4 billion, driven by net credit losses of approximately $900 million and LCA formation of approximately $500 million, primarily due to loan expansion in PBWM. At the end of the quarter, our general reserves amounted to $18. 7 billion, with reserves-to-loan ratio funded of approximately 2. 5%.
On slide five, we show the net interest source of income, loans, and deposits. In the third quarter, the overall net revenue interest source increased approximately $600 million on a sequential basis and approximately $1. 9 billion on a company-wide annual basis, driven through higher interest rates, deposit repricing control and expansion in PBWM lending.
Average loans decreased by approximately 2%, mainly due to the effect of currency conversion and the decrease in the balances of the old franchises. Excluding the exchange rate, loans remained strong and average deposits declined by about 2%, largely due to the decline in legacy franchises. and have an effect on currency conversion, partially offset through the issuance of institutional depository receipts as we continue to diversify the Bank’s investment profile. Excluding foreign currency deposits, they increase by approximately 1% and, sequentially, our net interest margin increases by 7%. Foundation points.
On slide six, we show a third-quarter spending march with the main underlying drivers. As I mentioned earlier, expenses increased by 8% to 7% excluding the effect of divestments, 2% of the increase is due to transformation investments, of which approximately two-thirds are similar to systems of risk, control, knowledge and monetary control, and approximately 25% of investments in those systems are technology-like.
To date, we have more than 10,000 people committed to transformation. Approximately 1% of the increase in spending is due to corporate investment, as we continue to engage advertising and investment bankers as well as consumer advisors in the area of wealth control. and continue to invest in the consumer experience, as well as front-office onboarding and onboarding. Platforms.
1% was due to higher volume-related expenses at PBWM and ICG. And about 3% was due to other investments in threats and control and inflation, partially offset by productivity gains and the effect of currency conversion. In all of those segments, we continue to invest in technology, add systems, and hire staff, resulting in an approximately 16% increase in our technology-related expenses for the quarter.
On slide seven, we show the key credit metrics for consumers and businesses. In recent years, we have been disciplined in our credit expansion and in line with our threat appetite framework. This framework includes credit threat limits that take into account concentrations, adding countries, industry, creditss score and, in the case of consumers, FICO score, and most importantly, those limits apply to the entire corporate and we frequently analyze our portfolios and concentrations under various stress scenarios.
As a result, we are very satisfied with the quality of our assets and reserve levels. As I mentioned earlier, our reserve-to-loan ratio is approximately 2. 5%, and on this PBWM and U. S. cards. The U. S. is 3. 7% and 7. 5%, respectively, around the first day’s CECL levels.
At PBWM, most of our card wallets are geared towards superior FICO customers and while we have to see normalization symptoms in any of the wallets, NCL rates continue to be below pre-COVID levels.
In our ICG portfolio, of our overall exposure, more than 80%, as unearned loans remain low and in line with pre-pandemic grades in approximately 40 core general loan issuances. Therefore, we are well reserved for a variety of scenarios and continuously compare our scenarios to reflect the evolution of the macro environment.
On slide eight, we show our abstract balance sheet and key capital and liquidity parameters. We have maintained a very strong balance sheet, of our $2. 4 trillion in assets, approximately 23% or $557 billion are liquid assets or HQLA and we have maintained overall liquidity resources of approximately $967 billion.
The combination of profit generation, capital outflow, and RWA optimization drove our CET1 index to approximately 25 core issues to about 12. 2% on a popular basis, which remains our restrictive restraint and our tangible e-book price consistent with a constant percentage of $80. 34, up 2% from a year ago.
On slide 9, we showed a sequential net income stream of $200 million [ph] for non-unusual stocks, which added 27 basis points. Second, we returned $1 billion in non-unusual dividends, resulting in a relief of about 8 basis points. Third, the effect of interest rates on the AOCI across our AFS investment portfolio resulted in five basis point relief. Fourth, adjustments in the DTA resulted in a relief of 3 basis points. And finally, the remaining 14 basis points of accumulation was largely due to net optimization of APRs.
Given the accumulation of our regulatory capital requirements, we ended the quarter with a CET1 ratio of 12. 2%, 25 fundamental issuances above the previous quarter. October 1 and above 12%, which will be our regulatory requirement from January 1 next year. As we said in the last quarter, we continue to make slow progress towards a CET1 target of around 13% until mid-2023, than the existing SCB of 4% and a control cushion of one hundred foundational emissions.
On slide 10, we show the effects of our institutional client organization. Revenue declined by 5%, as the strong expansion was more than offset by declining revenues in markets and banking. Expenses increased 10%, driven by processing and business-driven investment and volume-related expenses, partially offset through productivity and currency conversion.
Foster’s loans were boosted through an accumulation of reserves of $86 million. While the deterioration in some macroeconomic variables generated an increase, it was basically offset by the release of a RESERVOIR of uncertainty similar to COVID-19 and a release similar to direct exposures in Russia. This resulted in a net revenue source of approximately $2. 2 billion, down 30%.
Average loans increased by 1% thanks to a 9% increase in TTS loans, partially offset by the effect of currency conversion. Average deposits decreased by 2%, also largely due to currency conversion. And ICG delivered a RoTCE of 9%.
On slide 11, we show the earnings through activity functionality and the main drivers we present on Investor Day, which we’ll show you quarterly. Momentum to continue.
In treasury and industrial solutions, revenue increased 40%, driven by a 61% expansion in interest income, as well as an 8% expansion in NIR across all visitor segments. dollar clearing volumes increased by 2%, cross-border flows increased by 10%, advertising card volumes increased by approximately 50%, and average loans increased by 19%.
So while the interest rate environment generated about 40% of growth this quarter, ad stocks generated the remaining 60%.
In the first part of the year, based on the industry knowledge we see, we estimate that we have gained more than 60 basic market percentage issues with giant corporate consumers and that consumers have risen around 20% in all segments, adding contracts with institutions, which have risen only around 50%. These come with credited transactions for which we act as the customer’s number one operating bank. In addition, weak products in the U. S. They allow clients to link their liquidity and investment to their flows seven days a week.
In Securities Services, revenues increased 15% as a source of net interest income increased 73% as interest rates increased in all currencies, partially offset by a 6% decrease in the non-interest income source due to the effect of market valuations.
We continue to be pleased with the execution of the security services as we have incorporated approximately $1 trillion of assets under custody and management, so this year through significant visitor gains and we are very pleased with the portfolio of new transactions.
And we estimate that we got about 60 basic market percentage issues in security in the first part of this year, adding our domestic market. As a reminder, service activities are at the core of our strategy and our two most successful activities have close links within the company.
Market revenue fell by 7%, basically due to products with spreads, stocks and shares with RWA, as we continue to focus on returns. Fixed revenue stream revenue increased by 1% as the strength of the interest rate and currency more than offset through continued headwinds on products with spreads and, in the first part of the year, we gained approximately 40 fundamental market share issues.
Equity Markets’ revenue fell 25%, basically reflecting a decline in consumer activity in equity derivatives compared to last year’s very smart quarter. The steps we have taken to optimize RWAs in the markets are in line with the strategy we discussed at Investor Day and we are making solid progress in our revenue to meet RWA’s targets so far this year.
And finally, bank revenues, excluding gains and losses on loan hedges, fell 49%, driven by investment banking, as heightened macroeconomic uncertainty and volatility continue to weigh on consumer activity. The effects also come with a brand-related effect of approximately $110 million in loan commitments and losses in loan sales.
So overall, while the market environment remains challenging, we are pleased with the progress we are making as we continue to deepen relationships with existing consumers and gain new consumers.
Now, on slide 12, we show the effects of our private banking and wealth control businesses. Revenue increased 6% as expansion in the net interest income source was partially offset by a decrease in the non-interest income source due to lower investment fee income in Wealth. Invoice management and senior spouse in Retail Services.
Expenses increased 13% as a result of transformation, other threats and initiatives, business-driven investments and volume-related expenses, partially offset by productivity gains.
The credit charge $1. 1 billion, which included a reserve buildup basically driven by expansion in card volume. NCLs increased by 13% year-over-year compared to almost historically low levels, reflecting normalisation, particularly in retail services.
Overall, we continue to see strong credit functionality across portfolios. Average loans increased by 5%, driven by a strong expansion in branded cards, non-public banking and retail banking. Average deposits increased by 1%, driven by expansion in retail and wealth management, offset through currency conversion, and PBWM generated a ROCE of 9. 7%.
On slide 13, we show PBWM earnings across product, as well as key drivers and business metrics. Branded card earnings increased 10%, driven by higher interest income. volumes increased by 14% and average loans increased by 12%.
Personal Services revenue increased 12%, also due to higher net interest income, partially offset by higher partner bills. 9% on branded cards and 7% on non-utilities, and we expect to continue accumulating those balances in the fourth quarter.
Retail banking profits increased by 2%, mainly driven by the expansion of interest rates and deposits. Wealth control profits fell by 2% due to obstacles in investment commissions, particularly in Asia, which more than offset the expansion in net interest income. Excluding Asia, profits increased to 4%
Client advisors grew 5% and we are seeing net inflows of new investments and strong acquisitions from new consumers across our wealth control business, with new consumers in ultra-high net control and wealth control of 7% and 27%, respectively, for the quarter.
And we’re also leveraging our retail network, which has generated only about 50,000 wealth control recommendations this year. While the environment remains challenging, we are seeing strong underlying business drivers as we execute our strategy.
On slide 14, we show the effects for legacy franchising. Revenue increased by 66%, basically due to the gain in sales in the Philippines in the quarter and no loss in sales in Australia in the prior-year period. Excluding these items, revenue decreased by as much as 12%, basically due to the loss of final revenue in Australia and the Philippines, as well as the effect of liquidation in Korea.
Expenses increased by 6%, driven by divestments in Asia and Mexico. Loans and deposits decreased due to the reclassification of signed outflows to other assets and liabilities, the completion of the sale in the Philippines, and the effect of liquidation in Korea.
On slide 15, we show the effects for Corporate/Other. Revenue increased, largely due to a higher source of net income from the investment portfolio, partially offset by the market valuation of certain derivatives transactions and expenses decreased.
On slide 16, I will briefly address our outlook for 2022 as a whole. With one quarter remaining in the year, we continue to expect full-year revenue to be in the sub-single-digit, divestment impacts range. And in this context, we continue to see a shift with an accumulation in the net interest income source offset by a decrease in the interest-free income source.
As such, for the fourth quarter, we expect net interest source from revenue markets to increase from $1. 5 billion to $1. 8 billion year-over-year. Obviously, where we fall into this diversity will depend on a number of factors, adding rates, loan and deposit volumes, deposit betas and currency effects.
In full-year spending terms, we continue to expect spending expansion of 7% to 8%, excluding the effect of divestment. In terms of credit load, it will depend on the evolution of the macro environment. , the normalization we continue to anticipate in the card business and the expansion of lending. And keep in mind that loan expansion tends to be greater in the fourth quarter than in the third, given typical vacation spending.
Before we get into the Q&A session, I’d like to close with a few key points. We continue to apply the strategy we explained on Investor Day. We are seeing strong momentum in the underlying drivers of most of our business. as we said on Investor Day, the monetary trajectory will not be linear, but we are confident that we can achieve our medium-term goals in a variety of scenarios.
And with that, Jane and I would be satisfied with your questions.
Q&A session
Operator
Thank you. [Operator Instructions] Our first will come from Glenn Schorr with Evercore. Your line is now open.
Glenn Schorr
Hello, thank you very much. So, in fact, a smart functionality in TTS, it quotes a lot, however, I see an expansion in loans and fees and I have heard your feedback on expansion in all visitor segments. about those two separately. One is the NII of 61% year over year, how do betas work and progress next year in terms of higher rates and how does that translate?And then what’s emerging in particular within TTS in those visitor segments to drive this top single-digit expansion?
Marc Maçon
Of course. Hi Glenn. Why don’t you take this and take it in two parts, the two parts you presented?So, as you know, Glenn, when we think of our business as a whole, there’s an obvious divide between the institutional aspect and the customer aspect.
Our TTS business, which is in the institutional aspect and those corporate clients, tends to have higher betas overall than obviously in the retail banking aspect. What we’ve noticed is that betas have increased. They are still disminuyendo. de what we expected, once again, have increased. And with the expected growth rate continuing, I expect those beta versions to continue to increase in the coming quarters.
We actively manage the beta: deposit pricing and scaling with our clients on an ongoing basis. You know it’s more than just a deposit-taking business. This is a company where we seek to manage our clients’ operating accounts and provide them with breadth. of what we will be offering in our franchise.
And so the ones, that’s the kind of verbal exchange that we’ve had with them and we’re going to continue to do it for the purpose of expanding the volume of deposits with existing consumers and with new consumers. And so, again, we expect to see the accumulation of betas, the accumulation of betas, but we also expect to see an ongoing contribution to the NII.
The other aspect of your practice is what drove the activity?I discussed some of the things, so it’s not just about digging deeper with existing customers, but also onboarding new customers.
We have noticed that the price of cross-border transactions has increased by approximately 10%. Business card spending has increased significantly, business origins have increased by 27% and strong active engagement with our visitors. We won new mandates. We’ve noticed an increase in visitor revenue of approximately 20% and have gained market share in those visitor segments.
And hopefully, that gives you a little example: examples of where the benefits or boost in the NIR aspect come from. The 8% NIR expansion is driven through cards, invoices and accounts receivable, as well as commerce.
Jane Fraser
And I’d like to step in and say, I think there’s a little bit of a setback right now because the global environment is negative for business. We see just the opposite. Volatility is something we are very active in helping our multinational clients in global management, the local footprint we have and the global network we have is a great asset right now. Therefore, we are seeing many positive dynamics, which may not be intuitive. for everyone, though, I think that’s what makes the network the jewel in Citi’s crown.
Glenn Schorr
There is no doubt. I appreciate all of that. A fast in the markets, not as smart as the years, but that comes and goes. I know it’s a service from last year that was strong, it’s a gender diversity service in a given quarter. What I need to focus What are your comments on RWA optimization, what do you do in particular?I know it’s in the banking book, however, I’ve noticed that you withdraw your capital, call it redemption facility line. But in the markets, what do you get?outside of RWA, what elements of this corporate make it interesting?
marc mason
Of course. So, Glenn, remember that on Investor Day, we talked not only about RWA optimization in the broadest sense, but more particularly about the markets. And we’ve been talking about the concept of expanding our revenue/RWA ratio for the markets to around 5. 5% during this era of investor day.
Therefore, we actively work in all markets, in stocks, constant source of income and differential products, and look for opportunities where underperforming RPAs will be used to generate returns or to sell them.
And that includes a multitude of other structures. That includes running with customers to factor more promises into linked instances and other types of structures like this, which have stepped up in RWA, adding coverage and, as I said, posting the promises and margin that we have and ensuring that we are, in fact, making the most of that RWA usage.
Operator
Thanks. The next one will be john McDaniel — McDonald with Autonomous Research. Your line is now open.
John McDonald
yes. Hello. Thank you for answering my question. Mark, I just wanted to explain what, I think the expense advisor is for the fourth quarter, it turns out that the full-year forecast implies a fourth-quarter rollover for 12. 8% and an update of 12. 7. 5% this quarter. Is it the right reading, a little bit of buildup in the fourth quarter and is it just an accumulation of investments and what would motivate that?
Marc Mason
So, again, the indications on total year expenditures have not changed. It is the ex-rate that affects 7% to 8% of disposals that would mean a slight accumulation there. It is in the wake of the ongoing investments we are making and ongoing, as well as how we are, how the profits are going, and the related payment activity that goes with them. So, it is nothing ordinary and according to the indications given.
John McDonald
It is ok. And I know it’s too early to give formal guidance for next year, however, if we take a look at the investor’s day slides, it turns out that spending will increase for a few years until it reaches the medium term. it means around $51 million next year as a starting point. I mean, is it fair when I read the Investor Day slides and think about your investments that directional spending is likely to increase next year?
Marc Mason
John, I would say, as you know, okay, we’ll provide the direction for 2023 next quarter. But I think if you take a look at investor day and think about some of the things we just discussed about our business, we’d be expecting to see continued tailwinds in terms of net interest income.
We’d be hoping to get to the center of your practice that we’ll continue to invest in franchises that, in transformation, excuse me, would reach a noticeable peak, and then we’d start to see profits start flowing in this: duration. So yes, you may probably be expecting some sort of increase, however, I’ll give you more main points about that when we communicate the outlook for 2023 next quarter.
Operator
The next one will come from the hand of Erika Najarian of UBS. Your line is now open.
Erika Najarian
Hello. Hello.
Marc Mason
Good morning.
Erika Najarian
Ouais. Je just searched for – thank you. Yes. I just wanted to take a step back, its medium-term RoTCE target of 11% to 12% had foreseen a CET1 of 11. 5% to 12% compared to the 13% it aims for in the middle of next year. Also, you indicated on that same slide that you were targeting 2% federal investment over the medium term, which sounds pretty nice right now. I suppose I wonder, your confidence and, as you said, you are convinced that you can only achieve the medium-term objectives even with this capital increase, is it this renewal in the rate environment that is helping you to achieve it despite the higher denominator?
Marc Mason
So thanks for the question. Look, I think there are a couple of things to reconsider that are still true, and that is that the strategy that we’ve built, I think, is a resilient strategy and that actually speaks to the leadership momentum that we’ve been waiting for. Because, not only through rate increases, but also through percentage gains in the market and also through the company-led investments that we’re making and are making. Let’s take more advantage of the synergies and connections between franchises. All of that is true to the most sensible line.
He’s right, the assumption of the federal budget has changed. In March, I think, we were all looking for a federal budget rate at the end of the year that approaches about 1. 5%, and here we are now with the increases that we’ve noticed and looking for anything above 4%, 4. 5%.
And that is significantly replaced, however, there are a number of other drivers that are helping to achieve that return, including, this is the medium term, so to speak, 3 years to five years, I think, that’s how you characterized it. and they’re starting to see some of the benefits of the transformative investments we’re making.
As for its capital point, we are building up to 13%. Remember that this is a by-product of a 4% SCB for this specific CCAR cycle and that the strategy we have outlined includes a combination in our profit and profit movement over time, a combination towards a stronger PPNR and a profit source of more expenses that will contribute to, I think, a balance sheet and a combination that are safe, that generate fewer losses, losses of tension than our balance It is possible that the sheet simply does not do it today. Therefore, the contribution of those elements will lead to the goal of functionality that we have set ourselves and we are sure of ourselves in this regard.
Now, having said that, there are unknowns that exist. I just talked to a lot of nobles, and so what’s going on with the new capital needs and the existing regulatory regime, etc. ?Predict, however, we will get there as we are informed and more informed about it.
Erika Najarian
And my follow-up query is, given Citi’s valuation in the book, I think its current and potential shareholders are waiting for purchases to return prospectively. First, especially if you think you can stabilize your NRPP on the stress test, why a hundred basis point control buffer compared to one of your peers on 50 basic problems that paid off today?And secondly, as we think about the impact over time, if I don’t forget it correctly, there is an adjustment currency conversion that may be negative since the announcement in CET1, but it recovers all that at closing. So, I guess the real big question here is, how do we deserve to think, what are the milestones for the return of total buying activity?at Citi?
Marc Mason
It is ok. Thank you, Érika. Es a lot to unpack if I want something, please remind me. But it started from the beginning, which is that I know where we’re trading in terms of ebook pricing and I’d like to be in a position where we would buy again given that valuation.
Having said that, we will continue quarter by quarter, as I think you’ve heard us say, and evaluate what buyback decisions and what equity actions make the most sense in light of the environment in which we operate. Obviously, we are managing in a .
We do, as I just said and as you also discussed, we see that our business mix evolves over time as a result of our strategy. I believe that over time it will contribute, as I said, to the capital desires that we have. , however, it is in the medium term. And we still see a healthy dose of volatility in the tension capital buffer.
And one component of the explanation for why we have the control cushion is dealing only with this uncertainty in the SCB, but also in interest rates and, frankly, we’re seeing volatility in both. So, we’ll also continue to compare the control cushion to see what makes sense as we move into this medium term.
With regard to the transaction with Mexico, you are right that we have already talked about the CTA component. It’s a time difference. We have taken it into account in the trajectory to 13% until the middle of next year, and we have taken it into account to achieve the long-term objectives that we have set ourselves.
Operator
Next up will be Mike Mayo of Wells Fargo Securities. Your line is now open.
Mike May
Hello. Can you hear me?
Jane Fraser
Yes. We can, Mike.
Mike May
Good morning.
Jane Fraser
Good morning.
Mike May
See, I the global network a curse and a blessing. I guess the curse is just the complexity and the expense, and Mark, you said that the expense is expected to increase next year. He won’t tell us for a few months, but I wonder when he thinks he can grow profits faster than expenses? Again, not new news, source of profit and expense, you’ve pushed it and you’re in that range. It’s just that we’ve been waiting, do we have to wait a year or 3 years or how long for this complexity to be further simplified so that profits can catch up with this expense growth? And then on the blessing side, Mark, you argued, you said earn percentage on visitor segments. I think it was a bit vague. I mean, you discussed trading. You spoke of other activities that link multinational companies in times of volatility. So if you can put a little more meat on the bone when it comes to market share and profit headwinds, then you have the global network spending headwinds.
Jane Fraser
Hi, Mike. I’m Jeanne. I’m talking because I need to communicate a little about you on the global network here. I have to tell you that I find it difficult to locate a negative point on the global network. We started with the Bank vision that we defined in March. It’s about being the quintessential banking husband of consumers with cross-border needs.
Who are those customers? There are 5,000 multinationals in their subsidiaries, they are institutional investors and ultra-rich clients with a strong inclination towards the offices of the circle of relatives. And we serve them in foreign currency, liquidity management, payroll, chain of origin, as well as the financing of strategic advice, etc.
This represents a volume of $ 4 trillion, 80% of this loan portfolio is investment grade. So when we look at it, it’s the multinational that takes a country of greater threat, it’s the clientele we serve there from global multinationals much more than local players.
And so it’s not undeniable top performance, very well developed as we’re seeing right now, an incredibly difficult skill to replicate. Let me pass the word on to Mark in terms of what are some of the examples of other driver expansion spaces?
Marc Mason
yes.
Jane Fraser
It is, as I said at the beginning, it is a jewel in the crown. This is a source of complexity for the Bank.
Marc Mason
So, Mike, I would say a couple of things. First, what I said is that we continue to gain share in the market, and in particular I referred to about 60 basic percentage problems with giant corporate consumers and we, notoriously or notoriously, are also gaining mandates and we are also gaining percentage with other visitor segments. , knows that the visitor segment of ad banking is the one we are focusing on. the strength of our platform and its applicability also to those important consumers.
I discussed that our profits increased and more in particular, they increased by 20%, the mandates that we earned in all consumer segments and that, in particular, with FIs, increased by only 50%. So I hope it will provide you with a concept of where the expansion of profits comes from. The bottom line is that there are existing consumers and new consumers, as we continue to grow the platform and expand our features to succeed in them.
So the timing component of your inquiry on spending and spending expansion and when we will have an expansion of profits that will outpace the expansion of spending. definition and vital to achieve savings in our structural load base over time.
And on Investor Day, I think I pointed out, when we get to that era in the medium term, we’ll see our operating power drop to less than 60%. I think we’ve been very planned in looking to give you recommendation and update you on advice for the whole year, and along the way, we’ll be consistent in this field and I can definitely give you more information about 2023, as I mentioned earlier to John, next, next quarter.
mike may
And just to clarify, when you say you’ve gotten 60 basic percentage issues with giant corporate clients, what do you mean by percentage, percentage of what?
Marc Mason
One portfolio, 60 basis points, 50 basis points, 60 basis points. Therefore, the market share with them.
Operator
Next up will be from Bank of America’s Ebrahim Poonawala. Your line is now open.
Ebrahim Poonawala
Bonjour. Je I guess, one, just Mark, I sought to explain to your NII consultant for $1. 5 billion to $1. 8 billion, that’s just the overall NII, right?Aren’t they ex-markets or something?
Marc Mason
These are ex-markets.
Ebrahim Poonawala
Do you have any thoughts on the direction you see for markets in the fourth quarter, given what has happened with the rate environment?
Marc Mason
I do not deliberately plan not to expect NII markets in an emerging rate environment. I would see the NII markets go down. He has a tendency to be fussy about responsibility. But we have a tendency to focus, as you’ve probably heard me say repeatedly, on the overall profits of that business.
And I guess what I would point out is that in times of uncertainty and top-market volatility, our corporations tend to perform well, so let’s see how the fourth quarter goes. There’s an obvious seasonality that’s happened historically, so we have to take all things into account, but we’re going to have to see how that evolves.
Operator
The next one will be Betsy Graseck of Morgan Stanley. Your line is now open.
Betsy Graseck
Hello. Hello.
Marc Mason
Good morning.
Jane Fraser
Hello, Betsy.
Betsy Graseck
Just two things, one, just another query on the spending side, I just sought to stay in terms of, Mark, I think, the stagnant prices that he talked about at the Barclays convention and I wonder if I were given the message there, which is that when you leave customer business, there’s 25% that is controlled through an ASD. So, it’s a service contract and that expense will be absorbed over time, and then there will be another 25%, which is unlikely to be passed on. Is this fair or is there some other message I’m missing about this?
Marc Mason
Sí. No is fair. But I appreciate the clarity of the answer. So I divide myself into 3 cubes. So when we do those transactions, Jane and I really enjoy this area. We have a tendency to see that part of the prices pass to the buyer. So when we make the transaction, when we make the sale.
As you pointed out, about 25% are in position under a transition service agreement, so there are profits that we make to offset expenses until things transition completely, and then disappear.
And then the third segment is what I call a potentially failed charge and what Jane calls a non-failed call, right?And it is, I say, potentially, because their regional spending that is allocated to countries, for example, is global spending that is allocated to the region and countries, for example, and what we want to do.
And what we’re doing is we’re attacking what would otherwise be stranded prices and we’re attacking it by telling each and every one to serve the business and here’s your percentage of that 25% and go back and tell me how you’re going to rethink your organizational structure, simplify your processes in order to take that burden off the business. No?
And that’s what we did, the spending base here is probably $7 billion. So, you can break down the type of population we’re talking about. We have already worked as a team with each of the corporations and each of the purposes to deal with this charge so that we can reduce it in the short term.
Jane Fraser
And since it happened, I just can’t help but jump here. I think like Mark, so I spot Mark here. Mark and I are maniacally focused on that. we have 3 more in the next quarter and that’s ongoing.
We’ve already done that with Australia and the Philippines, and we’ve reduced that spending, as Mark said. There will be and will not hesitate to seize the opportunity to further simplify our organization next year when we have finished more divestments and further simplified our regional. control structures, plus overall expenses.
So, there is more to come and we will seek to do so. As I indicated on Investor Day, this will be a component once divestitures close from 2023 to 2024.
Betsy Graseck
So you were, Mark’s potentially abandoned positions, and Jane, you are the abandoned position, is the position without abandonment in the medium-term guidance?
Marc Mason
in. . .
Jane Fraser
yes.
Marc Mason
. . . It’s time to launch it, that’s it, yes.
Jane Fraser
Yes. And I think. . .
Operator
Thanks though
Jane Fraser
. . . that’s why, while Mark talks about spending, you want to take a look at the other dynamics going on. So, yes, we have investments in transformation right now. Many of them result in greater efficiency as well as greater safety. and more powerful businesses, divestments result in reduced prices, but we also set prices and simplify the organization. It has a number of other points that we will make absolutely transparent to you in play on our spending base from a more structural size in the coming quarters.
Operator
Our next one will be Matt O’Connor of Deutsche Bank. Su line is now open.
Matt O’Connor
Hello. Can you tell us about the speed of solving some of the regulatory problems?On the one hand, it came out of the previous AML consent order this year, which I think was very positive. But on the other hand, there was an article last month, suggesting that regulators need it passed faster and I think we all know that regulators need things to be passed faster on those issues, but I wanted to ask the question: thank you.
Jane Fraser
We all need things to happen faster, whether it’s our customers, our shareholders, the control team, the regulators, the board. So I think we’re perfectly aligned on that. Maybe if I take a step back on this. Transformation is our number a priority It will be a multi-year adventure and prioritizing security and robustness is a very and insurmountable global bank for all of us.
Where are we? I think we were very happy to see that the AML consent order was closed with the OCC. We continue to work on the regulatory orders we have. I must say that we have an ongoing and constructive engagement with our regulators that, personally, locate very useful and indispensable to our success.
We have a lot to do. As you can see from the number of hires, we’ve invested a lot in the skill and resources we need. As we have also said, this will only benefit our protection and strength, but also the excellence in delivery of our consumers and ultimately our shareholders as well.
I think the foundation we want for that is largely set, so Mark and I, and frankly, the entire control team, are very focused on proceeding to execute the other plans that we’ve put forward and the overall transformation of Citi from one strategic dimension and another. Obviously, we cannot give more main points than those, because this is confidential surveillance information, but I hope it will give you an intelligent idea.
Matt O’Connor
And I guess when you say the foundation is largely in place, for example, what are some of the things that are missing or is it just, let’s say, execute. . .
Jane Fraser
So what. . .
Matt O’Connor
. . . allocation.
Jane Fraser
Sí. Es hour. So some of the areas, for example, where we’re making investments in generation, where there were fragmented generation platforms, we’re migrating them to a single platform or to a popular industry where we’re from, where we haven’t been in the one we have. – that’s what we need in the long term and the scale and speed in the long term.
These things take time to put in place. But you can see the investments made, whether it’s the number of employees and the change of the board of directors to many more of our own people. You will also see generation accumulating in this change. So, some of that is just an herbal progression that you look forward to over time.
Operator
The next one will be Jim Mitchell of Seaport Global. Your line is now open.
Jim Mitchell
Hello, good afternoon. Maybe only when it comes to presentations and habit, you obviously have another combination across geography and company. Foreign exchange deposits are not more than 1%. Their peers were down just 3%. That’s right: how do we think about the long-term deposit habit given its combination of geography and business?Are you going to start seeing more deposit outflows there or do you think your deposits can hold up a little better?
Marc Mason
That’s a wonderful question, so why not accept it?So, some things and he began to allude to it. The first is that when you think about our business, you have a split between ICG and our PBWM business of 65%, 35% in terms of deposits. It also has an allocation in US and non-US dollars which is also significant.
And then at their point, we have other currencies and other rate hikes through other central banks around the world and this then juxtaposes with other beta visitor behaviors and so on: on the ICG side, we have a tendency to see higher betas, and obviously, with rates emerging at a faster rate, We expect them to be closer to our expectations in the short term.
We’re starting to see many more increases around the world outside the U. S. In the U. S. , and so, again, we expect to see beta versions, which are evolving at a much slower rate or operating at a much slower speed outside the U. S. The U. S. , however, is beginning to rise.
So over time, I think, we’re going to see continuous tailwinds from an NII as the differences between U. S. activities arise. U. S. and outside the U. S. play in our favor.
If you think about what I talked about earlier in terms of our ERI, our exposure to interest rates and the monetary technique that we’re adopting, in some way, captures precisely that point. So if you see a hundred basis point movement in the curve between currencies, we’re looking for a $2. 2 billion increase.
When you look at this increase, you lean more towards the non-US dollar than the US dollar and this is partly due to the other movements of the yield curves consistent with the currency, as well as the other betas through the type of visitor in the US. U. S. in opposition to no. -US.
Jim Mitchell
Correcto. Ley. De agreement. It really is useful. And then, maybe just: a momentary question about the impact in the fourth quarter. It has its most productive end in 3 divestments. How do we think about the effect on the P
Marc Mason
I think I talked about the idea that divestments give a contribution close to $3 billion for the full year, or about $3. 1 billion in terms of capital by 2022. The mix of Australia and the Philippines brings us to around $2. 1 billion. otherwise.
And so, the balance of provisions that we have planned for the fourth quarter closes this hole. Thailand, Malaysia, Bahrain, China’s firm, etc. , close that hole to get us to that $3. 1 billion. With the maximum of that still. . .
Operator
Thank you. Our next. . .
Marc Mason
. . . predisposing to the top three, Thailand, Malaysia, Bahrain.
Operator
The next one will be Gerard Cassidy from RBC. Su line is already open.
Gerard Cassidy
Thank you. Hi, Mark. Hello, Jeanne.
Marc Mason
Good morning.
Jane Fraser
Hello. Hello Gerardo.
Gerard Cassidy
Jane, spoke about her global presence and the strength it brings her as an organization, so maybe this consultation is very suitable for Citigroup, which is this. It has a very clever window into global money markets and there has been a disruption there. we all know what is going on in UK pension funds. You brought the Swiss National Bank to the New York Federal Reserve this week for $6. 3 billion in cross-currency swaps. We know there is a wonderful runner who has demanding situations there. , can you give us a concept of what you see from a tension perspective?What liquidity measures are you looking at to see if additional stresses arise?How will global money markets handle this?
Jane Fraser
Yes. That’s a very smart question. It’s a factor that we spend a lot of time on and I think, as Mark mentioned, we constantly do other stress tests in the market, in customers, in other areas. , we’re focusing more on market liquidity right now and that has an effect on some counterparties much more than on our credits, which — our credit threat and that can be replaced over time, depending on what happens with an excessive threat in geopolitics. here.
What do we see happening? I think a lot of this is in Europe. Right now, which is in the middle of the typhoon, we’re seeing that some spaces where there could be power supply restrictions are affecting some customers. So we see that commercial production is moving into the U. S. In the U. S. , for example, which is where the cost of production is lowest, a possible buffer for the slowdown, a component of the slowdown in U. S. production. The demand for goods has softened, for example.
We see spaces where customers on the collateral front where there is a scenario of intense volatility that is experiencing a wonderful fall, as we have noticed in the gilt, has an effect on liquidity and therefore the margin, what is going down and has happened with the United Kingdom. Pension budget with derivatives.
So, a lot of the spaces we’re looking at are, what’s the guarantee of other establishments like we did with commodity players earlier in the year?We’ve looked at some of the LDIs right now and we see other tensions, we’re jumping on it.
I think that central banks are also in a position to interfere if it is required and indeed aware of the importance of agility in those conditions as well. As our main global establishments appreciate us in terms of how we help the market, the merit of our Bank is that we are in a strong position in all our capital, liquidity, balance sheet and credit portfolio, as you can see, it is normal at this time. 0 losses in ICG this quarter. Again, we can interfere and play a vital role, but I’d say he’s a mole.
Gerard Cassidy
Very well. And then, Mark, just as a follow-up. He discussed his investment banking numbers and his market numbers, and yes, investment banking for everyone has been a struggle, obviously, this year. Can you give us a little more color and what the pipes look like as we move into the fourth quarter?
Marc Mason
Yes, of course. Listen, as everyone has seen, portfolios have been under significant pressure year on year, with a reduction of more than 50%. We have demonstrated strong functionality in parts of the business. The gaps we have in the portfolio in the spaces of health, technology, energy, etc.
DCM is more of a low-volume transaction feature in almost each and every domain and there’s rarely much more to it than that. But as you know, investment banking is a component of the strategy that we discussed on investor day and one and we will continue to invest in it and make sure we get the productivity that investment guarantees, but not much more in DCM beyond the low volume of transactions at all levels.
Operator
Our next will come from Vivek Juneja JPMorgan. Su line is now open.
Vivek Juneja
Thank you. Thank you for answering my questions. Some questions for you. First, Mark, I just need to clarify, you said, that the off-market NEI will grow from $1. 5 billion to $1. 8 billion year-over-year in the fourth quarter. Your increase of $1. 9 billion year-over-year in the third quarter. Given that there were more rate increases in the quarter and even later in the quarter, what color is driving this slightly decreasing NII buildup rather than emerging at a faster pace?
Marc Mason
Again, the vital points here come with volume, what we see in loan volume, deposit volume and obviously betas and how betas develop and we talked about the concept that with the higher frequency and rate escalation point, it’s going to put pressure on beta to see it happen across the board.
And then the 3rd thing is the price lists and what happens with the price lists and when that happens, right?When this happens, the quarter is vital to know if advantages are seen in this or in the next quarters.
And those are the things that solve this diversity that I gave them and it’s in the PBWM portfolio, as well as how it plays out in TTS and given the global that we’re managing through quantitative tightening and the like. And I think the other thing is dazzlingly FX and how it develops. So the main drivers, Vivek, and the lineup reflect all the tactics that can play the quarter.
Vivek Juneja
It is ok. Completely another query for any of you. The security services, you talked about $1 billion in new contracts, seem to be working very well. Any color if you can remind us in which segments of visitors you see this and said on the call that it is also national, however, any granularity – more color where you grow up and where you see all that unless?
Jane Fraser
We’re seeing this in a number of other areas, the most important of which has been the victory we’ve achieved with BlackRock in a gigantic percentage of activity here in the United States and in a gigantic, accurate and exciting component of security. But we have gained vital instances at all levels.
And one component of that, I think, comes from the fact that we can bring pre- and post-trade together in combination to generate a lot of power for our consumers and bring insights that some of the other players are doing to help. They manage and earn competitive merit in their businesses. So we’re about it. Marc, anything else to add?
Marc Mason
Ouais. La only thing I’ll add. I mean, we’re very pleased with the expansion here and the mandates won at all levels, but specifically in the U. S. In the US, as Jane says, those additional new assets that we are bringing.
The last point I would highlight is that, and again, I guess, not only is it one of our businesses that is developing rapidly, but it’s also a high-performing business for us. And so consistent with the strategy we talk about on investor day that reflects the connections across the franchise and that’s why we feel very smart about it.
Operator
The next one will come from Ken Usdin with Jefferies. Your line is now open.
Ken Usdin
Thank you. Good afternoon. Only two fasts. Mark, you talked about the effect on capital of legacy outflows, is there a way to measure how much in the fourth quarter of earnings and NII attitude comes out of legacy?
Marc Mason
I don’t have that in front of me, Ken. Je can, I guess if we have, I have a page here that reflects, page 22 reflects part of the duration of the exit markets, but I don’t have it in front of me. I turn around with you.
Ken Usdin
It is ok. I guess that’s part of the previous consultation on NII’s trajectory, it’s rarely very much. There’s a negative effect built into that also in the fourth trimester, it’s rarely very very, that’s just part of the progression. ?
Marc Mason
This is reflected in nii guidelines, but the main drivers are largely what I mentioned. But, yes, that would be reflected.
Operator
Next up will be Mike Mayo of Wells Fargo Securities. Your line is now open.
Mike May
Hello. As a follow-up, why does Citi continue to bank in Russia when all or most of the other major U. S. corporations are in Russia?Are you outside Russia?
Jane Fraser
Hé. Et Mike, as I mentioned in my previous comments, we are now informing our multinational customers operating in Russia. So, it’s the major American, European and Asian multinationals or the franchise that we’re ending up with almost all institutional banking. We propose them until the end of the first quarter of 2023. La load that would rise is substantial.
And then, at that point, our only operations in Russia will be the mandatory ones to satisfy our remaining legal and regulatory operations there. It has been very vital for those multinationals that we have helped them get out of the country and their payroll, and so on. while they do. So they were able to slow down or get out and some of those who stayed, however, as I said at the beginning, our goal here is to gradually decrease our operations in the country.
Mike May
And then, just if you can remind us, you discussed more provisions in the fourth quarter. So after 2022, what’s left of the provisions you discussed and how do you stick to your plan?
Marc Mason
We are, I mean, we are, we are very satisfied with the way we are following the plan. Obviously, Mexico is on the left. We have Vietnam, India, Taiwan and one that I’m missing in Indonesia, I think it’s. . .
Jane Fraser
yes.
Marc Mason
. . . which I miss. So they are the ones who stay, and then China, they?So those are the ones left on the balance of 20 or beyond 2022.
Jane Fraser
And I think those, again, some have been more than the ones they employ and you have a legal first day, a legal day moment. Everything is close to a blow in both, so some of them are later than what we had first. Everyone thought. But they’re doing well and the paintings around them and around the stranded prices similar to them, as we talked about before, are also going well. So we’re satisfied with the speed and we’re acting urgently, Mike, as you’d expect.
Operator
Merci. Il are out right now. Now I’ll turn Jen Landis over for closing remarks.
Jen Landis
Thank you all for us today. If you have any follow-up questions, please contact the IR team. Thank you.
Operator
This concludes Citi’s call for third quarter 2022 results. You can now log out.