Q4 2012 Results Earnings Call
January 17, 2013 11:00 a.m. ET
Mike Corbat - CEO
John Gerspach - CFO
Susan Kendall - IR
Glenn Schorr – Nomura
John McDonald - Sanford Bernstein
Jim Mitchell – Buckingham Research
Matt O'Connor - Deutsche Bank
Brennan Hawken - UBS
Betsy Graseck - Morgan Stanley
Erica Penala - Bank of America
Mike Mayo – CLSA
Gerard Cassidy - RBC
Marty Mosby – Guggenheim
Vivek Juneja - JPMorgan
Eric Wasserstrom – SunTrust
Andrew Marquardt - Evercore Partners
Hello and welcome to Citi’s Fourth Quarter 2012 Earnings Review with Chief Executive Officer Mike Corbat and Chief Financial Officer John Gerspach. Today’s call will be hosted by Susan Kendall, Head of Citi Investor Relations. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question-and-answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time.
Ms. Kendall, you may begin.
Thank you, operator. Good morning and thank you all for joining us. On our call today, our CEO, Mike Corbat, will speak first. Then John Gerspach, our CFO, will take you through the earnings presentation, which is available for download on our website citigroup.com. Afterwards, we’ll be happy to take questions.
Before we get started, I would like to remind you that today’s presentation may contain forward-looking statements which are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results in capital and other financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our SEC filings, including, without limitation, the Risk Factors section of our 2011 Form 10-K.
With that said, let me turn it over to Mike.
Susan, thank you and good morning everyone, and welcome. As you know, we reported earnings of $1.2 billion from the first quarter of 2012. Excluding DVA and our repositioning charge, net income was $2.2 billion, or $0.69 per share.
These earnings were below expectations, reflecting the high level of legacy costs, most notably in legal and related expenses. We also had a reserve release which was significantly smaller than in previous quarters as our credit trends are normalizing and we’ve not yet begun to release mortgage reserves.
To be clear, we’re not satisfied with these bottom line earnings, and our focus is not only on putting the drag of legacy issues behind us, but also on optimizing the efficiency and returns of our business as a whole.
Despite the disappointing bottom line, our businesses generally performed well during the quarter. Investment banking increased its wallet share, loans grew in our core businesses, such as Latin American consumer, where we saw double digit growth. In addition, we decreased Citi Holdings assets by 9% during the quarter for a 31% reduction for the year.Our capital strength improved during the quarter, with the tier 1 common ratio increasing to an estimated 8.7% on a Basel III basis.
Although the environment has shown signs of improvement, we believe it’s likely to remain challenging, with continued spread compression, the introduction and implementation of new or evolving regulation, as well as the costs associated with putting legacy issues behind us. This puts even greater importance on getting our operating efficiency to a level we’re satisfied with, and on allocating our resources to opportunities with the greatest risk-adjusted return.
Regardless of the environment, Citi needs to be recognized globally as an indisputably strong and stable bank. We believe the proper essentials are the combination of a strong balance sheet, made up of high-quality assets, supported by the appropriate levels of capital and liquidity.
Along with our risk profile, our necessary levels of capital and liquidity are a function of the consistency of the quantity and quality of our earnings, and as a company, we need to deliver on our commitments.
When I became CEO in October, I stated three main objectives to accomplish by early in the new year. First, conduct business reviews and prepare the 2013 budget, which drove our repositioning charge in the fourth quarter. Second was to structure my management team, which was announced on January 7, and third was to finalize and submit our CCAR, which was submitted on the same day.
Throughout this period, I spent a good amount of time meeting with stakeholders, our clients, investors, regulators, and of course our people. Let me make a few points based on those conversations. First, our strategy is to focus on our core banking businesses by trying to provide best in class products and services to people and institutions leveraging our global footprint, which includes the world’s growing fastest markets and cities. We believe our strategy is aligned with the dominant secular trends.
Second, we’ll continue to seek ways to refine and optimize the execution of our strategy and focus on operating efficiency. As a company, we need to fuel expense discipline and we can be smart allocators of our resources, driving them where they can catalyze strong, risk-adjusted returns.
For example, the $900 million in expense reductions we expect to realize in 2013 from the repositioning actions we announced in December, was driven by a bottoms-up review of where and how we’re going to allocate our expense dollars. That said, improving our operating efficiency needs to be BAU, not just an annual event.
Third, we’re very focused on Citi Holdings, considering additional portion of drag in places on net income and returns. In 2002, we reduced the size of Citi Holdings by 31% and it now makes up 80% of our balance sheet. That being said, there is no silver bullet which will immediately resolve Holdings.
We’ll continue to manage these assets and our associated expenses in an economically rational way while taking advantage of any reasonable opportunities to reduce them more expeditiously.
And as you know, our North American mortgage portfolio makes up the majority of Holdings’ assets. Trends in that portfolio were favorable in the recent quarter and we continue to watch the US economy and housing market very closely.
But before I turn it over to John, I’d like to emphasize that we recognize our net income today doesn’t yet reflect either the amount or caliber of earnings our shareholders expect and that our franchise is capable of. It’ll take some time to work through the challenges of the current environment to realize the potential.
Improving our operating efficiency, returns on assets and tangible equity in a risk-balanced manner and returning capital to our shareholders are critical goals going forward.
I’m a believer in you are what you measure and I intend to set clear goals and hold my management team accountable for them. Similarly, we’ll share key metrics with you in the coming months so you can hold me accountable as well.
Now, John will go over the slides and then we’d be happy to answer any of your questions. Thank you.
Thank you, Mike, and good morning, everyone. To start, I’d like to highlight some significant items affecting our results this quarter. First CDA and DBA were negative $485 million pre-tax and $301 million after tax in the fourth quarter for a negative impact on EPS of $0.10.
In addition, as previously announced, we reported a $1 billion pre-tax repositioning charge in the fourth quarter, or $653 million after tax, for a negative impact on EPS of $0.21.
For comparative purposes, in the fourth quarter of 2011, CDA and DBA had a minimal impact at negative $40 million pre-tax and repositioning costs were $428 million pre-tax or $275 million after tax for a total negative impact of $0.10 per share.
Adjusting the guidance, we earned $2.2 billion in the fourth quarter of 2012 or $0.69 per share as compared to $0.41 per share in the fourth quarter of 2011. To (inaudible)’s earnings presentation, I will be discussion our result excluding both CDA and DBA as well as the higher than normal repositioning costs in the fourth quarters of 2011 and 2012 to provide comparability to prior periods.
I will also discuss prior quarters excluding the impact of gains and losses on minority investments as well as the tax benefit in the third quarter of 2012. Our full schedule of repositioning charges by business is included in the appendix.
In addition, as shown on Slide 4, there are a few other significant items which are included in our results.
First, operating expenses in the fourth quarter included legal and related costs of nearly $1.3 billion compared to $529 million last quarter and $832 million in the prior year. Legal and related costs in Citicore including core other, increased significantly from prior periods to $735 million driven primarily by U.S. consumer-related matters. And, Citi Holding legal expenses were roughly $550 million, including the previously announced $305 million charge related to the foreclosure review settlement. Second, the net loan loss reserve release of $86 million this quarter, was significantly lower than prior periods.
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