Citigroup Q1 Earnings Call Transcript

123jump.com Staff
26 Apr, 2010
New York City

Revenues rose 3.7% to $25.4 billion and net income rose 178.6% to $4.43 billion or 15 cents a share. Operating expenses of $1.6 billion were up 7% quarter-over-quarter. International revenues of $4.3 billion were flat sequentially.. Net credit losses were down 66% to $364 million.

Citigroup Inc. ((C))
Q1 2010 Earnings Call Transcript
April 19, 2010 11:00 a.m. ET

Executives

John Andrews – Investor Relations
Vikram S. Pandit – Chief Executive Officer
John C. Gerspach – Chief Financial Officer

Analysts

Glenn Schorr – UBS
James Mitchell – Buckingham Research
Guy Moszkowski – Bank of America/Merrill Lynch
Christopher Kotowski – Oppenheimer
John McDonald – Sanford Bernstein
Betsy Graseck – Morgan Stanley
Michael Mayo – CLSA
Moshe Orenbuch –Credit Suisse
Jason Goldberg – Barclays Capital

Presentation

Operator

Hello and welcome to Citi''s First Quarter 2010 Earnings Review with Chief Executive Officer, Vikram Pandit and Chief Financial Officer, John Gerspach. Today''s call will be hosted by John Andrews, 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. Mr. Andrews, you may begin.

John Andrews

Thank you, Operator. Good morning, everybody and thank you for joining us today. On our call today, our CEO, Vikram Pandit, 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 will be happy to take your questions. Before we get started, I would like to remind you that today''s presentation may contain forward-looking statements. Citi''s financial results may differ materially from these statements, so please refer to our SEC filings for a description of the factors that could cause our actual results to differ from expectations. With that said, let me turn it over to Vikram.

Vikram S. Pandit

John, thank you very much and good morning, everyone. Thank you, again, for joining us today. You''ve seen our results. They were clearly helped by strong capital markets and improving credit but net income of $4.4 billion also reflects the hard work we''ve done to put the company in order. We''ve been completely focused on serving our clients’ need and that has helped drive revenue growth. We have retained our expense discipline and we continue to reduce the risk and size of many of our legacy portfolios. The results of these efforts, combined with an improved operating environment, are reflected in these results, these first quarter results.

$25.4 billion in revenue and operating cost of $11.5 billion, net credit losses were down for the third consecutive quarter, non-performing assets were down for the second consecutive quarter and we had no net build or net release of our loan loss reserves. Securities and Banking produced a net income of $3.2 billion.

As you know, we have significantly restructured this business and today, I believe, we have the right business model and we’re executing well. I see further opportunities in Securities and Banking in the future. GTS made almost $1 billion of net income this quarter and continues to operate at or near record levels despite the low interest rate environment.

International Regional Consumer Banking business also made almost $1 billion of net income this quarter. Revenues were up 11% versus a year ago and credit costs declined by 47%.

We like the client momentum and the credit trends we see in our international markets. North America Regional Consumer Banking was about breakeven, as credit losses in cards remained high.

Our core businesses in Citicorp produced over $5 billion of net income this quarter, earning attractive financial returns. Our non-core businesses in Citi Holdings lost $887 million. Those losses were far less than the $2.6 billion loss last quarter and the $5.5 billion loss of a year ago. The results reflected improving credit, asset reductions and lower risk.

I want to reiterate the comment that I made at the Citi Financial Services Conference last month, about our local consumer lending portfolio, which is the main driver of losses in Citi Holdings. Assuming the U.S. economy does not deteriorate, we currently believe that the expected cumulative pre-provision net revenues, plus existing loan loss reserves, should be sufficient to cover expected net credit losses over time. Finally, our financial strength is substantial, with a Tier 1 common ratio of 9.1%, Tier 1 of 11.2% and total allowance for loan losses of nearly $49 billion or 6.8% of total loans.

Our results today are a reflection of all the progress we''ve made at Citi. None of this success would have been possible without the people of Citi. I would like to take this opportunity to thank my 265,000 Citi colleagues for their hard work, dedication and commitment. That is what has gotten us to this point.

Looking forward, sustainable profitability is still my number one goal. The first quarter is a good sign that we are making progress towards that goal but realistically, the operating environment is critical, particularly the recovery of the U.S. economy and the continued improvement of credit quality and most importantly, job growth.

There''s still uncertainty about the economy and job growth. So our near-term performance will continue to reflect the pace of economic recovery and the level of activity in capital markets. However, the long-term picture is clear, Citi is well positioned to take advantage of all the long-term growth trends we see in the global economy.

Our franchise is strong, our global footprint unique and we’re having great success attracting talent and we’re building momentum. With that, let me turn it over to John Gerspach, who’ll take you through this quarter in detail. John?

John C. Gerspach

Thank you, Vikram and good morning, everyone. Let me start with our quarterly results on slide two. As you know, results for the first quarter of 2010 include the impact of the adoption of FAS 166/167, which resulted in the consolidation of certain off-balance sheet assets, including securitized credit card receivables. Therefore, GAAP results for the first quarter should be compared to managed number for prior quarters.

In the first quarter, we reported revenues of $25.4 billion. Operating expenses were $11.5 billion, down 6% from the fourth quarter. Provisions for credit losses, claims and benefits were $8.6 billion consisting primarily of net credit losses of $8.4 billion.

Net credit losses were down 16% from the fourth quarter on a comparable basis and we recorded a modest net loan loss reserve release of $53 million in the first quarter. We reported net income of $4.4 billion or earnings per share of $0.15 based on average diluted shares outstanding of 29.3 billion. This $4.4 billion represents the highest quarterly net income since the second quarter of 2007.

On slide three, we summarized the balance sheet impact of FAS 166/167. As of January 1, 2010, we consolidated approximately a $137 billion of assets and a $146 billion of liabilities on to our balance sheet. The majority of which was related to credit card securitizations.

This translated into $10 billion of additional risk weighted assets. We also added $13.4 billion to our loan loss reserves, which decreased our tangible common equity by $8.4 billion and in total, these adjustments lowered our Tier 1 Common Ratio by a 138 basis points. Importantly, we were able to largely offset the impact on TCE and Tier 1 Commons during the quarter.

On slide four, we show the results for Citicorp and Citi Holdings. Citicorp reported $5.1 billion of net income in the first quarter, while the loss in Citi Holdings narrowed to $887 million. Both segments benefited from a decline in net credit losses during the first quarter and the net loan loss reserve release in Citicorp was partially offset by a net build in Citi Holdings.

On slide five, we show the results for Citicorp. Excluding CVA, revenues of $18.2 billion were up 17% from the fourth quarter, driven primarily by Securities and Banking. Operating cost declined by 3% to $8.5 billion and net credit losses declined again this quarter by 5% to $3.1 billion.

We also recorded a $367 million net loan loss reserve release. Excluding CVA, earnings before taxes almost doubled to $6.9 billion. Now, I’ll turn to the businesses within Citicorp.

Slide six shows results for our North America Regional Consumer Banking business. Revenues were $3.8 billion in the first quarter, up 5% sequentially on a comparable basis. Retail Banking revenues of $1.3 billion were up 4% quarter-over-quarter. These results primarily reflect higher mortgage revenues, offset by lower deposit volumes and loan balances.

Card revenues were $2.5 billion, up 6% versus the prior quarter, as pricing actions offset a sequential decline in purchase sales and average receivables. While pricing actions were able to offset the impact of CARD Act in the first quarter, we expect the negative impact of CARD Act to increase as additional changes are implemented during the year. We continue to estimate that CARD Act could reduce revenues by a net pre-tax amount of approximately $400 million to $600 million this year.

Operating expenses of $1.6 billion were up 7% quarter-over-quarter. Excluding the impact of a litigation reserve in the first quarter, expenses were down slightly. On a comparable basis, net credit losses were up 6% this quarter to $2.2 billion, reflecting an expected increase in net credit losses in our branded cards business.

Slide seven shows the results of the International Regional Consumer Banking businesses. International revenues of $4.3 billion were flat sequentially. We saw continued growth in investment sales of 11% with improvement in every region and average deposits and total loan balances each grew modestly by 2% in the quarter driven by Asia and Latin America.

However, these trends were offset by deposit spread compressions, as well as seasonally lower card purchase sales. While we experienced some variability in drivers on a sequential basis, year-over-year compressions remained strong, reflecting the continued economic recovery in these regions.

Operating expenses were $2.3 billion, down 9% from the prior quarter and international credit cards were $735 million, down 39% sequentially. Credit cost declined across all regions, again, in the first quarter with the most significant improvement in Latin America.

Turning to Securities and Banking on slide eight; excluding CVA, revenues were $7.7 billion, up 48% versus the fourth quarter. The sequential increase in revenues reflects strong growth in our fixed income and equity markets businesses. Excluding CVA, fixed income market revenues were up 77% to $5.1 billion, with widespread growth across rates and currencies, credit products and securitized products. In equity markets, revenues, excluding CVA, grew 66% to $1.2 billion this quarter, with particular strength in derivatives.

In investment banking, revenues declined by roughly $400 million to $1.1 billion, as higher debt underwriting revenues were offset by lower equity underwriting fees. The Advisory business was down from the fourth quarter on lower completed deal volume. We achieved a number three ranking in announced global M&A in the first quarter, with cross border deals representing approximately 30% of market volume.

Citi’s global presence gives us a unique ability to advice clients on these transactions, particularly as an increasing number of deals are taking place in developing markets. Private Bank revenues, excluding CVA, were $496 million in the quarter and in lending, we saw a $462 million improvement, reflecting lower mark-to-market losses on hedging activity.

Operating expenses of $3.4 billion were down modestly versus the fourth quarter and credit costs improved, again, in the fourth quarter. Net credit losses were down 50% to a $101 million and we recorded a net loan loss reserve release of $169 million.

Slide nine shows the quarterly results of our Transaction Services business. Transaction Services revenues were $2.4 billion in the first quarter, down slightly from last quarter, driven by the absence of the fourth quarter gain on the sale of NikkoCiti Trust.

Average deposits of $319 billion declined 5% versus the fourth quarter as we targeted a reduction in higher cost deposits and assets under custody declined 2% to $11.8 trillion due to the impact of foreign exchange. Expenses of $1.2 billion in the first quarter were down 5% sequentially. On a year-over-year basis, revenues for both TTS and SFS grew in the first quarter by 2% and 5% respectively, driven by growth in average deposits of 15%, growth in assets under custody of 12% and higher client volumes across both businesses.

We continue to invest in technology to support our clients. On average, we invest roughly $1 billion annually on technology in Transaction Services to remain on the forefront of client service and product innovation. We show the results for Citi Holdings on slide 10. Revenues were up 26% to $6.6 billion, driven by positive marks in the Special Asset Pool. Operating expenses were down 14% to $2.6 billion. Net credit losses declined 21% to $5.2 billion and the net loan loss reserve build was down 59% to $314 million.

Slide 11 shows asset trends in Citi Holdings, which ended quarter with assets of $503 billion. In the first quarter, we reduced these assets by $27 billion, driven by $14 billion of net organic run-off, $9 billion of asset sales and business dispositions, not including the impact of the Primerica IPO and sale, which closed in the second quarter and $4 billion of net credit losses and net asset marks.

However, these reductions were offset by $43 billion of assets, which came on balance sheet with the adoption of FAS 166 and 167, mostly related to credit card receivables and student loans. At the end of the first quarter, local consumer lending had $346 billion of assets or over two-thirds of Citi Holdings. The Special Asset Pool had a $126 billion of assets and Brokerage and Asset Management was the smallest segment with $31 billion of assets, primarily related to the Morgan Stanley Smith Barney joint venture.

Turning to Brokerage and Asset Management on slide 12, revenues were up 25% sequentially to $340 million driven by first quarter gains on the sales of Habitat and Colfondos, two pension fund managers in Latin America and expenses were down 9% sequentially to $265 million as costs associated with Smith Barney declined.

Slide 13 shows the Local Consumer Lending segment. Revenues of $4.7 billion were up slightly versus the prior quarter on a comparable basis and operating expenses were down 13% to $2.2 billion. Credit cost improved again in the first quarter. Net credit losses of $4.9 billion were down 14% from the fourth quarter, driven by improvements in U.S. mortgages and international consumer credit and our net loan loss reserve build was down 56% to $386 million.

Turning to the Special Asset Pool on slide 14, positive net revenue marks of $1.4 billion drove reported revenues in the first quarter. Operating expenses were down 36% to a $131 million and credit cost declined 73% to $227 million driven by a decline in net credit losses. During the quarter, we executed over $6 billion of asset sales.

Slide 15 shows the results for the Corporate/Other segment. The sequential improvement in revenues and net income is primarily driven by the absence of $10.1 billion of pre-tax losses associated with TARP repayment and the exit from the loss-sharing agreement in the fourth quarter. Assets of $263 billion, include approximately a $107 billion of cash and cash equivalents and a $103 billion of available-for-sale securities.

Slide 16 shows total Citigroup net credit losses and reserve provisions. Net credit losses of $8.4 billion were down 16% versus the prior quarter and we recorded a modest net loan loss reserve release of $53 million versus a net build of $755 million in the fourth quarter.

Corporate credit costs were $87 million in the first quarter, down 89% sequentially. Net credit losses were down 66% to $364 million and we recorded a net loan loss reserve release of $277 million. The decline in credit cost reflects continued stabilization in credit quality across most segments of our corporate loan portfolio. Corporate non-accrual loans of $12.9 billion were down 4% versus the fourth quarter.

The majority of credit costs are generated by our consumer businesses in Regional Consumer Banking and Local Consumer Lending. Consumer net credit losses of $8 billion declined 10% versus the fourth quarter and the net loan loss reserve build of $224 million was down 78%.

Slide 17 shows total Citigroup loan loss reserves. Loan loss reserves were $48.7 billion at the end of the first quarter or 6.8% of total loans. Slide 18 shows consumer credit trends for Citigroup. Net credit losses of $8 billion were down 10% this quarter driven by lower losses in Citi Holdings and our net credit loss ratio declined again this quarter to 6.1%.

Our consumer loan loss reserve ratio increased to 7.8%, driven by FAS 166/167 and the resulting consolidation of securitized credit card receivables on our balance sheet. Over 80% of our consumer net credit losses were generated in North America, concentrated in the Citi-branded and retail partner cards portfolio and in U.S. consumer mortgages. Net credit losses in North America declined 7% to $6.5 billion during the quarter and international net credit losses also improved significantly down 20% to $1.5 billion.

Slide 19 shows consumer credit trends in our international markets. Net credit losses and delinquencies were down in the first quarter in every region. In Asia, credit trends in Korea remained stable to improving, while India showed the most significant decline in both net credit losses and delinquencies.

In Latin America, improving credit trends were driven by Mexico and Brazil. In EMEA, net credit losses and 90-plus day delinquencies improved across nearly all markets. And for the international consumer businesses within Local Consumer Lending, net credit losses and 90-plus day delinquencies were also down driven by assets sales in EMEA.

Slide 20 shows North America credit trends for Citi-branded cards in Citicorp and retail partner cards in Citi Holdings. We continue to see stable-to-improving credit trends across both portfolios. In Citi-branded cards, higher fourth quarter delinquencies created an expected increase in net credit losses, up 7% to $2.1 billion. However, dollar delinquencies declined in the first quarter in both early and later-stage buckets.

On a percentage basis, delinquencies are up in Citi-branded cards due to a declining loan balance. In retail partner cards, net credit losses declined for the third consecutive quarter by 2% to $1.9 billion, driven by loss mitigation efforts and a declining loan balance. Both early and later-stage delinquencies also improved in the first quarter.

Slide 21 shows the historical trends for net credit losses and 90-plus day delinquencies in our mortgage portfolio in Citi Holdings. Both first and second mortgages experienced lower net credit losses and lower 90-plus day delinquencies in the first quarter.

Net credit losses on first mortgages declined 24% to $819 million, driven by HAMP loan conversions, an improvement in loan loss severity and roughly $1 billion of asset sales during the quarter. For second mortgages, net credit losses were down 14% to $851 million, driven by roll rate improvement.

Slide 22 provides more detail on delinquency trends in first mortgages in Citi Holdings. Total delinquencies were down 15% to $14.3 billion in the first quarter, driven by lower delinquencies across all buckets.

The most significant drivers of improvement this quarter were asset sales and the impact of HAMP trial mods moving to permanent modification. While we continue to evaluate the impact of HAMP, we are somewhat encouraged by our results to-date.

Through the first quarter, we converted over $2 billion of HAMP trail mods in our on-balance sheet portfolio to permanent modifications, with many more borrowers continuing in active trials and early results indicate that re-default rates are likely to be lower for HAMP modified loans versus non-HAMP programs.

Slide 23 shows the delinquency trends for second mortgages in Citi Holdings. Total delinquencies were down 9% to $2.5 billion in the first quarter, driven by lower delinquencies in all buckets. However, 30 to 89-day delinquencies have remained fairly stable.

Slide 24 summarizes our quarterly asset trends. We ended the quarter at $2 trillion in total assets, up 8% from the fourth quarter, primarily driven by the impact of FAS 166/167. Citi Holdings now represents approximately 25% of our total assets. Our NIM increase by 67 basis points during the quarter, nearly three quarters of the increase was due to the impact of FAS 166/167 and the remainder was driven by the absence of interest payments on trust preferred securities repaid in the fourth quarter as well as the deployment of cash into higher yielding investments.

Slide 25 shows the trend in our key capital metrics. At the end of the first quarter, our Tier 1 and Tier 1 common ratios were 11.2% and 9.1%, respectively, up significantly from year-end, adjusted for FAS 166/167. So in summary, our first quarter net income of $4.4 billion was the highest for Citigroup since the second quarter of 2007. Strong revenues in our institutional businesses reflect the continued strength of our client franchise, drivers of our Regional Consumer Banking businesses showed continued growth internationally and losses in Citi Holdings narrowed during the quarter, as we continue to reduce these assets.

We also demonstrated continued expense discipline across the Firm and we benefited from positive credit trends both internationally and in North America. Earnings growth contributed to strong capital ratios at period-end even after the adoption of 166/167.

Looking forward, I’d like to discuss a few factors, which may affect our results. On the revenue side, while we believe Securities and Banking first quarter results were largely representative of our core business, the first quarter is historically the strongest period of the year, particularly in fixed income.

Additionally, as I mentioned before, CARD Act is expected to have an increasingly negative impact on U.S. credit card revenues. Net revenue marks in the Special Asset Pool will continue to be episodic.

On the cost side, operating expenses may increase in Citicorp going forward as we continue to invest in the business. We will also absorb the cost of the U.K. bonus tax in the second quarter and of course, credit cards will continue to be a significant driver of earnings performance. In the first quarter, we saw an accelerated decline in international consumer net credit losses and in North America, the decrease in consumer net credit losses exceeded our initial expectations, mostly due to the improvement in U.S. mortgages.

Looking forward, we currently expect consumer net credit losses to continue to modestly improve. Internationally, we expect consumer credit trends to continue to improve at a moderating pace as long as economic recovery in these regions is sustained. And in North America, we also expect consumer credit trends to continue to improve based on the stable to improving delinquencies we are seeing in our major portfolios as well as early signs of economic recovery.

However, significant uncertainty remains in the U.S., particularly with regard to employment levels and the risk of future legislative actions. Our consumer loan loss reserve balances will continue to reflect the losses embedded in our portfolio due to underlying credit trends as well as the impact of forbearance programs.

That concludes the review of the quarter. However, before I turn it back over to Vikram, let me be clear about one issue that has attracted a lot of attention since Friday.

So let me state the following; Citi is not involved in the matter the SEC announced on Friday. It has been widely reported that the SEC, among other regulators, is conducting an industry-wide investigation into a wide range of subprime-related issues.

As we disclosed in our 10-K, we are fully cooperating with these investigations and it would not be appropriate for us to comment further. So with that Vikram, now back over to you.

Vikram S. Pandit

John, thank you very much. This is an important quarter for us. We have come a long way. The most important thing is that we’re continuing to execute well across the entire company and that is due to the great people of Citi, who have worked extremely hard. We have more work to do, particularly deliver on the potential of this great franchise and that’s exactly what we’re going to be focused on.

With that Operator, can we open up the lines to questions?

Question-and-Answer Session

Operator

At this time, if you would like to ask a question, please press star then the number one on your telephone keypad. Your first question comes from Guy Moszkowski with Bank of America/Merrill Lynch.

Guy Moszkowski – Bank of America/Merrill Lynch

Good morning.

John C. Gerspach

Good morning.

Guy Moszkowski – Bank of America/Merrill Lynch

My first question is on expenses. You did have another significant decline but it was only about 1% lower in aggregate terms than first quarter a year ago and after the first quarter, expenses did rise off that level for the remainder of the year. Where should we look for the expense run rate to be? Where are you finding any further cutbacks that we’re seeing here in the first quarter and maybe you can give us a sense for what sort of compensation accrual rate you are using in Securities and Banking as a percentage of revenues?

John C. Gerspach

Let me try to take it from the top down. If you take a look at the expense run rate, what it’s being impacted by, I think, you clearly see declines in Citi Holdings which you should expect as we continue to work our way out of those assets. We are, as I think, we’ve been mentioning for the couple of quarters continuing to invest in our Citicorp businesses. Now on a going forward basis I think that for the balance of the year, you can expect that you’ll continue to see some rise in Citicorp expenses and how much Citi Holdings comes down depends really upon additional actions we would have against these assets. But given where we are right now, I would say that you could expect expenses to sort of stay within the $11.5 billion to $12 billion range for the balance of the year.

Guy Moszkowski – Bank of America/Merrill Lynch

Thanks. That’s helpful for the modeling. Now you alluded to some of that being driven by reduction of assets -- further reduction of assets in Holdings and actually a follow-up question that I have is, in Special Asset Pool, you did complete $6 billion in asset sales and your assets fell I think $12 billion on a pro forma basis. But it was a quarter in which pricing on distressed assets seem to improve quite a bit and obviously you reflected some of that on a mark-to-market basis. I wonder, why we didn’t see more asset sales given the improvement in the market, are there sales under negotiation and that where we might expect to see a pickup in asset dispositions in the second quarter?

John C. Gerspach

Guy, you can sort of assume that we are active with all of our assets in Citi Holdings and particularly that with the Special Asset Pool. So, there are always discussions underway. Obviously, each quarter is somewhat dependent upon what we can actually close on in the quarter as well as the depth of markets to accept various types of assets. The marks that you noted, those marks also reflect some realized gains.

For instance, you will note in one of the appendices that we provide to the deck, I think, the numbers we took the sub-prime asset marks up by about $800 million this quarter but somewhere between 15% to 20% of that number actually represents realized gain, so it''s a combination of both marks and realized gains in all of these portfolios.

Guy Moszkowski – Bank of America/Merrill Lynch

Would you say that the depth of markets and the market ability of some of those assets increased towards the end of the quarter? Again, just trying to look forward and see whether we might expect an acceleration of dispositions as the year progress.

John C. Gerspach

I can’t comment, Guy, as to whether or not something improved in the last two weeks of March or declined in the first two weeks of February. As I said, you can expect that we are actively working all of the assets in Citi Holdings.
Guy Moszkowski – Bank of America/Merrill Lynch

I’m just going to ask one final question on the sort of central corporate treasury portfolio in the corporate and other unit you had about $350 million of net revs, most of the swing, obviously, as you pointed out came from the TARP cost not being there as they were in the fourth quarter but we have seen at J.P. Morgan, significant realized gains on that central treasury portfolio over the last couple of quarters as they batten down the hatches for higher rates. Are you doing something similar to try to reduce your exposure to rates and was there within that unit in the quarter a significant realized gain from taking some of that rate risk off the table?

Vikram S. Pandit

You can count the fact that we always monitor our exposure to interest rates, but there was not some unusual amount of gains that resided in corporate/other for this quarter.

Guy Moszkowski – Bank of America/Merrill Lynch

Okay. Thanks very much for taking my questions.

Vikram S. Pandit

Not a problem, Guy. Thank you.

Operator

Your next question comes from Glenn Schorr with UBS.

Glenn Schorr – UBS

Could you provide any other color on card repricing? I mean we kind of know what it is conceptually but just curious on average rate from what to what or dollar impact on the quarter and net interest income in cards?

John C. Gerspach

I’m trying to think about going from what to what. I mean we have re-priced the entire now branded cards portfolio and our rates have gone up across the portfolio. I don’t have it in my head right now, Glenn, what the increase is overall. Just in general, it’s a pricing up and don’t forget, as we were pricing up, we also introduced the fact that consumers who made their payments would then see, in effect, a rebate of their interest. So there’s a lot of ups and downs across the portfolio but I just can’t give you on average what the rate increase was.

Glenn Schorr – UBS

How about revenue contribution in the quarter because you did noted, but is it big, small or medium?

John C. Gerspach

Well, it was enough to offset the impact of the CARD Act in the first quarter. So the net of the two was clearly a plus in this first quarter.

Glenn Schorr – UBS

Normally, not a question that I focus on, but 20% tax rate, longer term it''s -- I mean historically it’s much higher than that, but you have a huge DTA that people should feel better about. How do you think about the tax rate on the go forward?

John C. Gerspach

I think as we’ve seen for the last several quarters, our tax rate right now is still being impacted by the geographic distribution of our earnings and our earnings now are still more concentrated in low tax rate geographies. And so we’re getting an increased benefit from there, so 20% arguably is not a rate that we would think would be sustainable over time. I think that as we work our way through this transition period and somewhere around the future, you would expect some more normalized tax rate for us to be in the 28% to 29% range.

Glenn Schorr – UBS

The IB revenues were great for all the reasons that you mentioned, but actually expenses were down, I don’t know how to read that, because in the first quarter, usually a comp accrual would kind of go in-lineish with the direction of revenues, fat chance on this, but I’ll ask it anyway. Anyway to distinguish between marks versus just strong flows and revenues booked?

John C. Gerspach

No. I''m not going to comment on that. Obviously, the market volumes were up. Our customer flows I saw were excellent this quarter and our underlying comp accruals reflect the performance of this quarter.

Glenn Schorr – UBS

It is a break from years past though, when huge increase in revenues with not an increase in total expense?

John C. Gerspach

I’m sorry – you faded there just for a second.

Glenn Schorr – UBS

It''s different though, you’re saying it reflects but revenues were up huge and expenses were flat. It is a break from the past when you''d have huge flows, especially customer-related flows, usually comp would drift up with it.

John C. Gerspach

Yeah. And I think, well, if you take a look certainly year-on-year, our expenses have been up. I probably should mention that, in the first quarter, we did have in this business a release of historic litigation reserve, which tended to drive the expenses down below the fourth quarter levels and maybe that’s what you’re seeing in the numbers.

Glenn Schorr – UBS

Last quickie, do you have any Wells’ notices outstanding? I feel like I’m supposed to ask every company I cover that now.

John C. Gerspach

I think, Glenn, I probably covered everything we’re going to say by my opening comments.

Glenn Schorr – UBS

Okay.

John C. Gerspach

All right.

Glenn Schorr – UBS

Thanks very much.

John C. Gerspach

Okay.

Operator

Your next question comes from Betsy Graseck with Morgan Stanley.

Betsy Graseck – Morgan Stanley

Hi. Thansks. Good morning.

Vikram S. Pandit

Hi, Betsy.

Betsy Graseck – Morgan Stanley

Couple of questions, one on, just want a clarification on the CARD Act costs you made for $400 million to $600 million pre-tax this year versus ’09. How much of that is the run rate in 1Q?

John C. Gerspach

Obviously, the impact of CARD Act will increase as the year goes out – as the year goes on and the $400 million to $600 million is a net impact, so net of the impact of our re-pricing. The first quarter, as I had mentioned to, I can’t remember who asked the question before, we actually saw a slight increase, a benefit where our pricing – our change in terms impact outweighed the impact of CARD Act in the first quarter and what you’re going to see for the remaining quarters is CARD Act will eventually catch up and then probably overtake the impact of the increased pricing.

Betsy Graseck – Morgan Stanley

Maybe you can indicate how much the benefit was on a net basis then in the 4Q?

John C. Gerspach

No, I didn’t. All of these things, you take a look at the static portfolios and they are somewhat tough to layout with any sort of a specificity. So I think, the best guidance we can give right now is that on a full year basis. Our expectation is exactly what we’ve said, the net impact of all of this will be about a $400 million to $600 million negative impact on revenues.

Betsy Graseck – Morgan Stanley

Sure. Okay. And then on Common Tier 1 ratio up very nicely relative to the FAS 166/167?

John C. Gerspach

Yes.

Betsy Graseck – Morgan Stanley

And then you also indicated that you’re shifting from cash into higher yielding assets at the margin. I just wanted to kind of square the circle here and understand how you lowered the RWA in the quarter, at the same time are able to reinvest cash into higher yielding assets. Could you just give us some color as to what was the backdrop for all that?

John C. Gerspach

Sure. I mean, don’t forget the risk weighted assets are exactly what they say they are, risk weighted. So as our loan portfolios continue to decline, you are taking off 100% risk weighted assets and so even substituting them with high quality interest earning assets, you can still get a pickup in your -- or decline in your net risk weighted assets.

Betsy Graseck – Morgan Stanley

Sure. CARDS were a 100% risk weighted and mortgage is 50%, right?

John C. Gerspach

Well, it also depends upon the mortgage and where it is and aging and everything else.

Betsy Graseck – Morgan Stanley

Right. Okay. Could you just give us a little bit of color as to how much more room you have for reinvesting the cash into the higher yielding assets, how far along that process do you feel you are?

John C. Gerspach

Well, I think some of that really depends upon how our – obviously how our cash generation continues to be paced. That’s also somewhat driven by our ability then to actually grow more earning assets in our Citicorp businesses. And I personally would think that we would be more focused on growing those interest earning assets in the near future then as the most natural outlet for increased cash that we would generate.

Betsy Graseck – Morgan Stanley

Okay. And lastly, when does capital management start to kick in with 9.1% common Tier 1? What are the triggers that you see for dividend reinstatement or share buy backs?

John C. Gerspach

Well, I haven’t heard dividend reinstatement in a while, that’s -- I have to absorb that for a second. Betsy, right now I think what everybody is waiting for is some sort of clarity as to where the capital requirements settle out and I think that that’s probably an answer you’re getting from every institution at this point in time.

Betsy Graseck – Morgan Stanley

Sure. And you know that was the BIS stated out there today, was it or over the weekend, what everybody''s commentary was, so I read through your commentary that Citigroup indicated and there is obviously a lot of moving parts and challenges to the BIS or questions with regard to how they are triangulating. Maybe you can just give us a sense as to what you think your Common Tier 1 ratios are that you feel that you need to run the business and absorb the risk in the business?

John C. Gerspach

Well, right now, we’re very happy at 9.1%. And if we continue with the performance, any sort of a performance like this, you are going to see our Tier 1 common ratio grow.

Betsy Graseck – Morgan Stanley

Fair. But you have to triangulate against returns versus capital and I guess you’re not going to give any answer at this stage.

John C. Gerspach

That’s exactly, right, Betsy.

Betsy Graseck – Morgan Stanley

It is fine. Thank you.

John C. Gerspach

Okay. Thank you.

Operator

Your next question comes from Jim Mitchell with Buckingham Research.

James Mitchell – Buckingham Research

Hey, good morning.

Vikram S. Pandit

Good morning, Jim.

James Mitchell – Buckingham Research

Getting back to the Local Consumer Lending business, there is couple of distinct businesses in there including Consumer Finance in the U.S., outside the U.S. and the partner cards. Can you at least give us any inkling on whether those, given the drop in credit costs that we’ve seen this quarter, are they getting close to breakeven or profitability, which would obviously I would think make them a little bit more attractive to sell and therefore, could we see an acceleration of maybe some of these asset sales?

John C. Gerspach

Yeah. I can’t comment right now, Skip, on the profitability. I’m sorry Chip. I did say Skip, I’m sorry, Chip.

James Mitchell – Buckingham Research

Jim.

John C. Gerspach

Jim, sorry. Chip. Did I say, Skip? I’m sorry, Chip.

James Mitchell – Buckingham Research

Jim.

John C. Gerspach

Jim, sorry.

James Mitchell – Buckingham Research

That’s okay.

John C. Gerspach

Jim, Chip, I apologize.

James Mitchell – Buckingham Research

You can call me, Pete.

John C. Gerspach

All right, Pete. Pete, I’m not going to comment on the profitability of any of those individual businesses at this point in time.

James Mitchell – Buckingham Research

Okay. Fair enough. Maybe, outside of that, can you talk a little bit about – at least give some clarity on the expense, the amount of the expense on the loss-sharing agreement because obviously that was a big part of the driver sequentially, just trying to get a handle on what was driven by that versus other cost savings?

John C. Gerspach

Jim, I think that the -- each quarter the loan sharing arrangement was somewhere in the vicinity of a $150 million to maybe $200 million but I’d also then ask you to call our IR team and they can give you a more specific answer, alright?

James Mitchell – Buckingham Research

Yeah. Fair enough. Lastly, on the DTA, clearly you had some increase related to the FAS 166/167 charge. How much, now that you with the profit, were you able to use up this quarter? Can you give us a sense of how we should think about the pace of using those up going forward?

John C. Gerspach

Well, I can’t comment on the pace going forward.

James Mitchell – Buckingham Research

Fair enough. But can you talk about the pace of this quarter?

John C. Gerspach

Yeah. Sure. With the adoption of FAS 166/167, we added about $5 billion to the DTA. So that would bring us up to about a $51 billion number and then with the activities of this first quarter, it''s now settled back down to $50 billion.

James Mitchell – Buckingham Research

Okay. Great. Thanks a lot.

John C. Gerspach

Okay. Not a problem, Jim.

Operator

Your next question comes from John McDonald with Sanford Bernstein.

John McDonald – Sanford C. Bernstein

Hi. Good morning.

John C. Gerspach

Good morning, John.

John McDonald – Sanford C. Bernstein

John, you commented on some of the outlook on consumer credit and corporate as well. I’m just wondering at one point and what will drive your consumption of reserves? You, obviously, have a lot of reserves now, even more after 166.

John C. Gerspach

Yeah.

John McDonald – Sanford C. Bernstein

What will be the drivers of your -- we started to see some consumption from some other big banks, what will drive that for you guys as we look ahead?

John C. Gerspach

Actually, I think you got a pretty good answer in our results. We have been releasing some reserves for several quarters now. For the last three quarters, we’ve actually had small loan loss reserve releases on our corporate loan book, where we’ve seen good underlying credit trends and got a sense that the book was in good shape. You‘ll see this quarter that we’ve released reserves in the consumer businesses in both Asia, as well as Latin America. In Asia, we’ve had, I think it''s three consecutive quarters now of declining NCLs and good underlying delinquency trends as well as a sense that the underlying economy is performing well. And it’s a similar story then with Latin America, couple of quarters in a row of declining credit losses, good underlying delinquency trends and solid economic performance. So that’s kind of the mix to look at as far as what might signal any other reserve actions.

John McDonald – Sanford C. Bernstein

And you''ve seen some of that in the U.S., may be just you need to see a little bit more of it in a couple of more quarters or --?

John C. Gerspach

Well, we certainly haven’t seen anything right now that would suggest that we would be releasing our reserves, otherwise we would have.

John McDonald – Sanford C. Bernstein

Okay. Separate question, in terms of derivatives and thinking about derivatives regulation, have you ever sized your derivatives revenues, either in absolute terms or as a percent of equity trading revenues?

John C. Gerspach

No. We’ve never actually just taken -- I mean because derivatives kind of cross so many different activities and they''ve got a wide variety of uses as well. So, I’d say, the derivatives represent any specific percentage of revenues in any one of our specific businesses, it''s just not something we''ve attempted to do.

John McDonald – Sanford C. Bernstein

Okay. And I guess too early to take a rough stab on how the potential changes that are being discussed in Washington might impact to you?

John C. Gerspach

I would say, you’re absolutely right.

John McDonald – Sanford C. Bernstein

Okay. Last question, thinking about your goal of self funding the credit losses in LCL with reserves and pre-provision earnings?

John C. Gerspach

Yeah.

John McDonald – Sanford C. Bernstein

Looks like, first of all, how could we think about a reasonable timeframe of winding down of Holdings?

Vikram S. Pandit

We will continue to wind down Holdings as fast as we are able to in an economically rational manner. And it’s something that Michael Corbat and his team are focused on every single day, but I can’t give you a timeframe.

John McDonald – Sanford C. Bernstein

Okay. And finally there, it looks like the pre-provision earnings in LCL is about $10 billion annualized this quarter and going forward you''ll have some shrinking balances and may be the Card Act has an impact. What are the puts and takes in terms of what the pre-provision earnings power is in LCL as we go forward?

John C. Gerspach

I think that you got a pretty good handle on it right now. I mean it’s how faster do the earnings assets come down, what are the yields on the earning assets and we’ll continue, of course, to drive expenses down as we continue to get out of certain businesses. Those are the drivers.

John McDonald – Sanford C. Bernstein

Okay. Thank you.

John C. Gerspach

All right. Thank you, John.

Operator

Your next question comes from Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch – Credit Suisse

Great. Thanks. John, could you talk a little bit about either seasonality or kind of big trends in terms of consumer losses, any changes in the coming quarters? I’m thinking about kind of bankruptcies being somewhat seasonally high in the second quarter and then the impact on the mortgage and home equity from the modifications?

John C. Gerspach

Yeah. From a bankruptcy trend point of view, right, there’s a couple of things to look at. Right now, I''d say bankruptcies are probably trending a little bit higher than we would have thought going into the year but our share of bankruptcies is not as high as we would have thought. So we''ve got somewhat mixed news on the bankruptcy front.

As far as seasonality with regard to mortgages, I can''t really comment on that. Obviously, what''s driving mortgages, I think the second part of the question kind of hint to that, is all of the HAMP programs and how that’s impacting and you start to see some of that in some of the delinquency numbers that we talked about during the presentation.

Moshe Orenbuch – Credit Suisse

As kind of a separate issue, do you have any kind of indication from the Treasury yet as to what -- when they’re planning to begin, when the registration statement will be filed for the shares and that process?

John C. Gerspach

Moshe, all I can say is that the lockup agreement expired in mid-March. They’ve made their statement as far as their intention to fully dispose the 7.7 billion shares that they have over the course of 2010 and as to any decision regarding either the method or the timing, you’ve got to really contact the U.S. Treasury.

Moshe Orenbuch – Credit Suisse

But it''s you that would file the registration statement, right?

John C. Gerspach

We would certainly -- yes, we would certainly be filing the registration statement.

Moshe Orenbuch – Credit Suisse

Got it. Thank you.

John C. Gerspach

All right.

Operator

Your next question comes from Chris Kotowski with Oppenheimer.

Christopher Kotowski – Oppenheimer

I think most of us probably have a handle on the sluggish revenue growth and loan drivers in the United States. But looking at your Latin American and Asian consumer businesses, I see asset growth up about 20% year-over-year and return on assets for both those companies is now over 200 basis points. So I guess, I’m curious what''s the secret sauce there in terms of driving the growth into that level of profitability?

John C. Gerspach

Well, don''t forget we’ve been actively working those portfolios, plus both in Asia and in Latin America, there really the economic recovery took hold a bit earlier and it’s certainly proceeding at a much great pace.

Christopher Kotowski – Oppenheimer

And do you see like there’s a 200 basis point kind of level of profitability for consumer banking in those markets, is that something that you find extraordinary good or is that kind of the way you target it?

John C. Gerspach

No, I’d say that we’re comfortable with the levels where we are. We’ll take a look at where things kind of pan their way out. Don’t forget, especially in Latin America, we still have some de-risking that we’re doing in some of our Mexico card books. So we will see how the whole thing shakes out over the course of the next couple of quarters. And when it comes to operating in both Latin America and Asia, we’ve been there for a long time and this is just a situation where right now the credit is getting better than it has been for the last couple of years.

Christopher Kotowski – Oppenheimer

And then also just sort of given the general economic improvement in asset quality that we’ve been seeing here in the reports from the last couple of days. Are you rethinking any of the other businesses in Citi Holdings, the student loan business or mortgage business and are you thinking any of those maybe in the cold light of day with an economic recovery more or less in hand might be businesses that you’d want to keep?

John C. Gerspach

Not at this time and I think, we’ve been pretty clear on what our holding strategy is. And all those businesses as we look at it, they just don’t make sense going forward for the way that we want to run Citicorp.

Christopher Kotowski – Oppenheimer

And then finally, the share count, last quarter you talked about 30 billion shares and it came in I think 29.3 billion, a bit less than what you’d indicated. What’s the difference there?

John C. Gerspach

Well, there are still some shares that will be issued as we finalize the employee comp. Don’t forget we issued some of the employee comp this year in share equivalent units and so depending upon what happens over the next couple of weeks, there will be some additional shares that actually get issued just to finalize the year-end ’09 comp.

Christopher Kotowski – Oppenheimer

Okay. Thank you.

John C. Gerspach

Okay. Not a problem.

Operator

Your next question comes from Jason Goldberg with Barclays Capital.

Jason Goldberg – Barclays Capital

Hi. Thanks. Most have been addressed, but let me ask one more. A bunch of the rating agencies have come out and said a bunch of things, including you are going to experience multiple notch downgrades upon the enactment of certain of the proposed regulatory measures. I guess, if you''d kind of looked at the impact of any such actions and I guess, what steps you are taking to kind of mitigate that?

John C. Gerspach

Well, the rating agencies certainly are looking at things. Obviously, I think, it’s a little bit too early for anybody to take a look at what legislation is out there, because there has been a lot of talking so far, but certainly nothing finalized. And what some of their ratings were talking about were the short-term ratings and I think historically when you take a look at how rating agencies assess short-term ratings they get primarily focused on liquidity and capital. And I think, if you take a look at our liquidity and capital, they are in pretty good shape.

Jason Goldberg – Barclays Capital

I guess, with respect to liquidity, I guess, three other big peers reported last week, I guess, kind of like liquidity increased and you guys have started to reinvest some of that, any thoughts around that?

John C. Gerspach

No, I’d say, I still think that we have got ample liquidity and I think we’re well positioned.

Jason Goldberg – Barclays Capital

Fair enough. Thank you.

John C. Gerspach

Okay.

Operator

Your next question comes from Mike Mayo with CLSA.

Michael Mayo – CLSA

Good afternoon.

John C. Gerspach

Hi, Mike.

Michael Mayo – CLSA

The expenses, I just wanted to follow-up on that, with the expenses being down which is good, but some of that’s in other and it comes when firm-wide revenues are up a lot. So can you just give a little more color about that relationship?

John C. Gerspach

I’m sorry, Michael, which relationship in particular?

Michael Mayo – CLSA

Well, just it''s great linked quarter operating leverage, some of that’s due to other expenses being down. Why were other expenses down so much? I know someone else asked this question, is there anything else going on with the compensation?

John C. Gerspach

Mike, I’m sorry, but the other expenses, we''ve got a lot of stuff that flows through corporate/other. If there was anything really unusual in the expense items this quarter, I''d call it out to you.

Michael Mayo – CLSA

Okay. When you give guidance that the expenses might go up in future quarters, the main categories would that might go higher?

John C. Gerspach

Would be in Citicorp, depending upon the pace of investment that we would have in those Citicorp business and the other thing that I mentioned and let''s not forget about this is in the second quarter we know that we will have to record the impact of the U.K. bonus tax.

Michael Mayo – CLSA

Right. That’s more one-time.

John C. Gerspach

That’s a one-time.

Michael Mayo – CLSA

And then just a more big-picture question, what are your financial targets? Would that be the 1.25% to 1.5% ROA and 5% asset growth in Citicorp assets?

John C. Gerspach

That’s exactly what Vikram laid out at the conference in March and, again, those are still our long-term goals. That’s not any predictor that that’s what exactly we’re going to go do in 2010. And it''s the way we would take a look at the company, combining Citicorp and corp/other, which is really what we think the business -- once we exit ourselves from Holdings, that will really be the business that we''d have going forward and we think it''s reasonable to expect an ROA of between 125 and 150 basis points on those assets. And yes, we said, it would not be unreasonable to expect a 5% compound annual growth rate in those assets.

Michael Mayo – CLSA

And I guess, my follow-up to that is, it just seems though that ROE target, I recognize you have a lot more non-U.S. getting rid of some of the problem assets, but that ROE target is just so much more than where the company has been historically and so far above where the industry has been and does that sort of high ROA target encourage a similar type of excessive risk taking that the company had last decade?

John C. Gerspach

The excessive risk taking is not part of our strategy going forward. Our strategy going forward is certainly to be a client focused set of businesses and I think that certainly in the March conference, Vikram did a very good job -- nice of me to say that, since he is sitting next to me, a very good job of laying out the strategy both for Securities and Banking, Transaction Services and our Regional Consumer Banking businesses. And I think we also laid out at that point in time that if you look historically at the ROA that we actually have on Citicorp that 125 to 150 is really not out of reach.

Michael Mayo – CLSA

And when do you think you could potentially get there?

John C. Gerspach

Well, like I said, that’s going to depend a little bit on several things, certainly the pace at which we would exit ourselves from holdings and the pace at which we would actually get economic recovery to take hold here in the U.S. So we''ll see.

Michael Mayo – CLSA

All right. Thank you.

John C. Gerspach

All right.

Operator

And at this time, there are no further questions. I’d like to turn the call back over for closing comments.

John Andrews

Hi. This is John Andrews again. We''d like to thank you all for taking the time today. Obviously, if you have any follow-up questions, feel free to contact the helpful IR team, otherwise, enjoy the rest of the day. Thank you.

Operator

Thank you, ladies and gentlemen, for your participation. You may now disconnect.