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#Thank you, <UNK>, and good morning everyone
Starting on Slide 3, we show total Citigroup results
Revenues of $17 billion in the fourth quarter declined 9% from the prior year and expenses decreased 9% as well each driven primarily by the continued wind down of Citi Holdings, as well as the impact of foreign exchange translation
In our core Citicorp franchise revenues grew 6% year-over-year, while expenses declined 2% and in constant dollars revenues grew 8% versus 1% growth in expenses
Citigroup credit costs improved significantly driven by improvement in both ICG and Citi Holdings, partially offset by higher credit costs in consumer reflecting the loan growth as well as the shift from reserve releases last year to reserve builds in North America cards
Net income of $3.6 billion in the fourth quarter grew 4% from last year and earnings per share of $1.14 grew 8% including the benefit of share buybacks, which drove 5% decline in our average diluted shares outstanding
On a full-year basis, we earn nearly $15 billion or $4.72 per share with a drag from higher preferred dividends in 2016 more than offset by lower shares outstanding
And our full-year return on tangible common equity was 7.6% on a reported basis or 9% excluding the TCE supporting disallowed DTA
In constant dollars, Citigroup end of period loans grew 3% year-over-year to $624 billion as 6% growth in Citicorp was partially offset by the continued wind down of Citi Holdings and deposits grew 4% to $929 billion
On Slide 4, we showed a split between Citicorp and Citi Holdings
Citicorp was again the predominant driver of profitability in the fourth quarter contributing $3.5 billion or 98% of total net income
Pre-tax earnings of $5.1 billion in Citicorp grew by over $1.3 billion year-over-year mostly driven by higher revenues and lower credit costs in our institutional franchise
And on a full-year basis, despite the difficult first quarter, we were able to deliver an efficiency ratio in Citicorp of 58% in line with our revised goal for the year
Turning to Citi Holdings
We earned a small pre-tax profit in the fourth quarter with revenues, expenses, and cost of credit each declining significantly as we continue to wind down the portfolio
We reduced Citi Holdings to $54 billion of assets at year-end or 3% of total Citigroup and we have signed agreements in place to reduce this amount by an additional $9 billion
On a full-year basis, Citi Holdings contributed $600 million of net income, which we do not expect to recur in 2017. On Slide 5, we show the full-year 2016 EBIT walk for Citigroup
In total EBIT declined by over $3 billion from 2015 to 2016. Roughly half of which was attributable to lower gains on asset sales in Citi Holdings and a modest impact from FX translation
The remaining EBIT decline occurred in the core Citicorp franchise
However this comparison includes losses on mark-to-market loan hedges in 2016 as compared to gains in the prior year, as well as certain previously disclosed one-time items that also affect the variance, including a gain on the sale of our merchant acquiring business in Mexico in 2015 and the write-down of our investment in Venezuela in the first quarter of 2016. Together, these items drove a nearly $1.3 billion negative variance in the full-year EBIT comparison all of which was reflected in revenues
Excluding these items, Citicorp revenue increased 3% year-over-year in constant dollars or over $1.7 billion driven by growth in fixed income markets, Treasury and Trade Solutions, North America Card, and Mexico Consumer revenues
And our operating margin grew by nearly $400 million including the impact of significant investments in our North America cards franchise that have not yet fully matured
Of course credit cost also increased in 2016 as we grew loans in our target segments, including the acquisition of the Costco portfolio
However, most of the year-over-year variance of roughly $700 million in 2016 reflects the absence of nearly $400 million of reserve releases that occurred in 2015 as credit normalized in North America cards
Turning now to each business, Slide 6 shows the results for North America Consumer banking
Total revenues grew 5% year-over-year in the fourth quarter
Retail banking revenues of $1.3 billion declined 4% from last year reflecting lower mortgage revenues as well as the impact of certain consumer incentives offered in coordination with the launch of our enhanced retail segmentation strategy
During the quarter, we launched our enhanced Citigold integrated wealth management offering for the Affluent segment in the U.S
We also launched Citi Priority for the emerging Affluent segment and we executed significant enhancements to our mobile banking platform across all our consumer segments
We continue to rationalize our physical footprint down 7% to 723 branches at year-end, while doubling our free ATM access and we continue to grow volumes with average loans and checking deposits up 6% and 9% respectively
Turning to branded cards, revenues of $2.2 billion grew 15% reflecting the impact of the Costco portfolio acquisition as well as modest organic growth
Excluding Costco, we generated 2% revenue growth as we have largely absorbed the impact of higher acquisition and reward costs and are beginning to benefit from organic volume growth
Turning to Costco, the results continue to be very encouraging
To-date, we have generated over 1 million new Costco card accounts and over $52 billion of purchase sales and loans continue to grow in the fourth quarter ending the year at nearly $17 billion
In total, we grew end of period branded card loans by 11% or over $8 billion in the second half of 2016 across our proprietary products, Costco, and other co-brand portfolios
This reflects strong engagement with our existing cardholders as well as significant new account balance growth
New accounts typically feature promotional rates for a period of time
So we would expect revenue growth to follow once these balances mature and begin to accrue at full rate
Finally, Retail Services revenues of $1.6 billion were roughly flat to last year as loan growth offset the absence of two portfolios we sold in the first quarter as well as the impact of renewing and extending several partnerships
Total expenses for North America consumer were $2.5 billion, up 6% from last year mostly reflecting the Costco portfolio acquisition, volume growth, and continued marketing investments, partially offset by efficiency savings
And finally, credit costs of $1.2 billion were down sequentially but increased $370 million from last year
Net credit losses increased to $1.1 billion mostly driven by Costco, organic volume growth and seasoning, and the impact of regulatory changes on collections and cards and we've built a $113 million of net loan loss reserves during the quarter compared to a release in the prior year driven by the ongoing impact of the Costco portfolio acquisition as well as organic volume growth
We continue to expect the full-year NCL rate to be in the range of around 280 basis points in branded cards and 435 basis points in Retail Services for 2017 with some variability by quarter
On Slide 7, we show results for international consumer banking in constant dollars
Net income grew significantly from last year on higher revenues, lower operating expenses and stable cost of credit
In total, revenues grew 5% and expenses were down 1% versus last year
In Latin America, total consumer revenues grew 8% driven by continued momentum in retail banking with average loans and deposits increasing 7% and 13% respectively
Cards revenues declined slightly from last year
However we saw ongoing strength in account acquisitions, purchase sales, and average loan growth which should translate to sustainable revenue growth by the second half of 2017. And finally, expenses declined 5% year-over-year in Latin America as ongoing investment spending was more than offset by efficiency savings as well as the impact of one-time items in the prior year period
We continue to execute on our investment plans this quarter in Mexico, modernizing our branches and ATMs, enhancing our digital capabilities, and upgrading our core operating platforms
These infrastructure investments should improve operating efficiency and returns over time
And we still expect to maintain positive operating leverage each year throughout the investment period
Turning to Asia, consumer revenues grew 4% year-over-year driven by improvement in wealth management and cards
Wealth management revenues grew 18% from last year reflecting better investor sentiment and continued positive AUM influence
And cards remain positive as well with revenues up 4% driven by a continued improvement in yields and abating regulatory headwinds
Expenses in Asia grew 2% from last year, driven by investment spending, partially offset by efficiency savings
On Slide 8, we show more detail on our Asia consumer portfolios
Starting with retail loans, as we've discussed previously, we have been working to optimize the returns on this portfolio by shifting away from lower yielding mortgage loans and derisking the commercial portfolio, while growing higher return personal loans
Over the past year we have increased net interest revenue as a percentage of average loans in the retail portfolio by 13 basis points, largely offsetting the revenue impact from a 7% decline in average loans driven by mortgages and the runoff of certain non-core products
As you can see on the slide, personal loan balances have stabilized in recent quarters as underlying growth in certain markets has been offset by regulatory headwinds in others
These headwinds are abating and therefore, we believe, we can drive modest growth in total retail loans from this new base in 2017, while continuing to improve the yield on the portfolio
And turning to cards, while average card loans were flat year-over-year, we have improved net interest revenue as a percentage of average loans by roughly 40 basis points, as we have shifted a larger portion of our balances to higher yielding revolving loans
We also expect to generate loan growth in cards going forward as we invest to drive higher account acquisition and usage
We expect these initiatives, along with our continued focus on wealth management to drive sustained growth in Asia in 2017 and beyond
Slide 9 shows our global consumer credit trends in more detail, across both cards and retail banking
Credit remained broadly favorable again this quarter
The increase in the NCL rate in North America mostly reflects the impact of the Costco portfolio, seasonality, and the impact of regulatory changes on collections and cards
Credit trends in Asia consumer remains stable this quarter and the NCL rate in Latin America remained favorable at 415 basis points
While we continue to believe the NCL rate in Latin America should settle closer to 4.5% as the portfolio seasons, it will likely remain below this level for the first half of 2017, reflecting strong credit quality and continued loan delinquency rates
On Slide 10, we showed a year-over-year EBIT walk for consumer for the second half of the year
As we noted last quarter, the first half of 2016 was affected by several factors including the comparison to much stronger prior year periods in Wealth Management
The early stage of our organic cards investments, the expenses we were absorbing on Costco before we had the full benefit of the revenues on that portfolio, and the impact of significant repositioning charges in the first quarter of the year
As we moved into the third quarter you could see momentum building again in our consumer business and this continued through year-end
In total, we generated 6% underlying revenue growth with a 5% increase in expenses in the second half of 2016, driving growth in our operating margin of over $450 million year-over-year
Of course, credit costs also increased, reflecting volume growth and the absence of prior period reserve releases
But overall we feel good about the trajectory of our consumer business based on our performance in the second half of the year
Turning now to the institutional clients group on Slide 11. Net income of $2.5 billion in the fourth quarter grew substantially from last year on higher revenues, lower operating expenses, and lower cost of credit
Revenues of $8.3 billion grew 11% from last year reflecting solid progress across the franchise
Total banking revenues of $4.4 billion grew 3% from last year
Treasury and Trade Solutions revenues of $2.1 billion grew 6% in constant dollars driven by continued momentum with new and existing clients
We saw strong fee growth, higher volumes, and improved spreads in certain geographies, resulting in the 12th consecutive quarter of revenue and margin growth in TTS
Investment Banking revenues of $1.1 billion were flat to last year and higher debt underwriting revenues offset declines in equity underwriting and M&A
Private Bank revenues of $731 million were up 6% year-over-year, mostly driven by loan growth and improved spreads and corporate lending revenues of $462 million grew 7%, mostly reflecting the impact of loan sale activity in the prior year period
Total markets and security services revenues of $4.1 billion, grew 24% from last year
Fixed income revenues of $3 billion were up 36% with both rates and currencies and spread products contributing to revenue growth
Rates and currencies grew roughly 30% year-over-year, reflecting strong client activity and a more favorable environment continuing on the positive momentum that begin to build in the second quarter and spread product revenues grew nearly 40% this quarter also reflecting strong client engagement
Turning to equities, revenues grew 15% year-over-year driven by an improvement in derivatives along with improved trading activity overall, particularly post the U.S
Finally, in security services, revenues grew 3% year-over-year as increased client activity, higher deposit volumes, and improved spreads more than offset the impact of divestitures
Total operating expenses of $4.6 billion, were down 5% year-over-year driven by efficiency savings, lower repositioning costs, and a benefit from FX translation
For full-year 2016 excluding the impact of severance our comp ratio was 26% and cost of credit was substantially lower year-over-year reflecting stabilization in commodities as oil prices continue to recover from record lows
On a full-year basis our institutional business earned nearly $10 billion with solid progress in our network-driven businesses
TTS grew 8% for the full-year in constant dollars
Security services grew 6% on the same basis excluding the impact of business divestitures, and rates and currencies grew 22% in 2016 accelerating from the 5% growth we generated in 2015. We maintained our expense discipline absorbing higher volumes without significant incremental cost
And we managed effectively through the volatility in oil prices and other factors this year, resulting in favorable credit performance consistent with our high quality target client segments
On Slide 12, we show the year-over-year EBIT walk for ICG demonstrating the strong momentum we have generated since the difficult start of the year
We saw broad-based growth this year across our accrual and transaction services businesses
And in market-sensitive franchises our strength in fixed income more than offset the lower market activity in both investment banking and equities
The most significant year-over-year drag comes from other revenue items, including the impact of the Venezuela write-downs in the first quarter as well as the mark-to-market losses on loan hedges driven by spread movements
Slide 13 shows the results for Corporate/Other
Revenue decreased year-over-year due to the absence of both the contribution from our equity stake in China Guangfa Bank, which we sold last quarter as well as gains on asset sales in the prior year
And expenses decreased, mostly reflecting lower repositioning cost, partially offset by higher regulatory spend
On Slide 14 we show Citigroup's net interest revenue and margin trends
With net interest revenue continuing to grow year-over-year in Citicorp while Citi Holdings declined with the reduction in assets
Citicorp net interest revenues grew 4% in the fourth quarter and 5% for the full-year in constant dollars, driven by loan growth as well as the net impact of higher short-term rates
Looking forward, we believe Citicorp net interest revenue will continue to grow in 2017 with a roughly $500 million impact from the December 2016 rate hike and a $900 million benefit from loan growth and mix including the impact of our card investments maturing in the second half of 2017. However this upside should be partially offset by an increase in funding costs of roughly $100 million as we absorb the full-year impact of our TLAC related benchmark debt issuance as well as a roughly $100 million impact from lower day count
Turning to Citi Holdings
We would expect the net interest revenue of $2 billion in 2016 to decline again by roughly half in 2017. But this decline should be neutral to earnings as we continue to expect this portfolio to operate at around breakeven
Of course, we could see some fluctuations from FX translation but these are the underlying trends we expect, going into 2017. Turning to NIM, our net interest margin of 279 basis points in the fourth quarter declined by roughly 7 basis points sequentially, driven mostly by lower trading NIM, higher funding costs, and the higher mix of promotional rate balances in cards
And looking to next year, we expect the net interest margin to remain roughly flat to the full-year of 286 basis points as improvement in the core franchise offsets the continued decline in the Legacy Holdings portfolio
On Slide 15 we show our key capital metrics
During the quarter our CET1 capital ratio declined slightly to 12.5% driven by OCI movements and $4.7 billion of capital return during the quarter, partially offset by earnings and a decline in risk-weighted assets
Our supplementary leverage ratio was 7.2% and our tangible book value per share grew by 7% year-over-year to $64.57 per share despite the OCI pressure this quarter, in part driven by a 6% reduction in our shares outstanding
To conclude, I'd like to spend some time on our outlook
As a reminder, we are holding Citi Holdings into Corp/Other starting this quarter
So I'll reference total Citigroup results going forward
Starting with our assumptions around the environment
We ended 2016 with a far more favorable backdrop than we started the year, in terms of client engagement, capital markets activity, and commodity prices and we expect the environment to remain broadly favorable going forward
But our base case does not assume any additional rate hikes in 2017. At a high level, we expect to deliver modest revenue growth and an improved efficiency ratio for total Citigroup, even as we continue to invest in the franchise and wind down the non-core assets that will now be reported in Corp/Other
In consumer, we expect continued revenue growth and positive operating leverage on a full-year basis in constant dollars in both Asia and Mexico even as we execute on our investment plans for each region
And in North America, we expect the revenue growth as well
In the first half of 2017 this growth should mostly reflect the impact of the Costco portfolio acquisition
In the second half we expect growth to be driven organically as our branded cards investments mature and more loans begin to accrue at full rate
However mortgage revenues will likely continue to be a drag on year-over-year results in a higher rate environment
In our institutional business, we expect continued growth in our accrual and transaction services businesses
We feel good about the strength of our franchises in fixed income and Investment Banking where clients remain engaged and our results will reflect overall market environment
And we remain focused on improved execution and wallet share gains in equities where we continue to see a significant revenue opportunity over time
We believe we can drive an improvement in the efficiency ratio from 59% for total Citigroup in 2016 to roughly 58% in 2017 as we continue to automate processes and enhance our digital capabilities
Our original target of achieving an efficiency ratio in the mid-50 range for Citicorp remains in place now for total Citigroup and we believe we could operate within that range as early as 2018. Citigroup cost of credit should be somewhat higher in 2017 driven by loan growth and seasoning and our tax rate should be in the range of around 31%
We also expect continued significant EPS benefits from our share buybacks during the year
As <UNK> described earlier, we believe we're on the right path to improve our return on tangible common equity excluding the capital supporting disallowed DTA from 9% in 2016 to at least 10% in 2018 and we should demonstrate progress towards that goal this year as we continue to drive efficiencies across the franchise and begin to see the full benefit of our cards investments in the second half of the year
We continue to believe that we are capable of producing a return on tangible common equity of roughly 14% over time as we previously disclosed
And an important milestone on that path will be achieving at least a 10% ROTCE on the full amount of our tangible common equity, which we believe we could achieve as early as 2019 depending on the rate environment as well as the outcome of tax reform
With that <UNK> and I will be happy to take any questions
Question-and-Answer Session
So let me just update only because numbers have changed a little bit since when I spoke at that conference back in November, I think it was
But at that point, what I would say right now is again just to reiterate we end the year with about $47 billion of deferred tax assets
And within that there's about $40 billion that are really U.S
federal DTAs, within that $40 billion there is about $3 billion of NOLs which you got 20-year life and there's $14 billion now of foreign tax credits that again you generally have a 10-year life
So that leaves $23 billion that really comes about as a result of timing differences and therefore have no specific time use or limitation
So those are the ---+ that's just the, I want to give you the context on some of the updated numbers
Everything you said when I spoke at that conference again, I went through a whole series of things including how you might calculate rate impact saying that the largest impact would be on timing differences and just to again update some of the things that I talked about if we now dropped to a 25% tax rate with the territorial system, we end up with still no reduction to our territory ---+ to our I'm sorry we end over combined with a territory system the P&L hit would be about $12 billion, which I think is consistent with what I quoted back in November
And that $12 billion would probably have about $3 billion reduction would amount to a $3 billion reduction in our regulatory capital and the change from the $4 billion that I talked about back in November just reflects subsequent changes due to allowable, disallowable DTA mostly coming out of the OCI
So again as I said those are all very, very raw estimates
Within that again, our belief is that we continue to expect FTC carryforwards to continue to exist post-tax reform
And under the law, FTC carryforwards can be used because there is a provision in the law that allows 50% of domestic income to be treated as foreign income
So that's in the law and we don't think, so again with the 25% tax rate and a territorial system, we don't see any hit to our ability to use FTCs
Well, I think that absent tax reform that we will probably get to that 10% number late in 2019 with tax reform it would be for the full-year
So there is ---+ there is some element in tax reform that's baked into getting into that 10% number in 2019 but it's relatively small
In 2018 we've assumed one additional rate increase around the middle of the year
So I'd just to be totally transparent
There is a very, very small impact of higher rates that we've got baked into 2018 but it's a half-year of a 25 basis point increase so it doesn't really drive a lot
Yes, we've long talked about being a shrinking pie
So I think that that's fairly consistent
I think it probably shrunk a little bit more than any of us thought it would during the latter part of 2015 and perhaps the early part of 2016. But again, we don't anticipate fixed to be a pool of revenues that is going to exhibit tremendous growth rates
I do think that there is potential , if you just take a look at fixed in the last say half of 2016 the pool probably grew in the second half of 2016 and shrunk a bit more in the first half of 2016. So again, I mean we are not looking at fixed some expanding pool of revenues
We do continue to believe that fixed is largely a scale gain and we think that our franchise is benefiting from our approach
We continue to consolidate share
Yes, when you look at the results for the full-year, we probably ended up at I think it's 238 basis points of Citicorp revenue legal and repositioning were about 238 basis points of revenue for Citicorp
Now that's little higher than where we had for 2015 and higher than the 200 basis points or so that we had guided to for full-year 2016 and most of that above guidance impact occurred in the first quarter, as a result of the rather large repositioning charge that we took early in the year
If you look at Citigroup and let's say, Citigroup is what we're all going to be looking at going forward, legal and repositioning for 2016 was 264 basis points about flat, I think would be with whatever we had in 2015 it was 265, 270. Going forward what we fully expect is that legal and repositioning will be a diminishing part of our story
So I would say that those charges should run about 200 basis points of Citigroup revenues in 2017 and then decline further in 2018. Yes, I looking to <UNK>, I'd say just as you know we're going stop reporting Holdings as a separate management entity in 2017. My hope is that we can stop reporting legal and repositioning as a separate component of expense in 2018.
Yes
Well, as I think we've talked a little bit about
I mean, Asia is still an incredible story when it comes to credit
So, Asia we still see our overall cost of credit in Asia bumping at most up to 1% in 100 basis points in the near-term
You take a look at where we're running right now that's well, well below that
We've given you our target for what we think Latin America will settle out at which is about 4.5 again that's higher than where we are right now
We think that's where will settle 450 basis points given portfolio seasoning
And then we gave you 2017 guidance for the two largest segments in North America branded cards and retail
Credit costs in our forward look inch up a bit from the 2018 as portfolio season and we have to think that the environment becomes a little weak, but again we’re not looking, we don't anticipate a significant growth in that credit by 2018, 2019 may be branded cards ticks up somewhat above 300 basis points but it's still well within I think what you would expect a good branded performance to be
And it's reflected again of the quality of the book that that we're building up
That's correct <UNK> in Citicorp
One of the reasons no, no, <UNK>, that's one of the reasons why I mentioned if you look on that schedule that's in the deck
We generated $2 billion of net interest income from holdings in 2016 and we fully expect that amount to decline by half so we expect that amount to go down by $1 billion in 2017 because we sold off a bunch of portfolios and we have plans to continue to sell portfolios in holdings
But again, we are not expecting holdings to generate net income in 2017 because at the same time, we've told you that our expectations going forward is that holdings overall should operate at about breakeven
So whatever ---+ so as you look at the net interest income that we've generated this year, you kind of look at holdings as being a series of empty calories, it's there but it's not really doing anybody, any good because it's one going to go away and two it's going to get absorbed in the overall holdings breakeven
Yes and again and I think if you're trying to gauge growth, where we are getting momentum and I know that we are not going to be reporting Citi Holdings any longer but again that momentum is going to come from Citicorp and we've had good consistent net income ---+ net interest income growth in Citicorp in 2016 and we will have it again in 2017. And we'll have it again in 2018 and it will be even higher, if we get more rate increases
Yes in the quarter, <UNK>, the DTA that we utilized through operations of about $600 million, we utilized $600 million through operations but as you mentioned the OCI impact cost us about $1.08 billion
So we actually grew DTA by $1.2 billion in the fourth quarter
If you take a look at DTA for the full-year, full-year we utilized on a net basis including the OCI impact about $1.2 billion
But I think it's important that that we parse that out a little bit for you because of this two different components of our DTA that the series of our DTA that is time-sensitive
The NOLs, the FTCs etcetera, we utilized during the year about $2.4 billion of our time-sensitive DTA
So we utilized $2.4 billion of our time-sensitive DTA
And then it was timing difference DTA mostly as a result of the OCI movements that caused us to grow timing difference DTA by about $1.2 billion
But we continue to utilize that that time-sensitive portion of the DTA at a fairly regular pace
I'd say looking ahead to next year, we have targeted the use of about $2 billion of DTA this year and I would say that's a pretty good target to have for next year as well
So let's ---+ there is a lot in there, so let's go little bit back in time and talked about three, four years ago what we laid out, we laid out three big external goals in ROA between 90 and 110 basis points
We talked about an efficiency ratio in the mid-50s
And we talked about a return on tangible common equity of 10%
So let's pick those off, as you have cited last year, we came in 94, 95 basis points in terms of the ROA this year 82, what I would say this is not an excuse and the 90 to 110 remains the numbers and the outlook for 2017. But since the ROA target was introduced factor in TLAC, factor in LCR where our liquidity measures have come up and our funding, our funding base has changed mix precipitously and when you factor those in, it gets you pretty darn close to the 90 for the year in terms of the impact of those and some other things
So not an excuse by the way we are not backing away from it, we would love to be at the 90. The second piece I would say about ROA and why today we probably speak less about ROA than we have in the past is because I think our balance sheet is pretty darn efficient that back then we said, we got a lot of balance sheet tied up in Holdings, we've got an inefficient balance sheet in Citicorp and really what we want is rather than growing our balance sheet to optimize the balance sheet we have
And since we made that announcement like the balance sheet hasn't moved and on a net deployed basis in the client activities, it's actually gone down because of the higher percentage that's deployed in terms of liquidity and the things that are necessary there
The second piece of that is when we think about the way we run the firm and the leverage in the dials and the things that we want to optimize, ROA has become less relevant because clearly today our binding constraint is around CCAR Capital and so a great example
If we were simply focused on ROA, I would cut the balance sheet right now to rates and currencies and say, you can have what you have dedicated to that client flow business
Clearly, revenues up 27% over two years that would have been the wrong decision and that's what a strict ROA methodology would have led us to do so not backing away from the 90 which we were there, the things in there, you can choose to accept them or not
And again I think we are doing a pretty darn good job in terms of managing the balance sheet
In terms of the efficiency ratio, we did put out some revised guidance after what I think the industry would describe as an extremely difficult first quarter, we could have sat there and said you know what it is what it is but again what we want to do is we want to have real guideposts along the way by which to run the firm and to give external guidance
And again, when you compare our 58% versus the rest of the industry, I'm not ashamed of it, we're going to do better of it but I don't look at that and say that we are underperforming given our business mix and the investments that we're making
And again, we recommitted to be able to get to the mid-50s
And the third point in terms of ROTCE, we had and again I've publicly taken accountability around what happened in terms of CCAR and that was what it was
But what we've tried to do is come back from that and again quite proud of our $12.2 billion of CCAR cycle capital and by the way, the expectation is to continue to take that up as quickly as we can and to pull every lever between revenues, expenses, and capital return to get that up as quickly as we have
We made a commitment to use DTA, I remember four, five years ago, some people writing that not only would we never use it, we never stop creating it, and we have and so listen it's progress, it's not as fast as we'd like to go, the environment is not as good as we'd like to have it, it's not an excuse but I think in terms of the things that we've laid out there, we have executed against each of them in this environment, in a disciplined and committed way and that's what we're going to continue to do
In the shorter-term, <UNK> that's why we gave you the 2017 efficiency ratio of 58%
I think that's a pretty clear efficiency ratio to measure us by next year
And I think <UNK> was pretty clear on 2018, which is in ROTCE again excluding the DTA capital but it's progress of 10% and during 2017, the expectation is that you're going to see meaningful progress towards that goal
Not going to give you an exact number at this point in time but you can expect that we have to demonstrate progress towards that goal otherwise that 10% goal in 2018 will be credible by the time we get to the end of 17.
That's still is what we think that the franchise is capable of producing and that is ---+ that is where we are going to get to
If you go to Slide 20 in the deck, you take a look at Slide 20 that kind of summarizes where we are today
We've said that we believe that the entire franchise is capable of generating an 14% ---+ an ROTCE of 14% or higher
We are at 7.6%
Okay
So that means that there is a gap of 640 basis points that we need to bridge, now there is going to be many actions that are going to contribute to closing that gap but you can, you can probably say that they fit into three broad buckets
Structural, business performance, and call it environmental rates, I think the structural elements are all the items that we've discussed
We need to reduce to $29 billion of capital that we currently have supporting the DTA on which we earn nothing
We need to complete the wind down of holdings and free up the remaining capital that we have caught up in the credit and market risk RWA that's in that segment
And finally, we're currently operating at a CVT1 capital ratio of 12.5%
Going forward, again, as we've demonstrated our ability to do this, we should be able to operate more in line with a ratio of 11.5% maybe even slightly lower, yes
We would expect these improvements and that's going to close roughly 40% of the gap let's say call that out of the 640 roughly 250 basis points
Now we've got plans in place for each of them, we are going to continue to utilize the DTA
We continue to wind down holdings and as <UNK> said, we're going to be increasing the amount of capital that we return each year to our shareholders
So that will be returning an amount of capital that is at least equal to the amount of capital that we generate each year
That's all in our plans; we would expect business performance to cover another 40% of the gap
Another 250 basis points without any benefit any, any benefit from the rising interest rates other than to say that 25 basis points that I talked about in 2018. So our Citigroup goal of 14% requires ICG to operate at an ROTCE of 14% and GCB of 20% and for Citigroup to operate in an efficiency ratio in the mid-50s
We've already talked about how we're going to get to that mid-50s, ICG generated 12.3% ROTCE in 2016, you see it right there on that page
And we would expect the investments that we made in our equities business along with the continued growth in investment banking and PTS to help us close this gap
With GCB the gap between consumers, the gap between our target of 20% and the 14% that we generated in 2016 is much larger
But again, we believe that the investments that we've made and are continuing to make our branded cards franchise as <UNK> mentioned in Mexico and in Asia that's going to help us significantly close this gap and we expect to show you continuous improvement in GCB's ROTCE each year from this point forward
And then the final 20% that's likely to come from race, when I think yes, I think it might be you and I that had this exact conversation a couple of quarters ago on this call when I spoke about the 14% target then I mentioned the rate environment through the fed funds rate that was 200 basis points higher than where we were at that point so we've seen the first 25 basis points we got that in December
There is talk of perhaps another three interest rate ---+ rate hikes in 2017 and I recognize
This is just talk, but if that does turn out to be true then we're halfway, home to the rate environment that I have described
Now we would see that until 2018 fully baked into the numbers but it is there so, that's the rough outline of how we move from 2016's ROTCE to the 14% target
And quite frankly, with the exception of the rate environment most of it is within our control
I understand that increasing the level of capital return to shareholders, requires approval from the fed but it's up to us to make the case through our performance and you've seen the progress that we've made over the last three CCAR cycles increasing our annual capital return from about a $1 billion in the 2014 cycle, $7 billion on a four quarter basis in 2015. And now $12 billion in 2016 so, we believe we're making significant progress and we expect to continue to demonstrate progress in the next cycle
So, with that as a backdrop, and then we think that those interim goals that we shared with you earlier should serve as important milestones for you to judge our overall progress towards achieving that 14% goal
That's exactly what the goal is, is to, quite frankly, as I mentioned, we need to be able to return the capital that we generate each year, which actually is in excess of the net income that we generate
So, that's, that is the goal we have yet to see the, the CCAR scenario and everything so it's a little early to be talking about specific targets for 2017, let alone 2018 but again, you've seen the trajectory $1 billion, $7 billion, $12 billion
The goal for 2017 and I've talked longer term both <UNK> and I've said, we know that we've got to get to the range of $15 billion to $18 billion and we want to get into that range as quickly as we can
I don't think that it's something that's just only with a new administration
I mean, it's something that we will need to get to over time
I think quite frankly with the discussions that we've had with the existing, make up in the fed I've yet to hear anybody put an artificial cap on a quote payout ratio and the way that ---+
I just want to be clear <UNK>; I was referring to the net interest revenue in Citi Holdings just one component of the revenues
But and so again if you just go back to that Slide 14, you can see that the net interest revenue in Citi Holdings declined from $4.4 billion in 2015 to $2 billion in 2016 as I mentioned, it could drop, it should drop by about half again in 2017. When I take a look at 2018, it will decline
It shouldn't decline again by half but by a decent amount somewhere between 30%, 40% in 2018 and then it could stabilize after that
But quite frankly this is a fairly low number
So it would be less of a drag on the overall results
Not a problem
When you get to, we were at I think 57.1% last year in Citicorp and we certainly could not say that that was in the band of mid-50s
I think you as you get to the upper band of 50, the high-56s you start to stretch the band of mid-50s but so 57% would be probably just like it ticked too far but if we got to 56.8%, 56.7% maybe even 56.9% if you want to split hairs in 2018 I think that would be pretty good progress and put us in that band of mid-50s
Not a problem
