Hello, and welcome to Citi’s third quarter 2013 earnings review with Chief Executive Officer Mike Corbat and Chief Financial Officer John Gerspach. Today’s call will be hosted by Susan Kendall, head of Citi Investor Relations. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question-and-answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Ms. Kendall, you may begin.

Thank you, operator. Good morning, and thank you all for joining us. On our call today, our CEO, Mike Corbat, will speak first. Then John Gerspach, our CFO, will take you through the earnings presentation, which is available for download on our website, citigroup.com. Afterwards, we’ll be happy to take questions. Before we get started, I would like to remind you that today’s presentation may contain forward-looking statements, which are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results in capital and other financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our SEC filings, including, without limitation, the Risk Factors section of our 2012 Form 10-K. With that said, let me turn it over to Mike.

Thank you, Susan. Good morning everyone. Earlier today, we reported earnings of $3.2 billion for the third quarter. Excluding CVA and DVA and a tax benefit, net income was $3.3 billion, or $1.02 per share. Our results reflect a challenging operating environment, including the slowdown in client activity based on uncertainty regarding Fed tapering, concerns about the effect of a U.S. government shutdown, and forecasts for slowing economic growth, particularly in the emerging markets. Although I think we performed relatively well in this challenging, uneven environment, we cannot, and are not, satisfied with these results, and will be focusing on areas where we need to continue to improve. Turning to our individual businesses, the macro-environment had the biggest impact in our markets businesses, and in particular fixed income, where the typical slowdown in third quarter activity levels was exacerbated. We also pared back some of our risks in emerging markets that impacted trading opportunities, but it was the right thing to do for the firm. We have more work to do in equities, where our derivatives performance was not where we want it to be, but year to date we continue to make progress. As for investment banking, although there was some transactions we would have liked to participate in, we increased our share of wallet so far this year. Our transaction services businesses are still being affected by spread compression, but we continue to work hard to offset that through volume growth and increased market share. In trade loans, one of the several areas where we leverage our unique global network to a competitive advantage, new originations grew 23% year-to-year. In consumer banking, as expected, we face significant revenue pressure, as U.S. mortgage originations were sharply reduced, and we continue to adjust to regulatory changes in other markets, such…

Thank you, Mike, and good morning everyone. To start, I’d like to highlight some significant items affecting our results this quarter. First, CVA and DVA were negative $336 million pretax and $208 million after tax in the third quarter, for a negative impact on EPS of $0.07. We also recorded a tax benefit of $176 million related to the resolution of certain tax audit items, which had a positive impact on EPS of $0.06 per share. For comparison purposes, in the third quarter of 2012, CVA and DVA were negative $776 million pretax, or $485 million after tax, for a negative impact of $0.16 per share. We also had a tax benefit last year of $582 million, or $0.19 per share. In addition, in the third quarter of 2012, we recorded a pretax loss of $4.7 billion related to to Morgan Stanley Smith Barney joint venture, which had a negative impact on EPS of $0.94 per share in that quarter. Adjusting for these items, we earned $3.3 billion in the third quarter of 2013, or $1.02 per share, as compared to $1.06 per share on an adjusted basis in the third quarter of 2012. Throughout today’s earnings presentation, I will be discussing our results, excluding CVA/DVA, the tax benefits, and gains or losses on the sale of minority investments, to provide comparability to prior periods. On slide four, we show total Citigroup results for the quarter. We earned $3.3 billion in the third quarter, roughly flat to last year, as lower operating expenses and lower credit costs were offset by a decline in revenues and a higher tax rate. Earnings per share declined 4%, including the impact of higher preferred dividends in the recent quarter. Citigroup end of period loans were flat year over year at $658 billion, as growth…

[Operator instructions.] And your first question comes from the line of John McDonald with Sanford Bernstein.

I was wondering how you’re feeling about some of the 2015 financial targets. If we look at the ROA target of 90 to 110 basis points in 2015, we look at this quarter at [59] basis points year to date, around 80, what do you see as the key driver to getting toward the 2015 goal?

As we’ve talked about, reducing the losses in Citi Holdings is certainly one of the key goals that we see driving us toward the goal of generating ROA of between 90 and 110 basis points in 2015. And we’d also look for some modest amount of net income improvement coming out of Citicorp as well.

On the Citicorp side, I guess the efficiency goal is part of those 2015 targets around mid-50s, I'd just call it 55. You had 61 this quarter on the efficiency ratio, and 57 year to date. So I guess that implies some additional savings to be realized or revenue growth? Can you talk about getting to those efficiency goals?

Yeah, as we said when Mike laid out those efficiency goals back in March, the environment that we anticipated was low single digit growth in revenues, and I think that’s pretty much the environment that we’ve seen, and certainly might expect to see in the near term. So we do anticipate most of the contribution towards those efficiency targets to come out of the expense line. And, I think as you’ve seen, we’ve been delivering on the repositioning savings that we talked about after that fourth quarter reserve that we took last year, and we continue to try to find additional efficiency savings throughout the businesses.

And just on that, you mentioned the incremental efficiency saves this quarter. Can you just remind us, if you tally up what you were shooting for with last year’s, I think it was 900 this year, where are you on that cumulatively?

As we said at the end of the second quarter, I walked everybody through where we were, and we said our estimate that was that you’d see $300 million of the savings in the run rate in the fourth quarter. The $300 million, therefore, representing exactly what we had said we would get, which is a total annual save of $1.2 billion. And we had about $200 million of additional run rate savings to generate from the end of the second quarter. And as I mentioned, we generated about half of that, say $100 million, in the third quarter. So we’ve got about $100 million more to bake into our fourth quarter results.

So we should look for that to kind of come off the 10.8 adjusted expense number, assuming a similar revenue environment?

If volumes and the environment stays the same, you’ll see the repositioning savings come through maybe partially offset by some incremental seasonal marketing expenses. So I don’t want you to just take the 10.843 and take an even $100 off and get 10.743. The roundings could end up leaving us rounding at 10.8. But you should see the expenses come down, again, assuming the environment stays where it is.

Understood. But thinking about next year, as we go from 2014 to 2015, it seems that if revenues aren’t going to get better, you would need to do more than 10.7, 10.8, or beyond the re-positioning saves you’ve announced for this year to get that efficiency ratio towards the 2015 target. So it seems reasonable to expect more saves, whether you announce them or not, in 2014?

Well, as I said, we’re going to be committed to delivering the efficiency targets as we laid out for 2015. And as you noted, year to date we’ve already got an efficiency ratio of 57% in Citicorp. So I think that we’ve already made a fair bit of progress this year in going from where we ended up in 2012. So I think we’ll continue to make progress toward the 2015 goal in 2014.

Your next question comes from the line of Glenn Schorr with ISI.

A two-parter, quickly, on reserves. One, I just want to make sure the reserve build that you spoke about, especially on the international side, is a function of growth and not some concerns on credit?

The two particular areas of “credit concerns” that we had in the quarter were the home builder loans that I mentioned and the impact of those two hurricanes that hit Mexico during the month of September. So when you think about the $170 million reserve build that I mentioned for Latin America, three quarters, maybe a little bit more of that build, were really associated with those two items. And the rest is portfolio growth.

And then you also said inside holdings, I think, this quarter, you had the 725. You broke down the portion related to losses, and the portion related to just overage, and led us to not more than just losses in the fourth quarter. Just curious, you follow that up with 40 months of coverage. What’s holding back a little bit more? Because the trends on credit seem great.

Yeah, the trends on credit are great, and like anything else, we’d like to see where the environment is going into the fourth quarter. There still is a bit of an unsettled environment out there as you may know, and you may see yourself. But in general, when you look at 40 months of coverage - and I’m not saying we’re always going to stay at 40 months of coverage - it won’t be unusual, or shouldn’t be unusual, for us to have a fairly high month’s coverage ratio on NCLs when you think about the fact that TDR - troubled debt restructurings - represent just under 20% or so of our first mortgage portfolio on holdings. And as you think about it, the LLR that you need to hold for a TDR is, for all intents and purposes, a discounted value of a life of loan reserve. So, as such, I just think you should expect that our LLR is going to continue to represent fairly significant months of NCL coverage for some time.

The mortgage revenue runoff will happen quickly, as we’ve seen, and typically there’s an expense lag of a quarter or two. Is there anything material you can point to that over the next couple of quarters, as you adjust on that lag, that even in a no-change world, you’ll get some efficiencies just from running through the normal process?

You’re referring in this instance to the mortgage business in corp, not the holdings run?

Correct.

So what we’ve spoke to is we’ve clearly, as a company, clearly as an industry, seen the slowdown coming out of the changes [stance] in May for the Fed. And we started very quickly in anticipating that to take actions in the second quarter. We’ve taken more actions in the third quarter. You’ve probably read in the press some of those actions we’ve taken. Unfortunately, there’s a lag to that, because in the area of fulfillment, we’ve got commitments that we need to process and get through the pipes. But we’re focused on it, and clearly making sure that our mortgage business fits what we see as the future capacity, future necessity and demand of that sector.

Last one is, just in [FIC], I understand the choppiness, and you referred to it a couple of times, on the macro stuff, that delayed the quarter or impacted the quarter. Just curious if it was particularly acute within emerging market FX or within credit, just so we can adjust for ourselves. Because we’re well below something like a 12-quarter average number.

And when you think about the impact on the [FIC] revenues, it certainly had the largest product that was impacted quarter on quarter and year over year, was certainly our rates and currencies business. And you wouldn’t be wrong in thinking about the fact that there was a fair degree of that impact that was concentrated in the emerging markets. And that’s really due to the fact that in the third quarter, even towards the end of June, we saw a high amount of volatility in certain emerging markets. And in some cases we saw spreads widening between 50 and 250 basis points. So as a result, we pared back our risk in many of those markets, while still providing liquidity to our customers during this period of turmoil. So I’d say that the combination of the high volatility and our intentionally running a lower risk in many of the markets made for a more difficult environment for us to capture trading opportunities.

And your next question comes from Gerard Cassidy with RBC.

On the $300 million of Mexican loans that you identified, what types of loans to builders? Are they more land loans, or are they working capital loans? What type of loans are they?

They’re development loans. They’re, you know, building loans as far as people are building. They have the land, and they’re looking for construction type of loans.

And in terms of your transaction business, you talked about the challenges that you’re having with the spreads, and it’s been like this for some time, because of the low rate environment. Can you share with us what kind of interest rate environment would be ideal for that business to start seeing wider spreads?

Rising rates, but particularly rising rates in the current to five-year area. So far, to the extent we’ve had any sort of rising rate environment, it’s been more out towards the 10-year and higher. And we really need the shorter tenures to begin to rise to really benefit that business.

Would you benefit more for the rates here in the U.S. or in the E.U., or is it 50-50? Which rates may work better, once they start rising?

U.S. rates would definitely have a faster and certainly more impactful hit on us.

You, like your peers, I presume, have made comments to the Federal Reserve about the SLR that they’ve proposed. What’s you folks’ view on the possibility of them easing up, or giving you guys some relief in the way they’re defining the assets that you’re going to use, and the denominator for that equation, such as cash at central banks? Do you think they might pull that out of the equation? Or are they really focused on just keeping it the way it is?

That’s a little difficult to answer. The comment period only ended a brief time ago, and so there’s a lot to see how the Fed and others take a look at the various comment letters that were submitted. And I’d say that, as I normally do, we continue to have constructive dialogues with our regulators, and so we’ll have to see how they react.

Coming back to Citi Holdings and talking about the loan loss reserve releasing, if we were to see housing prices appreciate in 2014 in the mid to high single-digits, down from where we’ve seen low double-digits, would that give you more confidence to release more reserves?

I don’t want you to think that the amount of loan loss reserves that we think we need to hold is solely linked to home price movements. It’s that, it’s also a bit of the overall economy. So there’s a lot. There’s what’s going on with delinquencies. And, as I mentioned to one of the prior callers, it also has to do with the amount of TDRs that we have in the portfolio, where you’re really then dealing with, like I said, almost a discounted life of loan reserve. And that’s not necessarily going to get influenced tremendously by movements in HPI.

And then finally, John, on slide 31 you guys give us good detail on the consumer credit delinquency trends, and obviously they’re going in the proper direction for the total portfolio. Are there any of those subsectors, whether it’s Mexico or Korea, that concern you the most, or what we should kind of keep an eye on? Because the total numbers are good, but some of the subsectors are going the opposite direction.

I’d say that the ones that you would think about are the ones that we’re focused on as well, which is, as I mentioned, Mexico. Not that we’ve got a tremendous worry in Mexico, but we called out a couple of things with the home builders. And we’ll have to assess the impact of the recent storms. Mexico is also going through a period where they’re still absorbing the change in administration and a lot of the reform work that is going on with the new administration, so we think that long term that’s beneficial, but it’s certainly had a slowdown in growth in the near term in Mexico. But Mexico, Korea, those are certainly the countries where we’ve got the two largest portfolios, and so those are certainly two good ones to watch.

Your next question comes from the line of Jim Mitchell with Buckingham Research.

Just a quick question. You’re down to 6% of assets out of Citi Holdings, but the RWAs are still at 20%. Is that all a function of the mortgage side? Or are there some idiosyncratic or large RWA assets in, say, SAP that we could see some more progress on the RWAs on the Basel III side?

, :

Should we expect any pop from the sale of some of the hedge fund and private equity assets that looks like will close in the fourth quarter?

Not really.

And maybe another question on the SLR. It seems like there’s been more effort to use compression trades and it’s unclear on the benefits of OTC clearing, but I would assume that would also be positive on notional value. Have you got any sense whether you think that’s a big item, a small item? And obviously you can’t give any numbers, but do you think that could have some positive impact on SLR going forward?

I clearly think it could have a positive impact on the SLR going forward. I think the magnitude of the impact is something that we’ll have to see over time, just to see just how much of that we can actually accomplish.

And last question, just on CCAR. You guys, obviously with one of the strongest Basel III ratios, the new stress test will partially use Basel III, and your SLR is above 5% already, do you guys feel a lot better, still cautious? How do we think about your approach to CCAR at the end of this year?

Well, I think versus a year ago, I’d say we certainly feel better, and we feel better by a few things. We laid out that we wanted to get the right result in terms of last year’s submission. I think we got that, and I think, importantly, it just wasn’t the quantitative piece, it was the qualitative piece. And since then, I think we’ve shown the ability to generate capital in a meaningful way when we kind of get the right things working. The combination of corporate earnings, reducing the drag in holdings, the utilization, the DTA, and I think we’ve started to build a track record of that. But I think we’ve got more work to do. We continue to be in a challenging operating environment, and as John and I have described, I don’t think that’s going to change. And at this point, we really don’t know the scenarios and what they’re going to be, so we’ll take those on board, we’ll see how the fourth quarter shapes up, and then we’ll start to make some decisions in terms of what our submission might look like.

Your next question comes from Guy Moszkowski with Autonomous Research.

First question is on one of the items that you think broadly you can control, which is your expense structure. Obviously securities and banking saw a pretty significant decline in revenue and we know that expenses can be sticky, but it seemed as if they were very sticky when you look at the efficiency ratio there, even ex the DVA issues. And I was wondering is there some high level of litigation reserve build maybe that’s encompassed within the expenses there this quarter?

There’s a minor amount of litigation expenses, but I don’t think it’s anything that would be driving the expense [due] in securities and banking. Otherwise we would have called it out for you.

I think you might have mentioned in a [unintelligible] or earlier today that you saw private label securities as still an open issue, and I wasn’t sure what you exactly meant to say with that. But maybe you can give us a sense for whether we should be expecting more litigation reserve build as a result of that?

I think the question was more in terms of what issues remain open from a litigation point of view relating to mortgages. And it was more on dealing with holdings and the litigation expenses that we had in holdings, and the fact that with the agreements now that we had reached with Fannie and Freddie, we had pretty much put the repurchase risk with those two - the GSEs - behind us. And my comment was that the largest remaining area of mortgage litigation that I think the industry still faced had to do with private label securitizations.

And if you were building reserves for the private label litigations that did affect you for underwriting and originations that you had done prior to 2009, would that reserve build be in holdings?

Yes, it would.

And the final question, since we’re talking about holdings expense levels, is as you called out, ex all that stuff, your expense levels in holdings were down about 16% year over year, which is obviously the trend that we all want to see. But I was wondering if you could give us a little bit more guidance over the next one to two years how should we see the expense that’s in place for managing all those Citi Holdings assets come down as the assets do.

It’s tough to predict what asset sales will look like. Clearly we’ve been in a transitioning rate environment, and John had talked about our desire to sell reperforming mortgages and also not only shed the asset but take the expense out. So I think in this environment it’s tough to know and have a crystal ball looking forward in terms of what sales will look like, and therefore I think it’s difficult to judge what expense reductions will look like. But as we’ve been, we’re going to continue to be focused on trying to manage those expenses down. And again, as we look at asset sales, it’s not just about the asset sale, the capital release, the risk reduction, it’s also about the expense reduction. We look at those things in aggregate, and we’re going to continue to do that and take advantage of those things that are out there. But really tough to predict.

And then maybe just a follow up on that. Maybe you can give us an update on how you’re managing One Main?

One Main is a business that we put through a pretty sizable restructuring. Probably today one of a few, if not only, of scale branch base subprime consumer lending businesses. Not a business, as we’ve said, that fits long term with us. But again, I think things that have gone on from a regulatory and credit dynamic, there’s a real part of society that needs to be served. We think One Main is very well-positioned to do that. And at the point in time where somebody comes along and is willing to pay us a price that we think the business is worth, then we’ll be happy to consider that. But until that, we’re going to continue to run the business and have it best positioned for that day.

Your next question comes from the line of Chris Kotowski with Oppenheimer & Company. Chris Kotowski - Oppenheimer & Company : Just a follow up on the difference between RWAs and assets in holdings. You mentioned that a big portion of the difference is operating risk. And most of holdings looks like a mortgage company now, and I’m wondering to what extent is there still an operating mortgage company there? I thought of it mainly as just basically holdings of loans and assets as opposed to an operating company.

Well, you do have to service those assets. Chris Kotowski - Oppenheimer & Company : So it’s purely a servicing, it’s not an origination…

Correct. And you may think about the fact that certainly in the last couple of years a lot of the expense that has been incurred by people in the industry, including elevated NCL rates, including some of the additional expense dollars that people have had to put in it, have been associated with what has been determined to be operating deficiencies for these mortgages. So there is still a certain amount of op risk that we need to account for in our Basel III risk weighted asset determination. Chris Kotowski - Oppenheimer & Company : But should we expect over time that the RWAs will track down roughly in line with the asset decline? Because we didn’t see that this quarter.

Well, let’s see. On holdings, the GAAP assets came down $9 billion and the risk-weighted assets and holdings came down about 13. So it’s more or less in line. Again, it has to do with mix and everything else. I don’t think you’re going to be able to just look always and say it’s exactly in a ratio of X to X. Plus, as I mentioned, that op risk does not come down ratably based upon the sale of assets. To the extent I’m servicing a loan, I still have op risk. Chris Kotowski - Oppenheimer & Company : And then another question just on the Best Buy acquisition. Should we expect that to have roughly the same profitability of your other partner cards? Or theoretically should it be disproportionately better impact? And I would assume there’s some that you’d get efficiencies on the expense side in managing that in your existing business.

I would say that over time you should expect it to contribute to increased profitability in retail services, but in the near term it’s likely to actually be a drag on profitability growth, only because of the mechanics that are involved in calculating now the loan loss reserves that we need to put on Best Buy. You know, under purchase accounting the acquired portfolios now we bring them on our books at fair market value, which means they come on without any loan loss reserve. Therefore, as you build each new loan, as each new incremental loan comes on your books, you need to start putting up loan loss reserves for the estimated inherent losses in those loans. And there’s no benefit from old loans rolling off your books, so you don’t see any reduction in LLR because you’ve got old loans rolling off. So the first 12 months, maybe the first 15 months, of the acquisition, you’re going to see an accelerated build of LLR, just resulting from the mechanics, before everything smooths itself out.

And the tax books work the same way?

Well, the tax books, the tax return, won’t reflect. But I think what you’re interested in is the DTA aspect.

Correct. Do acquisitions help the DTA?

They do over the longer term, but I take tax benefit for the LLR just as I do with any other business. So, again, the first year or so, it will be less beneficial than you might otherwise think.

And then finally, just to ask Guy’s question a different way, in securities and banking we saw revenues go from $6.4 billion to $5.1 billion, so down $1.3 billion, but expenses only came down $100 million. And should one just not look at it on a linked-quarter basis? I mean, it just didn’t seem like they came down in line with revenues.

I actually agree with your comment. I think that quarter on quarter expense variations in that business can be a bit misleading. I personally believe that to really get a true picture of how a firm is managing its expense base, you need to look at its performance over a full year. And I think if you do the analysis, and if you look at the expenses in that business… Just take out our fourth quarter ’12 repositioning reserve, and look at those expenses on a trailing 12 month basis, for a run of quarters, what you’re going to see is that expenses, both in the ICG and securities and banking have been steadily declining since the first quarter of last year. So on a trailing 12 months basis, the efficiency ratios in both ICG and securities and banking have also been steadily improving during that same timeframe. And I think that if you take a look at that and you compare our efficiency ratios on a trailing 12 month basis over that timeframe with our peer institutions, using the ICG ratios for the universal banking peers and the security and banking ratios for our more pure play investment banking peers, I think you’re going to find that we hold up pretty well and almost every quarter our trailing 12 month expense efficiency is better than each of our peers.

Your next question comes from the line of Mike Mayo with CLSA.

I wanted to follow up on that last question, and it’s been asked several times. So if we were to accept that your trailing 12 month expense efficiency looks good, but still I think the issue is the quarter on quarter decline. You said it could be misleading in the bigger picture of things. But at the same time, what we’ve heard is macro still has headwinds, markets are still unsettled, it’s a challenging operating environment, and you only have $100 million of savings left. So I think the concern is, is this potentially an inflection point for what’s been a decent trailing 12 month record, but now we’re going into an area that’s maybe not going to get us positive operating leverage?

When we laid out our public targets in spring, we laid out an efficiency ratio which we then went on and spoke to what portion of that’s consumer versus what’s ICG. And we spoke to mid to high 50s for ICG. And so clearly those businesses have taken that on. And again, we’ve talked about tepid top line growth in terms of low single digits, and the businesses have to onboard that, and they have. And they’ve got to work to achieve that. So I don’t think there’s a mystery, or there’s any surprise to what needs to be done. And again, I think those metrics were designed without looking at overreaching revenue targets. And so, again, I think they’re in line, and we’ll continue to adjust. And I think you’ve seen, away from the significant repositioning charge in the fourth quarter, us at a run rate somewhere plus or minus $100 million or $125 million a quarter. Again, going at it in that BAU we described. And obviously some of that’s coming out of ICG, and we’d expect them to keep continue doing that in their business.

So how should I think about this? For the firm as a whole, revenues from the second to the third quarter were down $1.6 billion, and expenses were down roughly $300 million. So that’s a $1.3 billion gap linked quarter. To get the other $100 million of savings, it’s still a $1.2 billion gap. So either revenues need to improve or stabilize in certain areas, or expenses have to go down a lot. Where is the extra leverage?

Mike, I still think you’re focused on the quarter to quarter. And again, the targets that we set out were targets for a full year. And I think that when you take a look at performance, you want to judge the performance over a full year. Now, granted, if you want to take a look out of full year, that’s okay. So judge us by how we perform then, over that full year, when we get there. But the targets specifically that we set out for securities and banking back in March is we said that in 2015 we would be able to run securities and banking with an efficiency ratio of between 55% and 60%. And people at that point in time thought that that was a pretty good target to aim for. Well, in fact, if you take a look at our securities and banking business, on a trailing 12 month basis, we’re operating that business at a 57% efficiency ratio.

Yeah, I guess the test will be a year from now, as we look back. Are you as confident as you were before that you’ll have positive operating leverage looking ahead?

We’re still committed to getting to the efficiency ratios that we laid out for 2015, as well as the ROA targets that we laid out for 2015.

If I can shift gears, on Citi Holdings, what were the losses on the asset sales of $4 billion?

I don’t have that number in my head. I’m sorry.

But it was a loss?

I don’t even know. It could have been a slight net gain. I actually think it was a slight positive this quarter. That’s one of the reasons why I called out the fact that the 0.5 in that upper left quadrant of that one chart is something that I think will likely come down, just because there were some episodic gains in that 0.5.

So how should we think about pretax earnings and holdings? The last four quarters, it’s gone from negative $1.7 billion, negative $1.3 billion, negative $900 million, negative $500 million. So that’s a nice trend, but you said don’t read too much into home price appreciation. So if we were trying to model that, what would you point us to?

Well, our target is still to drive holdings to breakeven, to close to breakeven, by 2015. And I think that we’re still on a path to do that, but I don’t want you to think that that path is going to be linear. There’s likely to be some ups and downs in that. But in general, the trend is moving towards breakeven by 2015.

Since you’re getting so close to that target now, why wouldn’t you revise that projection from 2015 to, say, late 2014 even?

Well, the target that we put out was in March, so we’re seven months into achieving a target that we said we would do over, you do the math. I guess it’s somewhere around 33 months. So we still have 26 months to go to the end of 2015.

And then as it relates to emerging markets, you said revenues in Korea should stabilize early next year. With all the regulatory and other changes taking place there, what gives you that confidence?

Just the way we’re looking at the business. And again, when I throw things out like that, that’s what we think should happen. And it’s based upon how we see the runoff in existing portfolios that we think are going to come down, and based upon the environment that we see. If there’s a significant change in the environment, then, as we always do, we will update you on our new views.

Can you remind us how long you’ve been repositioning Korea? It’s been a couple of years now?

It certainly has been in excess of one year, yes.

And last question, going from what you can control to what you can’t control, as it relates to the government situation in the U.S., have you been selling Treasuries to help protect yourself?

As a matter of fact, I got that question earlier today on the media call. And yes, we no longer hold any U.S. Treasuries that have a maturity date prior to November 1. And quite frankly we have a very de minimis amount that have maturities prior to November 16.

Your next question comes from Moshe Orenbuch with Credit Suisse.

On the card business, as you’re seeing now kind of stabilization in the branded card business, and you’ve got the Best Buy assets, there was a mention of actually reduced marketing. Can you talk a little bit about your plans, both for the branded card business and whether there are other opportunities out there to grow or acquire in the private label business?

You just went back and forth, so I want to make sure I answer the exact question that you’ve put out. And I thought I heard you first ask about the branded cards business with marketing. And I think that you’ll see that we are still in the process of repositioning the branded cards business. We did delay. We didn’t have much to talk about with branded cards, quite frankly, in the third quarter. You’re likely to see some additional advertising and marketing as we move into the fourth quarter. And hopefully what I think you’ll see over the course of the fourth quarter, and then into 2014, is some new product offerings and some revitalized product offerings that we should have in branded cards. Your question on retail services, that’s much more of an ongoing operation with the retail services, and the big change there of course is the acquisition of the Best Buy portfolio.

And I would say to that point, it’s been asked before, we’re absolutely open to more portfolio purchases, but those portfolio purchases need to make sense from a yield, returns, resource deployment perspective. People have often said, well, do you rationalize it from a DTA perspective? One thing we look at are that the underlying fundamentals of the portfolio purchase have to make sense before we consider the DTA benefit. But if there are things out there that make sense, we’ll certainly take a look at them.

And on a slightly separate topic, the questions about Citi Holdings have been asked several different times, but you’ve got $1.2 billion of revenue, and $1.4 billion in expenses. So your preprovision is a couple hundred million negative. But embedded in that expense is $600 million of legal. Is there kind of a run rate that you would expect kind of irrespective of all those volatile items of legal, and then something on top of that that we should expect? Or is that kind of not a way that you can look at it at this point.

Well, exactly what you have just pointed out is the exact point that I was trying to make by having you focus on the upper left quadrant of that slide that we had earlier, the four panel slide dealing with Citi Holdings. And you’re right, when you move out the litigation expenses, we have $500 million of PPNR, adjusted PPNR, in that number. The issue there is, as I mentioned, there’s some element of episodic gains that is built into that number, and asset marks. And so I don’t want you to think that represents a run rate. As you can imagine, holdings is a collection of some businesses, a lot of different portfolios, a couple of different assets, and so I don’t want you to think in terms of now we’ve hit a run rate of $500 million of adjusted PPNR in that business. It will fluctuate.

Right. Although I would assume that, One Main was alluded to before, that that’s a big driver of that, and that’s something that should be stable, if not actually growing, right?

Spot on.

Your next question comes from the line of Matt Burnell with Wells Fargo.

John, a question for you just to follow up on your guidance in terms of operating leverage trends, specifically within Korea. You mentioned that you expect revenues to stabilize early in 2014, and that operating leverage would be positive in your forecast for the full year.

I think you’re linking two different comments that I made. The comment that I made on Korea as far as revenues stabilizing, that is particular to the global consumer business in Korea. The comment that I think I made as far as positive operating leverage in the second half of this year was on the transaction services business.

Then I guess what is your outlook for operating leverage trends within the Korea consumer business over the course of the next six to 12 months? Asia more broadly had slightly lower revenues year over year, but your expense control more than offset that within Asia. I guess I’m just curious as to how you’re thinking about the revenue trends within Korea could affect the overall Asia operating leverage trend?

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Just moving on to the slide on corporate loan details within Brazil, India, and China, which was very interesting, I guess I’m just curious, given how low the loss rates are in those countries - and I appreciate a lot of that is due to the loan mix - are the loan mixes in some of your smaller exposures within EM markets similar in terms of the CTS and TF composition? Or are they more varied across the smaller exposures you have in EM?

Well, the loan composition in each country will be slightly different. You can see how the loan composition inside China, India, and Brazil are somewhat different. But the trend is still going to be much more towards loans for either local market champions - in other words those really high quality emerging market headquartered companies - or to subsidiaries of companies that are headquartered in the development markets, and then with a fairly decent dose, where we have it, of trade-related. So the mix will vary, but it’s going to look something like this if you think about the way these three countries are portrayed.

And then just one final question on the domestic mortgage portfolio. In the North American home equity portfolio within Citi Holdings, the credit performance has obviously gotten a lot better. I guess I’m curious as to how you think about a higher rate environment potentially affecting the home equity portfolio specifically, and the ability of those homeowners to continue to make payments, or what the effect of a higher rate environment on that portfolio might be in terms of credit performance.

I think you’ve hit on the single largest risk that does impact the home equity book in holdings. And it’s something that we think a lot about, and it drives a lot of our thought as far as what level of reserves that we need to have. We’ve also given you some additional disclosure in our recent Qs as far as what percentage of that portfolio begins to hit resets in ’15, ’16, and ’17. I don’t have all those numbers in my head, but if you go to our most recent Q, and we’ll do it again on this upcoming Q, we’ll lay that out for you as far as the reset risk that we have in that portfolio.

Your next question comes from the line of Erika Najarian with Bank of America.

I just had one follow up question. On the four-panel slide that you referred to, the message is clear that adjusted PPNR may be lower than we’ve seen over the past few quarters, but still positive. And when you said you’re utilizing reserves for future chargeoffs, that implies to me your provision. I guess is it fair to conclude that when you get to breakeven, the holdings have to do with your legal and related costs at this point?

I would say that, again, there will be some variability, as you just laid out, in that upper quadrant. And I’m not going to say that it could never go negative. I don’t want you to think that that’s always going to be positive. There’s a chance it could go slightly negative depending upon how low the asset volumes get in the business, etc. But you’re absolutely right, the single largest driver of when we are able to get to holdings to be consistently breakeven really has to do with the legal and related costs.

Your next question comes from the line of Marty Mosby with Guggenheim Securities.

I wanted to kind of go back to the CCAR question and just focus on dividends. As you’re going through the reinstitution of your dividend, how do you think about that when you kind of look at the volatility of earnings that have been anywhere from a quarterly run rate of close to $1 this quarter or at the top end was close to $1.30, given the Fed gives you about a 30% kind of leeway. How do you think about that when you go to establish this dividend level going into next year?

I think when you look at it, the corporate finance math pretty clearly points you towards a preference of buyback versus dividend as your stock trades below book. And so I think that will be the first bias. But at that point, we also understand that we, to some degree, need to be mindful, and over time continue to address the dividend issue. So we’ll look at those tradeoffs as we approach, but again, I think as has been very clearly signaled by the Fed, the bar around dividend is higher than buyback, just based on the nature of what a dividend is. And so we’ll have to take that into account.

And then just briefly touching on the expense versus revenue, the way you’re looking at that trailing 12 months, is that just because the composition is more fixed with salary and bonus versus variable expenses, so that over time you kind of work your way through the ups and downs of revenue and create traction and efficiencies, but you’re not going to be able to move as quickly to the quarterly fluctuations?

I’d say that I still think that the best way to measure your efficiency is over time. And therefore, as you look at something over a trailing 12 month basis, you would have captured a full year of performance, and I really think that’s the best way to judge how a firm is evidencing expense discipline.

And I wouldn’t disagree with that as much as I was trying to just get at is that just a difference in the way that the compensation is kind of set up now and structured, and looking at it over that time really is a better way to do that, because of the way the compensation is structured now?

I think it’s a matter of how compensation is structured between deferrals of incentive comp. Much more is deferred now and recognized over three or four years, and so a lot of the compensation expense that you have in a year actually relates to performance in other years, as well as the operating performance that you have in the current year. Plus, there’s different methodologies that firms employ in how they accrue compensation expense, and when they accrue compensation expense. But when you get to year-end, you have to have the expenses accrued for that year’s performance, in that year. So that’s why I continue to think that at any given point in time, you really want to measure people on a trailing 12 month basis.

And lastly, on page 38, you’re showing the loan to value for mortgages in Citi Holdings, and you’ve seen a marked improvement in those that have loan to values over 100%, to the point now that your reserves cover basically 100% of those balances when you start looking at those that have greater than 100% and FICOs less than 660. So when you’re talking about home prices and the difference it makes, it does make a difference on this particular page, in that you’re seeing migration into more stable and better-performing buckets. That would still be a positive you could see rolling forward, I would think.

And you’re absolutely correct.

Your next question comes from the line of Derek De Vries of UBS.

You just sort of opened the can of worms on deferred comp, and I’m wondering if you could just help me understand it a little bit. As we get to the end of the compensation year within securities and banking, can you just give us the amount of, just broadly, in hundreds of millions or billions, or whatever, the amount that would be awarded but not yet expensed? That would help us understand the ability to flex down the cost there. So I was wondering if you could just give us the awarded but not yet expensed at the end of the compensation year.

I’m not prepared to do that at this point in time.

And then maybe just a slightly more generic question then. I’m trying to sort of reconcile the comments you made in the beginning, the challenging and uneven operating environment, with more of an upbeat backdrop on loan growth, particularly in emerging markets. And just as we go forward, should we think about the kind of growth rates that you’ve been able to deliver recently? Or do you see some things that make you think that could slow down a little?

I would take a look at the overall environment and I do think that it does remain challenging. We have been able to grow loans in a challenging environment, although that loan growth has been a little bit less this year than it had been in years before. And even though you can continue to grow loans, then you have the other issue as far as spread compression. So you can continue to grow loans, but if you’re growing loans at lower spreads, that not exactly going to be beneficial towards your revenue. So I think that you need to sort through how you think about both. I think we’ve evidenced that we can certainly grow the volumes, but I think what you also see is that we have been impacted by a certain amount of spread compression, as have most other people in the industry.

And as I think about it, there’s two things in some ways in competition. I think as you look at growth estimates as we look forward for 2013, we’ve seen, off of downward revisions in 2013 actually some uplifts in ’14. But I think at the same point, when you go back and you look historically and you can look at several points of history, ’94-95 certainly easily being one of those, any time in particular out of the U.S. you’re transitioning into a higher rate environment, the EM economies don’t come through that cleanly. I think in many ways today those economies are much better positioned to come through the shift towards higher rates, and whether that’s a rise in foreign exchange reserves, whether that’s floating exchange rate mechanisms, external liquidity, and you can go on and on through those. But again, I just think a transitioning U.S. interest rate is certainly going to have an impact on trading volumes, capital flows, new issuance calendars. And so I think we’ve got to try and strike a balance between those things.

Your next question is coming from the line of Vivek Juneja with JPMorgan.

I won’t beat up on the securities and banking efficiency ratio question, even though that’s up 10 percentage points linked quarter. Let’s turn to the other two businesses that are almost two-thirds of your revenues, GTS and global consumer banking. So following a little bit of your trail of thought, John, you’re looking at it year to date. GTS efficiency ratios up from, I believe, 52% to 54%, and global consumer bank is up also from 53% to 54%. So even though you’re more than halfway through your cost restructuring, your efficiency ratios are going the other direction. Can you talk to that a little bit, especially given your confidence about GTS for the second half?

I think what you’re going to see in transaction services - and I said it before - I think you’ll start to see improvement beginning in the fourth quarter. And that improvement should begin to then roll forward through next year’s results as well. And I have no doubt that transaction services will meet the efficiency targets that we set out for them for 2015. Consumer has been bumping around at, as you mentioned, 53-54% probably, if I look at it on a trailing 12 month basis, for the last five quarters maybe. But there’s still work to go there. They have not fully completed the rollout of rainbow yet. And obviously we’re still in the process of readjusting the mortgage business. So they’ve got that running through the top line, and we haven’t quite gotten the expenses out in mortgages yet. And the commitment was that we would get consumer to 47% to 50% by 2015. And so I still think that we’re on track to do that.

Even though so far you’ve gone the other direction? You’re over half [unintelligible] in ’14. Okay, a couple of little ones. Private label, I just want to come back to that. Did you add anything for that in the third quarter?

There was a very small amount, because don’t forget we only had the Best Buy…

No, sorry, private label MBS. My apologies.

I’m sorry. When it comes to private label securitizations, I’m not going to comment about any specific reserving in the quarter.

And then turning to Best Buy, did you take on any delinquencies with that?

Again, when it comes to the Best Buy, we did take on delinquencies. And so the delinquencies do end up in our statistics. It’s just that, from a reserving point of view, we don’t pick up loan loss reserves.

And those are not marked down, the loan portfolios?

The loan portfolios come on our books on a fair market value basis.

Your next question comes from the line of Adam Hurwich with Ulysses Management.

I’m referring to slide 21, 26, and slide 41. You’ve managed to keep your risk-weighted assets pretty flat, actually declining, on a Basel III basis. And at the same time, you seem to be growing your regulatory capital currently at a $15 billion rate and rising. I’m just wondering, how do we think about capital adequacy going forward? And given your capital build rate, at some point we need to think a little bit more holistically about what you do with that. Could you give us at least the basis to understand that?

You’ve got a lot of questions wrapped up in there. Let me try to parse through a little bit of that, and you come back where I’ve failed. From a capital build rate, certainly the capital is building as a result of the earnings, as well as the DTA. So this quarter, the earnings themselves were a lot of $3 billion, the DTA was a benefit of $500 million, then we also had a benefit of OCI, which of course from a Basel III basis ends up in that as well. So, over the course of the quarter, we actually built about $4.5 billion worth of regulatory capital from those three components. What we’ve said is that our expectation is over time we would target running at a 10% Basel III ratio. Now, we need to think about how we may change that as the supplemental leverage ratio rules begin to finalize, but that’s where we are right now. So what have I failed to answer?

You didn’t fail to answer anything. The only reason I’m asking this is because there seems to be a lot of focus on GAAP numbers, but there’s a large discrepancy between GAAP and regulatory capital measures. And there seems to be a benefit that you will accrue due to that differential. Am I missing anything, or in fact when regulators are comfortable with the bank, will we be able to see a benefit from the discrepancy?

I think you’re right. As a matter of fact, one of the things that we talk about is the fact that as we think about the strategies for our Citicorp businesses, we think that those Citicorp businesses operate in a very Basel III friendly way. We’re focused on real high-level credit worthy customers in both the consumer businesses as well as in the corporate business, and we think we can run the business, as I say, in a very efficient manner under Basel III. It maybe referenced in one of the slides that we have in the appendix that shows the returns that we get on a Basel III basis. So that’s where we’re headed with the strategy. As far as how the regulators view us and what might be the future, again, we think that we’re in fairly constructive dialogs with the regulators.

Your next question comes from Andrew Marquardt with Evercore.

A couple of ticky-tack questions. Just to follow on that last question, in terms of capital, can you help us understand, is there a material difference in terms of tier one common Basel III under the standardized approach versus the advanced?

There’s a very large difference between the way those two calculations work, and under the terms of Dodd-Frank, what large banks in the U.S. are directed to do is report the lower of the two ratios. So currently we are reporting our ratios under the advanced approach.

Which is the lower of the two?

Yes, by definition. I couldn’t report it if it wasn’t.

And then separately, you had mentioned, in terms of unfunded commitments, there was a reserve build, partly due to growth in commitments, as well as some risk migration downward. Can you help clarify exactly what was going on there in terms of risk migration?

In our commitments book, we took a look at some of the commitments we had to our clients, especially clients that are in countries where the country itself ends up being risk weighted lower. We therefore re-rate the company, and therefore ended up building a bit more reserves.

Should we expect continued build in unfunded commitment reserves? Or is this kind of a one-time adjustment?

I wouldn’t call it a one-time adjustment, but it’s another one of those episodic adjustments. I don’t anticipate that level of migration repeating in the fourth quarter, but I can’t tell you that it absolutely won’t, either.

And then lastly, just bigger picture, in terms of the margin on a consolidated basis. You had mentioned you expect it may be flattish in the fourth quarter. But then beyond that, is it fair to assume that there will be still kind of this gradual grind down in terms of the margin on a consolidated basis, given the global spread compression that you’ve referenced?

I think as long as we stay in a low interest rate environment, you’re going to have, as you put it, that grind down approach. I would think at some point in time we would begin to see some level of interest rate increase, and then you could get a bit of a benefit. Until then, it’s going to be really a matter of how the calculus works out between your ability to grow loans and lower your cost of funding, how those two factors offset the impact of the continued spread compression.

And lastly, just to wrap it kind of maybe back to the first question, on this long call, of kind of getting to your longer term ROA goal, what would be your view of a normalized interest margin over the cycle to get into that 90/110 ROA basis?

We didn’t really talk about that at that point in time, and I don’t really have a longer term NIM goal that I care to share at this point in time.

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Just one quick question on TSS. You indicated that the operating leverage, you’re expecting second half to be positive. Can you just give us a sense as to is that versus first half, is that year on year, and the major drivers there?

It would be year on year. In other words, it would be the second half of 2013 compared to the second half of 2012.

And the drivers?

The drivers would be revenue growth being larger than expense growth. I’m only kidding, sorry.

No, I get operating leverage. I’m just saying it’s really you’re banking on it being more revenue related than expense related.

No, actually I think you’re going to see some good expense performance coming out of the fourth quarter.

And then in retail banking, ex the mortgage, on the revenue margins there, got the message that it was competitive environment and you need to be competitive to get the volume growth. That’s been a trend over the past couple of quarters. So we should continue to expect that going forward? I’m just asking for some color from the field as to how you’re thinking about it.

On mortgage revenues in particular?

No, excluding mortgage revenues. So, retail banking margins are down. Excluding mortgage related.

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At this time, we have reached our allotted time for questions.