Citigroup Inc. (NYSE:C) Q4 2023 Earnings Call Transcript

Citigroup Inc. (NYSE:C) Q4 2023 Earnings Call Transcript January 12, 2024

Citigroup Inc. beats earnings expectations. Reported EPS is $0.84, expectations were $0.73. Citigroup Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to Citi’s Fourth Quarter 2023 Earnings Call. Today’s call will be hosted by Jenn Landis, Head of Citi’s 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. Landis, you may begin.

Jennifer Landis: Thank you, operator. Good afternoon and thank you all for joining our fourth quarter 2023 earnings call. I am joined today by our Chief Executive Officer, Jane Fraser, and our Chief Financial Officer, Mark Mason. I’d like to remind you that today’s presentation, which is available for download on our website, citigroup.com, may contain forward-looking statements, which are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these statements due to a variety of factors, including those described in our earnings materials, as well as in our SEC filings. And with that, I’ll turn it over to Jane.

Jane Fraser: Thank you, Jenn, and a very Happy New Year to everyone, and I hope you all had a good break. At Citi, we’re back at it. And given the notable items and our new financial reporting structure, we’ve got a lot to cover today, so I’m going to get right to it. 2023 was a foundational year in which we made substantial progress, simplifying Citi and executing the strategy we laid out at Investor Day. With that said, the fourth quarter was clearly very disappointing. Today, I’m going to provide a high-level view on our progress in 2023, discuss our Q4 results and finish with our priorities for ’24. We know that 2024 is critical as we prepare to enter the next phase of our journey and we are completely focused on delivering our medium-term targets and our transformation.

So turning to what we accomplished in terms of executing our strategy. As you can see on slide five, in 2023, we saw a record year for services where we maintained our number one ranking amongst large institutions in TTS, with client wins up 27% and a sustained win-loss rate above 80%. We’ve now gained over 100 basis points in share and security services since 2021. In wealth, we added an estimated $21 billion in net new assets during the year. In USPB, we enjoyed our sixth consecutive quarter of growth and we began to see the early fruits of our investments in key talent in banking. In September, we began the most consequential series of changes to the organization and the running of our firm since the aftermath of the financial crisis. We restructured around five core interconnected businesses to align our organization to our business strategy and to provide greater transparency into their performance.

You can now see in our financials, the full year returns and P&L by business. While they are all impacted by investments and transformation expense, it is clear where we have work to do. The simplification of our organization structure will conclude at the end of the first quarter and will result in over $1 billion of run rate saves from the net elimination of approximately 5,000 roles mainly managers. As Mark will detail, this will contribute to the reduction of our expenses in ’24. Over the medium term, between simplification, benefits of the transformation, stranded costs and other productivity efforts, we expect to eliminate 20,000 positions ex-Mexico, resulting in over $2 billion in run rate saves. Simplification is also enabling Citi to be more client-focused and less bureaucratic.

Realizing the synergies between our five businesses is one of the key drivers to achieving our medium-term revenue target. With this new structure, I’m holding my business leaders accountable for enhancing connectivity across clients and products. In addition, having a Chief Client Officer Act to ensure we’re disciplined in bringing the full power of our franchise to our clients. We have now completed the divestitures of nine of our 14 international consumer franchises and have wound down nearly 70% of our total retail loans and deposits in Russia, Korea and China. We’ve restarted the sales process in Poland and a well down the execution path for the Mexico IPO next year. We’re exiting marginal businesses such as munis and a subset of distressed debt trading to focus on our core strengths and allocate our capital with rigor.

And without doubt, all these changes are difficult, if they are necessary. At the same time, we continue to invest in our transformation, risk and control environment and data architecture. And we were pleased to have closed the FX consent order with the Federal Reserve. We’re committed to fulfilling the expectations of our regulators, given the unique role we play in the global financial system. The modernization of our tech infrastructure is proceeding at pace, allowing us to deliver new capabilities to our clients. During the year, we consolidated trading and reporting platforms and retired 6% of our legacy applications for the second year in a row. These enhancements dovetail with significant investments in our businesses such as hiring commercial bankers to capture share, improving the digital payment capabilities we offer throughout our global network and automating processes for our security services clients.

It was also a year where we upgraded talent with key internal promotions supplemented by selective external hires, including Andy Sieg. The simplified reporting structure has been embraced by colleagues. We’re feeling empowered by the new structure to serve clients and drive value for shareholders. While Mark will go through the details, I’d like to level set on our disappointing fourth quarter before recapping the full year’s results. Earlier this week, we disclosed additional external headwinds, some of which materialized in the second half of December, including a $1.3 billion reserve build related to transfer risk stemming from exposures to Argentina and Russia. We also saw a nearly $900 million negative revenue impact as a result of the larger-than-expected devaluation of the Argentine currency.

These items, together with the $1.7 billion FDIC assessment, drove this quarter to a negative EPS of $1.16. And while these items are clearly very painful, they are quite idiosyncratic in nature and will not impact the course we have set. In terms of the performance of our five businesses, while services was the most impacted by the Argentine devaluation. The underlying growth remains very strong, driven by share gains and client wins. Overall, services revenues were up 16% for the full year despite the impact of the Argentine devaluation. In TTS, cross-border transactions were up 15% and AUC, AUA in Security Services were up by close to $3 trillion for the year. In markets, our fixed income results were disappointing as we saw a significant slowdown in December, particularly in rates and FX.

Markets was also impacted by the Argentine devaluation. This franchise is well positioned with our corporate clients, and we continue to take actions to improve returns, whether by redeploying capital to high-returning products or exiting products, which aren’t a strategic fit. We had a decent quarter in equities, particularly in derivatives and we saw growth in prime balances, an area we have been focusing on. Well activity picked up in the fourth quarter with revenues up 22%. Overall banking revenue continued to be impacted by a weak wallet globally. Investment banking was up slightly for the year and we finished 2023 as the fifth leading franchise. We certainly aspire to be better. We’re seeing improved confidence among CEOs and we like our pipeline, but of course, the timing for a robust recovery is uncertain.

The share gains we’ve made in areas such as health care put us in a good position when this business turns more decisively. While investment activity in Asia rebounded with quarterly revenues up 21% and Wealth at Work up 18% for the year. Overall, wealth revenues were down in 2023 and we fully recognized that this business isn’t where it needs to be. Andy is off to a fast start. In addition to resetting the expense base and ensuring the right utilization of our balance sheet is tightening our focus to build fee-based revenue streams and investment AUM. With $100 trillion in new wells to be created by 2030 mainly in North America and Asia and with our clients holding $5.4 trillion away from us, we have an important affinity here to drive growth and return to where they should be.

USPB was a bright spot with every product up double-digits in the quarter compared to last year, including retail banking, which benefited from a rebound in mortgage origination new and refreshed products have increased customer engagement as we see the benefits of the investments we’ve made and in Cards, IB and ANR continued their growth reflecting a more balanced lend versus spend mix and falling payment rates. As expected, loss rates are now back to pre-pandemic levels driven by customers in the lower FICO bands. In terms of the full year in 2023, we grew revenues ex-divestures by 4%, although the Argentine devaluation essentially prevented us from reaching the $78 billion revenue mark. We met our full year expense guidance and we increased our CET1 ratio to 13.3% during the year.

We grew our tangible book value per share by 6% to $86.19 and we returned $6 billion in capital to our shareholders in the form of common dividends and share buybacks. We remain committed to continuing to return capital to investors through both of these channels. As I reflect on the year, I also want to note that we were a source of strength for the system and for clients during a volatile period for the banking sector and geopolitically and I’m very proud of how our people around the world performed during challenging times. 2024 looks to be similar to 2023 in terms of the macro environment with moderating rates and inflation. We expect to see growth slowing globally with the US well positioned to withstand a run-of-the-mill recession should one materialize.

With a strong balance sheet, ample liquidity and diligent risk management we are well positioned to support our clients through whatever environment comes to path. Moreover, we think environments like these play to our strengths, given how far we are down the path of our simplification and divestitures. 2024 will be a turning point as we will be able to completely focus on the performance of our five businesses and our transformation. I recognize the importance of this year and I am highly confident that we will see the benefits of the actions we’ve taken through the momentum of our businesses. Backed by investments in key products we believe we can continue to grow revenues ex-divestitures by 4% to 5% over the medium term. Overall, we remain confident in our ability to adapt to the evolving capital and macro environment to reach our medium-term return targets and return capital to our shareholders whilst continuing the investments needed in our information.

With that, I’d like to turn it over to Mark, and then we will be delighted, as always, to take your questions.

Mark Mason: Thanks, Jane, and good morning, everyone. We have a lot to cover on today’s call. I’m going to start with the fourth quarter and full year firm-wide financial results, focusing on year-over-year comparisons, unless I indicate otherwise. I’ll also focus on our guidance for 2024 and end with the path to our medium-term return target. The presentation of our results reflects the changes we’ve made in conjunction with our organizational simplification, including reporting legacy franchises and corporate other in all other. However, before I go into the results, let me walk you through some of the notable items that impacted the quarter that were included in the 8-K we recently filed. At the top right of slide seven, we show these items on a pre-tax basis.

The FDIC special assessment of approximately $1.7 billion related to regional bank failures in March. This impacted expenses in all other. A restructuring charge of approximately $780 million related to actions associated with our organizational simplification, which will drive headcount reductions and future savings over the medium term, impacted expenses in all other the impact of the currency devaluation in Argentina of approximately $880 million. This was recorded in noninterest revenue across services, markets and banking and you can see the impact by business in the appendix of the presentation. While we did have an adverse impact from the Argentina devaluation this quarter, we also benefited from high interest rates, earning approximately $250 million of NII on the net investment in the quarter given the hyperinflationary environment and a reserve build of $1.3 billion related to increases in transfer risk associated with exposures to Russia and Argentina as described in the 8-K.

This impact is mostly included in other provisions and cost of credit and spans multiple businesses due to their globality. The combination of these items negatively impacted diluted EPS by approximately $2 and RoTCE by approximately 920 basis points. Now turning to the left side of the slide where we show our financial results for the full firm. In the fourth quarter, we reported a net loss of $1.8 billion and a net loss per share of $1.16 on $17.4 billion of revenue. Excluding the notable items, diluted EPS would have been $0.84 with an RoTCE of 4.1% for the quarter. In the quarter, total revenues decreased by 3% on a reported basis. Excluding divestiture-related impacts and the impact of the Argentina devaluation, revenues increased 2% driven by strength across services, USPB and investment banking, partially offset by lower revenues in markets and wealth and the revenue reduction from the closed exits and wind down.

Turning to expenses, we reported expenses of $16 billion, which include the FDIC special assessment and modest divestiture-related costs. Excluding these items, expenses increased 10% to $14.2 billion, largely driven by the restructuring charge I just mentioned. Cost of credit was approximately $3.5 billion. Excluding the reserve bill for transfer risk, cost of credit was primarily driven by card net credit losses, which are now at pre-COVID levels as well as ACL builds for new card volume. At the end of the quarter, we had nearly $22 billion in total reserves, with a reserve to funded loan ratio of approximately 2.7%. And on a full year basis, we delivered $9.2 billion of net income and an RoTCE of 4.9%, adjusting for the notable items, net income was approximately $13.1 billion with an RoTCE of 7.3%.

On slide eight, we show full year revenue trends by business from 2021 to 2023. It is important to highlight that in conjunction with the change to align with our new financial reporting structure, we moved the majority of the financing and securitization business from banking to markets. We also implemented a revenue-sharing arrangement within banking and between banking, services and markets to reflect the benefits of businesses get from our relationship-based lending. These changes are now reflected in our results and our historical financials. Now looking at the full year numbers. Services had a record year with revenues of $18.1 billion, up 16%, benefiting from both rates and business actions, new client wins and deepening with existing clients, partially offset by the Argentina devaluation.

Markets revenues decreased 6% to $18.9 billion, largely driven by lower volatility and a significant slowdown in December. The markets business was also impacted by the Argentina devaluation. Banking revenues decreased 15% to $4.6 billion, primarily driven by the mark-to-market on loan hedges as well as a decrease in corporate lending. Investment banking revenues were relatively flat for the year as we gained share amidst the declining wallet. Corporate Lending revenues were down 4%, excluding mark-to-market on loan hedges. Wealth revenues decreased 5% to $7.1 billion, primarily due to the deposit mix shift towards higher-yielding products, which drove lower deposit spreads. USPB revenues increased 14% to $19.2 billion, primarily driven by growth in card balances as we continue to see the benefit of our investments in digital acquisition and customer engagement.

Total revenues, excluding divestitures, came in at $77.1 billion, below our guidance of $78 billion to $79 billion for the year, largely due to the impact of the Argentina devaluation, softer markets performance, particularly in December and losses on loan hedges. However, NIIX ex-markets came in at $47.6 billion in line with our guidance. Despite the challenging environment and the impact of the Argentina devaluation, we grew firm-wide revenues by approximately 4% ex-divestitures in line with our Investor Day target, demonstrating the benefit of our diversified business model and the investments we’ve been making. On slide nine, we show full year expense trends from 2021 to 2023, excluding the FDIC special assessment and divestiture-related impacts, full year expenses were $54.3 billion for 2023 in line with our guidance.

As I mentioned, this includes roughly $780 million of restructuring costs associated with our organizational simplification and additional severance costs of approximately $730 million, which included actions to address stranded costs and start to right-size the businesses. Relative to the prior year, expense growth continued to be driven by transformation and business-led investments, volume-related expenses and other investments in risk and controls and technology, partially offset by productivity savings and a reduction in expenses and legacy franchises within all other. Over the past few years, we’ve been investing across these themes, which has not only impacted the performance of the firm, but also the businesses. On slide 10, we show the components of our transformation and technology spend from 2021 to 2023.

Over the past three years, we have invested significantly in our infrastructure, platforms, applications, processes and data. As you can see in the bar chart at the top of the slide, roughly 30% of our transformation investments over the last three years were in technology, with the remainder related to non-tech employees and consultants. In 2023, we’ve seen a shift from consulting expenses to technology and compensation as we’ve gotten deeper into the execution of our transformation. And you should expect to see this trend continue. In total, we invested over $12 billion in technology in 2023. Beyond transformation, our technology investments are also focused on digital innovation, new product development, client experience enhancements and areas that support our infrastructure like cloud and cyber.

On slide 11, we show key consumer and corporate credit metrics. Across branded cards and retail services, approximately 80% of our card loans are to consumers with FICO scores of 680 or higher. And across both portfolios, NCL rates have reached pre-COVID levels, but we continue to be well reserved with a reserve to funded loan ratio of 7.7%. In our corporate portfolio, the majority of our exposure is investment grade, which is reflected in our low level of nonaccrual loans at 63 basis points of total corporate loans. We feel good about the quality and mix of our portfolio and are well reserved for the current environment. As it relates to Argentina, we’ve included a slide in the appendix summarizing the value it brings to the global network and the broader institutional client relationships we hold as well as the strength of our financial profile in Argentine.

As it relates to Russia, we’ve also included a slide in the appendix. You will see that the reserves for transfer risk that we have taken have significantly reduced our net investment and therefore our risk of loss related to Russia. On slide 12, we show our summary balance sheet and key capital liquidity metrics. We maintain a very strong $2.4 trillion balance sheet, which is funded in part by a well-diversified $1.3 trillion deposit base, which is deployed into high-quality diversified assets. The majority of our deposits, $801 billion, are institutional and operational in nature and span across 90 countries and are complemented by $426 billion of US personal banking and wealth deposits. We have approximately $561 billion of HQLA and approximately $690 billion of loans and we maintained total liquidity resources of $965 billion.

Our LCR decreased modestly to 116% and our tangible book value per share was $86.19, up 6%. On the bottom left corner of the slide, we show a full CET1 walk to provide more detail on the drivers in 2023. First, we generated $8 billion of net income to common, which added 70 basis points. Second, we returned $6.1 billion in the form of common dividends and share repurchases, which drove a reduction of about 53 basis points. Third, we benefited from the impact of lower rates on our AFS investment portfolio, which drove an increase of 20 basis points. And finally, the remaining three basis points was largely driven by higher RWA, partially offset by capital releases from the exit markets. We ended the quarter with a 13.3% CET1 capital ratio, approximately 100 basis points above our regulatory capital requirement of 12.3%.

As you can see, we’ve grown our CET1 ratio by approximately 30 basis points over the course of the year while returning over $6 billion to shareholders in common dividends and repurchases. Before I take you through each business, as Jane mentioned, we are not satisfied with the performance and returns of our businesses. And therefore, we are laser-focused on executing against our strategy, simplifying the organization and rightsizing the expense base. As a reminder, the investments that we’ve been making have impacted each of the businesses, as you will see in the next few slides. So now turning to slide 13, where we show the results for services for the fourth quarter and the full year. Revenues were up 6% this quarter, largely driven by NII across TTS and security services, partially offset by NIR, driven by the Argentina devaluation.

Services noninterest revenues were up 20%, excluding the impact of the Argentina devaluation. Expenses increased 9%, primarily driven by continued investments in technology, product innovation and client experience. Cost of credit was $646 million, driven by a reserve build of approximately $652 million primarily associated with transfer risk in Russia and Argentina. Net income decreased to $776 million as higher revenues were more than offset by higher cost of credit and higher expenses. Average loans were up 6%, primarily driven by strong demand for working capital loans in TTS, both in North America and internationally. Average deposits were down 3% as the impact of quantitative tightening more than offset new client acquisition and deepening with existing clients.

However, sequentially, deposits were up 1%. Services delivered an RoTCE of 13.4% for the quarter. And for the full year, services delivered an RoTCE of 20% on $18.1 billion of revenue. On slide 14, we show the results for markets for the fourth quarter and the full year. Markets revenues were down 19% versus a strong quarter last year, driven by a decline in fixed income and the impact of the devaluation, partially offset by an increase in equities. Fixed income revenues decreased by 25% largely driven by rates and currencies on lower volatility and a significant slowdown in December as well as the impact of devaluation. However, we saw a good underlying momentum in equities with revenues up 9%, driven by gains across all products and we continue to grow prime balances while making solid progress on our revenue to RWA targets.

Expenses increased 8%, driven by investments in transformation and risk and controls and volume-related costs, partially offset by productivity savings. Cost of credit was $209 million, driven by a reserve build of approximately $179 million, primarily associated with the transfer risk in Russia and Argentina. Markets reported a net loss of $134 million as revenues were more than offset by higher expenses and higher cost of credit. Average loans increased 4% to $115 billion as we saw increased client demand for credit driving growth in warehouse lending. Average trading assets increased 18% to $391 billion, largely driven by treasuries and mortgage-backed securities, given the strong client activity in fixed income for much of the year. While it was a challenging quarter, markets performed relatively well for the full year with revenue of $18.9 billion and an RoTCE of 7.4% compared with very strong performance in the prior year and we are focused on improving returns over time through a combination of revenue growth, expense discipline and capital optimization.

On slide 15, we show the results for banking for the fourth quarter and the full year. Banking revenues increased 22%, driven by growth in investment banking fees and lower losses on loan hedges, partially offset by lower corporate lending revenue. Investment banking revenues increased 27% year-over-year, driven by DCM and advisory due to improvements in market sentiment. In advisory, we saw signs of strength across technology, health care and energy, and we feel good about the strength of our pipeline. Corporate lending revenues, excluding mark-to-market on loan hedges decreased 26%, largely driven by lower revenue share from investment banking services and markets. Expenses increased 37%, primarily driven by the absence of an operational loss reserve release in the prior year.

Excluding the reserve release, expenses were roughly flat. Cost of credit was $185 million, driven by a reserve build associated with the transfer risk in Russia and Argentina. The NCL rate was 32 basis points of average loans and we ended the quarter with a reserve to funded loan ratio of 1.6%. Banking reported a net loss of $322 million as higher expenses and cost of credit more than offset higher revenue. RoTCE was negative 6% for the quarter. And for the full year, banking reported an RoTCE of negative 0.2% on $4.6 billion of revenue. So clearly, we have more work to do on returns. And while it’s difficult to predict when activity will normalize, we’re positioning the business to capitalize on the rebound in the market wallet, and that includes continuing to invest in key growth areas, upgrading talent in traditional sectors and continuing to right-size the business.

On slide 16, we show the results for wealth for the fourth quarter and the full year. Wealth revenues decreased 3%, driven by lower deposit spreads, partially offset by lower mortgage funding costs and higher investment fee revenues. We’re seeing good momentum in noninterest revenue, which was up 13% in the fourth quarter, driven by higher investment assets, increased client activity and market performance. Expenses were up 4%, primarily driven by investments in risk and controls and technology, partially offset by replacing strategic investments and tighter expense control as we begin to right-size the expense base in the business. Wealth reported a net income of $5 million as revenues were mostly offset by higher expenses. Client balances increased 6%, primarily driven by higher client investment assets, partially offset by lower deposit balance.

Average loans were flat as we continue to optimize capital usage. Average deposits decreased 2%, reflecting the continued mix shift of deposits to higher-yielding investments on Citi’s platform. Client investment assets were up 12%, driven by new acquisitions and the benefit from higher market valuation, and we’re seeing good momentum in net new assets, which more than doubled to $16 billion for the quarter. For the full year, we added an estimated $21 billion in net new assets. RoTCE was 0.1% for the quarter. And for the full year, RoTCE was 2.6% on $7.1 billion of revenue. Looking ahead, we’re going to improve the returns in the business as we invest in talent to execute on our refocused strategy to drive investment revenue with an eye towards rightsizing the expense base.

We will wind down non-core initiatives, exit less productive performers and enhance discipline across every expense line. On slide 17, we show the results for US Personal Banking for the fourth quarter and the full year. US Personal Banking revenues increased 12%. Branded cards revenues increased 10%, driven by higher net interest margin and interest-earning balances growth of 13% and we continue to see healthy growth in new account acquisition up 8% and spend volumes up 3%. Retail services revenues increased 15% also driven by higher net interest margin and interest-earning balance growth of 11% as well as lower partner payments due to higher net credit losses. Retail banking revenues increased 15%, driven by higher deposit spreads, loan growth and improved mortgage margins.

Expenses decreased 1% as higher expenses to support lending programs and client engagement as well as the rollout of simplified banking were offset by lower non-volume-related expenses. Cost of credit of $2.1 billion, increased 20%, driven by higher NCLs, partially offset by a lower ACL build. Net income increased to $201 million, driven by higher revenues, partially offset by higher cost of credit. Average deposits decreased 5%, driven by the transfer of relationships and the associated deposits to our wealth business. We continue to make progress against our digital strategy with digital deposits up 14% and active digital users increasing 6%. RoTCE for the quarter was 3.6%. And for the full year, US Personal Banking delivered an RoTCE of 8.3% or $19.2 billion of revenue.

Here again, we are focused on improving the return profile of the business. Managing through this part of the credit cycle and continuing to make progress in retail banking will be key. On slide 18, we show results for all other on a managed basis, which includes corporate other and legacy franchises and excludes divestiture-related items. Revenues decreased 17%, driven by a decrease in NII of 29% driven by the closed exits and wind down, partially offset by higher noninterest revenue and expenses increased to $4.5 billion, driven by the FDIC special assessment and restructuring costs, partially offset by lower expenses in both wind down and exit markets. Turning to slide 20, as we kick off 2024, the environment remains somewhat uncertain and markets remain difficult to predict.

But based on what we see today, we expect revenues to be approximately $80 million to $81 billion, as shown on the left side of the slide. And on the right side of the slide, we list the key drivers. In TTS, we expect revenue growth to be driven by new client wins, deepening with our existing clients and continued momentum with commercial clients as we continue to leverage our global footprint and product innovation. In Security Services, we have a very healthy pipeline, and we’ll continue to on-board assets under custody from new mandates, win new clients and deepen relationships with existing clients. In Investment Banking, we anticipate a rebound in activity and to maintain our position as the wallet recovers. Over time, we do expect the investments that we’ve made in key growth areas, such as health care and technology to allow us to gain share.

And we also expect a modest rebound in wealth as we execute on our refocused strategy with an eye towards growing investment fees, particularly with our existing clients. In USPB, we expect continued growth in card balances driven by the investments we’ve been making as well as lower partner payments in retail services to continue to drive revenue growth. We also expect to continue to improve our retail brand performance. And as it relates to NII, excluding markets, we expect net interest income to be down modestly as the volume growth we expect from loans and deposits is more than offset by lower US rates and the reduction from the closed exits and wind down. Turning to slide 21. We expect expenses to be approximately $53.5 billion to $53.8 billion, down from $54.3 billion, subject to volume-related expenses.

The decrease in expenses will be driven by the benefits of our organizational simplification, a continued reduction from exit markets and wind down and productivity savings partially offset by investments in risk and controls and volume-related expenses. Embedded in this guidance, includes an elevated level of severance as well as additional potential costs related to the organizational simplification totaling approximately $700 million to $1 billion. This will contribute to reducing headcount over 2024 and the medium term, which we will discuss on the next slide. On slide 22, we show the drivers of headcount and expense reduction over the medium term. As we’ve discussed in the past, there are three drivers that will reduce our expenses, organizational simplification, including the reduction of management layers, eliminating stranded costs as we take additional actions to reduce excess overhead in light of the exit markets and realizing productivity savings from our investments in the transformation and technology.

We expect the combination of these three drivers to reduce our headcount by a net 20,000, excluding Mexico and generate a net run rate save of $2 billion to $2.5 billion over the medium term. This will underpin our path to $51 million to $53 billion of expenses, subject to volume-related expenses. Both the headcount and expense reduction will allow us to right-size the firm and businesses to improve performance and returns. On slide 23, we show our outlook for US Cards in 2024. In terms of credit performance, based on the trends that we’re seeing, we expect NCL rates both in branded cards and retail services portfolios to rise above pre-COVID levels and peak in 2024. On a full year basis for 2024, we expect the branded card’s NCL rates to be in the range of 3.5% to 4% and the retail services NCL rate to be in the range of 5.75% to 6.25%.

From an allowance perspective, we are reserved for a weighted eight quarter average unemployment rate of almost 5%, which embeds a downside scenario of approximately 6.8%. ACL builds in 2024 will primarily be a function of the volume growth that we see as well as changes in the macro scenarios and the probabilities associated with them and we expect continued momentum in cards, albeit more in line with mid-single-digit loan growth. On slide 24, we summarize our medium-term targets. From a revenue perspective, we continue to expect 4% to 5% revenue CAGR in the medium term, including the ongoing reduction of revenue from the closing of the exits and the wind down. From an expense perspective, we’re now on the path to lowering our expenses beginning in 2024.

From a credit perspective, we expect credit costs to be a function of portfolio mix, volumes and macro assumptions. And we are committed to returning capital to our shareholders and, in fact, expect to do a modest level of buybacks in the first quarter of 2024. So to wrap it up, while the world has changed significantly and the components have shifted since Investor Day, our strategy has not, and we are confident we are on the right path to deliver our 11% to 12% RoTCE in the medium term. With that, Jane and I will be happy to take your questions.

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Q&A Session

Operator: At this time, we will open the floor for questions. [Operator Instructions] Okay. Our first question will come from Mike Mayo with Wells Fargo. Your line is now open. Please go ahead.

Mike Mayo: Hi. I looked in detail at the earnings presentation, especially slide four. And I think the question is on many people’s minds. I count 12 restructurings at Citigroup. And I count 12 restructurings that have failed at Citigroup. You might disagree with the number 12. It could be five, it could be eight, it could be 12. It could be more, but I’ve not spoken to one person of any investor who would say that Citi has succeeded on its prior restructuring. So the question is, why is this time different? Number one, who is this new and improved Citigroup? Number two, why are expenses down even more, especially when few people that I talk to think you’ll hit your revenue target. And three, Jane, what is your conviction level of getting to that 11% to 12% RoTCE in ’25 or ’26? Thank you.

Jane Fraser: Well, thank you very much indeed, Mike. I’ll start with who is Citi. Citi is I’m delighted to say finally simple. At Investor Day, I set out a vision to be the preeminent banking partner for clients cross-border needs. That vision was based on five core interconnected businesses. We set out on a deliberate path to get there. And over the last three years, we’ve done so. Page four is who we are today. We are five interconnected businesses. No more, no less. We have our organization now aligns with those five businesses, and this enables us to focus on two priorities. The first is improving the performance and the returns of those five core businesses, so that we can meet the medium-term RoTCE target we laid out. And the second is on addressing our regulatory issues through the transformation.

And I would also be I need to note that I fully recognize that 2024 is an inflection year, Mike. And I and the management team are accountable to deliver and that you and our investors have the transparency need to hold us accountable. So why is this time different? Look, it’s not lost on me that there have been many attempts in the past to change this firm. I and the management are fully committed to transforming this company for the long-term and we are addressing the issues that have held us back in the past. And you’ve got proof points of the last three years where we’ve made a lot of tough decisions, and we have put through a tremendous amount of change to get to the simple Citi that we are today. We completely reset our strategy. So we now have a significantly more focused business and operating model.

We’ve announced the most consequential set of changes to our organizational model. And frankly, from my perspective, more importantly, how we run the bank, since the financial crisis aimed at simplifying the bank and increasing accountability. You’ve seen we’ve moved quickly. We’re on track with our execution of this effort and it will generate over $1 billion of run rate saves at the end of the first quarter, purely from the organization efforts that we put in, that we announced in September. We’ve done this while investing and I think this is another difference. We’ve invested heavily in our transformation. And while that was capitalized by our consent orders, these investments will ultimately deliver benefits from automation from well governed data from consolidated platforms.

We also have made significant investments in our business to support the 4% to 5% revenue growth and to ensure client momentum. And those investments have helped us expand our product suite, invest in digital capabilities, automate our processes, capture synergies through a client organization. We’ve also brought in some incredible external talent in key strategic areas, including Andy to lead wealth, and we now have a good balance between experienced Citi people and external talent with fresh perspectives through multiple layers of the organization. So we are doing things the right way. We’re doing it for the long-term and we’re moving with urgency. We will need and are spending the money that we need to, to address our regulatory requirements, but that’s already embedded in our path to the 11% to 12% RoTCE in the medium term.

And this already feels like a different bank. We have more work to do. I recognize ’24 is a critical year. And as I said, the decks are much clearer now so that we can focus on two imperatives, improving our business performance and executing the transformation. Neither is an entirely linear path as we’ve seen over the last three years. We all know that. We get, we have to build our credibility. We’re committed to doing so and we are providing far more transparency around the business performance, so investors have a better sense of how we’re doing, and I and my management team, to your final question, are fully accountable for getting this all done, we will. Mark, expenses?