Citigroup Inc Q2 FY2020 Earnings Call

Hello and welcome to Citi's Second Quarter 2020 Earnings Review with the Chief Executive Officer, Mike Corbat and Chief Financial Officer, Mark Mason. Today's call will be hosted by Elizabeth Lynn, Head of Citi Investor Relations. Also as a reminder, this conference is being recorded today. If you have objections please disconnect at the time. Ms. Lynn, you may begin.

Thank you, operator. Good morning and thank you all for joining us. On our call today are CEO, Mike Corbat who will speak first. Then Mark Mason, our CFO will take you through the earnings presentation which is available for download on our website, citigroup.com. Afterwards, we will be happy to take questions. Before we get started, I’d 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, capital and other financial conditions 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 2019 Form 10-K. With that said, let me turn it over to Mike.

Thank you, Liz and good morning, everyone. Today, we reported earnings for the second quarter of 2020, with net income of $1.3 billion and earnings per share of $0.50. As in the first quarter, credit costs weighed down our net income. However, the overall business performance was strong, which shows that we've been able to navigate the COVID-19 pandemic reasonably well so far. The solid revenue growth at 5% and strong expense management down 1% both on the year-on-year basis, our margin was up 13%. We grew loans and our deposits were up significantly. Our regulatory capital increased and we continue to add to our substantial liquidity, and our balance sheet has more than ample capacity to continue to serve our clients. The Institutional Clients Group had an exceptional quarter. Fixed income was at 68%. We had our best investment banking quarter in recent history and private bank revenues approached $1 billion. And while Treasury and Trade Solutions continued to be impacted by the lower rate environment, we did see good client engagement and strong deposit growth in that business. Global Consumer Banking revenues were down and spending slowed significantly due to the pandemic. In North America, despite the decline in purchase sale activity, Branded Cards revenues were up slightly due to a mix shift towards earning balances. At the same time, Retail Services saw a significant decline in consumer spending with our partners. Retail Banking saw higher mortgage revenue from refinancing activity due to the low rate environment. In Asia, the slowdown in travel and consumer activity again reduced revenues. And in Mexico, revenues declined as the country is struggling from the effects of the health pandemic. Our capital position strengthened during the quarter with our common equity Tier 1 ratio increasing to 11.5% on an advanced basis. I was pleased with our results from the Federal Reserve's related stress test, placing our stress capital buffer at 2.5%. This leads us comfortably above our new regulatory minimum of 10%. Our tangible book value per share of $71.15 was down only slightly from the first quarter, but still up 5% from a year ago. We plan to keep paying our quarterly dividend as long as macroeconomic and financial conditions permit. During the quarter, we continued to support our clients, colleagues, and communities through this pandemic. While I'd like to see more of our people back in the office, we've been clear that we won't do anything to jeopardize their health and safety. Most recently, we paused plans to invite a limited number of colleagues back to sites located in areas where the health data was going in the wrong direction. We've also remained committed to supporting communities through a variety of initiatives. These now total over $100 million in contributions from our company and its foundation. But what I'm most proud of is the $2 million my colleagues donated out of their own pockets to organizations providing COVID relief as part of our matching program. We recently made our first distribution to the Citi Foundation representing $25 million in net profits from the Payroll Protection Program to support Community Development Financial Institutions. We're also partnering with minority-owned depository institutions to help them extend credit to businesses through PPP by purchasing their loans through a $50 million facility. This effort is even more important as we look at the economic disparities drawn along racial lines in our society. And, of course, we continue to serve our clients, whether it's providing consumer relief or helping companies access the capital markets to strengthen their balance sheets. We enter the second half in a strong position to handle what comes our way. We are in a completely unpredictable environment for which no models, no cycles to point to. The pandemic has a grip on the economy and it doesn't seem likely to loosen until vaccines are widely available. We'll keep managing through this with a sharp emphasis on our risk management and continue to make investments in our infrastructure to enhance our safety, soundness, and controls to ensure that we have an industry with strong and stable institutions. With that, Mark will go through our presentation. And then we will be happy to answer your questions.

Thank you, Mike, and good morning, everyone. Starting on slide 4. Citigroup reported second quarter net income of $1.3 billion, which included a $5.6 billion increase in credit reserves this quarter, primarily reflecting the deterioration in the economic outlook since the end of the first quarter under CECL and downgrades in the corporate loan portfolio. The reserve build also includes an additional qualitative management adjustment to reflect the potential for a higher level of stress and/or a somewhat slower recovery. Revenues of $19.8 billion grew by 5% from the prior year, primarily reflecting higher fixed income and investment banking records. Expenses were down slightly year-over-year resulting in positive operating leverage and a 13% improvement in operating margin. Credit costs were $7.9 billion this quarter. Our effective tax rate was 9% for the second quarter, reflecting a higher relative impact from tax-advantaged investments and other tax benefit items given the lower level of EBIT. Looking at results for the first half of 2020, we delivered net income of $3.8 billion even as we increased credit reserves by $10.5 billion under the CECL framework given the current environment. We grew revenues by 8% predominantly reflecting continued strength in our markets and investment banking businesses while we held expenses flat year-over-year, allowing us to deliver positive operating leverage and a 20% increase in operating margin. In constant dollars, end-of-period loans were down 1% year-over-year to $685 billion, reflecting growth in our institutional businesses mostly offset by the impact of lower spending activity in our consumer business. Deposits grew 20%, reflecting engagement with clients and a flight to quality across both institutional and consumer franchises, which serve to strengthen our available liquidity. We maintain a strong capital and liquidity position which has been critical to our ability to support our clients as they manage through this crisis. As of June 30th, our CET1 capital ratio was 11.5%, 150 basis points above our regulatory minimum requirement. We had close to $900 billion in available liquidity, including the additional reserves taken this quarter, credit reserves stand at roughly $28 billion with the reserve ratio of 3.89% of funded loans. With the level of capital, liquidity, and reserves we hold today plus significant pre-provision earnings power seen through the first half of the year, we continue to operate from a position of strength. As we discussed last quarter, we're combining this financial strength with operational resiliency which allows us to partner with and support our clients as we all manage through this crisis. Turning now to each business. Slide 5 shows the results for Global Consumer Banking in constant dollars. Revenues declined 7% as strong deposit growth was more than offset by lower loan volumes and lower interest rates across all regions. Expenses decreased 8% as lower volume-related expenses, reductions in marketing and other discretionary spending, and efficiency savings were partially offset by increases in COVID-19 related expenses. Total credit costs of $3.9 billion were up significantly from last year, including a reserve build of approximately $2 billion driven by the deterioration in the economic outlook. Slide 6 shows the results for North America consumer in more detail. Second quarter revenues of $4.7 billion were down 5% from last year. During the quarter, we continued to focus on providing assistance to help customers impacted by COVID-19. Since the crisis began, we have provided relief to more than 2 million accounts representing roughly 6% of our aggregate balances across cards and mortgages. In a hopeful sign, many of those same customers continued to make their regular payments during the second quarter, although we realized that and to date over half of our current enrollees have rolled off the program with more than 80% of these customers remaining current. While re-enrollment rates remain below expectations at about the mid-teens. Turning now to the businesses starting with cards. Branded Cards revenues of $2.2 billion were up 1% year-over-year as lower purchase sales and lower average loans were offset by a favorable mix shift towards interest-earning balances which supported net increase revenues. As seen across the industry, purchase sales declined significantly down 21% in the second quarter. However, in recent weeks we have seen signs of improvement with purchase sales down to the low double digits year-over-year in June compared to a 30% decline in April. Average loans declined 7% reflecting lower sales activity. We also took credit actions during the quarter including a pause in proactive marketing and a reduction in credit line increases and balance-concentration activity as examples. We believe these risk actions are prudent given the current environment, but they are likely to result in more pressure on interest-earning balances in the second half of the year. Retail Services revenues of $1.4 billion were down 13% year-over-year, reflecting lower average loans as well as higher partner payments. Net interest revenues were down 7% as average loans declined by 6% on lower purchase sale activity. Purchase sales were down 25% year-over-year in the second quarter, but similar to Branded Cards, we saw improvement in the month of June with the pace of sales declines flowing to the mid-teens. Higher partner payments drove the remainder of the revenue decline versus last year. As we have discussed in the past, Retail Services revenues are shown net of payments related to income-sharing arrangements with our retail partners, which can vary quarter-to-quarter based on the overall mix and profit outlook for our portfolios. Retail Banking revenues of $1.1 billion were down 3% year-over-year as the benefit of stronger deposit volume and an improvement in mortgage revenues were more than offset by lower deposit spreads. Our deposit momentum continues to improve with average deposits up 14% driven by a combination of environmental factors including the delay of tax payments, stimulus payments, and a reduction in overall spending, as well as our continued strategic efforts to drive organic growth. Digital deposit sales accelerated even as we continue to adjust pricing given the current rate environment with digital deposits growing by $3 billion this quarter to a total of nearly $12 billion. We also saw strong engagement with existing clients driving balanced growth across deposit products including checking which grew 13% year-over-year. Total expenses for North America consumer were down 10% year-over-year as reductions in marketing and other discretionary expenses along with efficiency savings and lower volume-related costs more than offset incremental COVID-19 related expenses. Turning to Credit. Total Credit cost of $3 billion increased significantly from last year as we built roughly $1.5 billion in reserves this quarter reflecting the impact of changes in our economic outlook, partially offset by the impact of a change in accounting for third-party collection fees. On Slide 7, we show results for International Consumer Banking in constant dollars. In Asia, revenues declined 15% year-over-year in the second quarter. Cards revenues declined by 22% reflecting lower activity levels with purchase sales down 29% year-over-year. We're seeing a disproportionate impact on Asia card revenues from lower travel spend in the region given our affluent client base and a greater proportion of fee revenues coming from travel-related interchange and foreign transaction fees. We also saw an impact on customer acquisition in products like insurance which rely more heavily on face-to-face engagement. However, average deposits remained strong at 10% this quarter albeit at lower deposit spreads, reflecting a flight to quality as well as continued client engagement across the franchise. While investment revenues were down this quarter, we saw continued underlying growth in our wealth management drivers with a 6% growth in Citigold clients and a 10% growth in net new money versus last year. Today, we are seeing some early signs that we are picking up activity with purchase sales declines moderating and net new money and investment sales showing a material improvement in June versus prior month. But the shape of recovery remains fluid. Turning to Latin America. Total consumer revenues declined 7% year-over-year. Similar to other regions, we saw good growth in deposits in Mexico this quarter with average balances up 9%. However, revenues were impacted by lower purchase sales, loan volume, and lower deposit spreads in the current environment. In total, operating expenses for international business were down 4% in the second quarter, reflecting efficiency savings and lower volume-related expenses, and cost of credit increased to $883 million. Slide 8 provides additional detail on Global Consumer credit trends. Credit loss rates generally trended upward this quarter as a result of the macroeconomic slowdown. Although this was much more a function of lower loan balances, it is still too early to see a pronounced impact from COVID-19 on our net credit losses. 90-plus day delinquency rates improved in the US despite the lower balances; reduced spending combined with the benefit of significant government stimulus and our own customer relief efforts generated liquidity which has been used to pay down debt even in the later delinquency buckets. Earlier stage delinquencies are also improved given the additional liquidity and the impact of relief efforts although it is still early and there is still significant uncertainty around the timing of the economic recovery and how customers will perform once these relief and stimulus programs start to roll off. Delinquency rates were up slightly in Asia, although still at modest and absolute levels. In Mexico, we saw a more significant impact as COVID-19 is still peaking in that market and customers are not benefiting from the same level of government stimulus. Turning now to Institutional Clients Group on Slide 9. Revenues of $12.1 billion increased 21% in the second quarter and were up 25% excluding a roughly $350 million pretax gain on our investment in trade wealth in the prior year, as strong performance in fixed income, investment banking and the private bank was partially offset by lower revenues in GTS, corporate lending, and security services. The quarter was also impacted by $431 million of mark-to-market losses on loan hedges as credit spreads tightened during the quarter. During the quarter, we continued to see strong client engagement across all of our institutional businesses. We've been actively helping our clients navigate through this uncertain environment. In TTS, we continue to work with our clients to sustain their operations, manage their supply chain, and optimize their working capital and liquidity. We will continue to see momentum in our digital efforts as evidenced by strong growth in Citi direct users and digital account opening, which further deepens our relationship with our clients. In markets, we saw record volumes as we supported our clients, leveraging our Citi velocity platform and electronic execution capability. And similar to the first quarter, we actively made markets for both our corporate and investor clients as we helped them navigate through volatile macroeconomic conditions. In Investment Banking, clients remained focused on both sources and usage of short-term and long-term liquidity. We continue to provide new loans and facilitate additional draws for clients looking to bolster liquidity. However, we also saw significant repayments which led to the sequential decline in end-of-period loan and corporate lending, and we continue to help our clients access capital markets which drove further share gain. I'd note that investment-grade debt underwriting is up 131% year-over-year as we continue to help our clients source liquidity in this evolving environment. Turning now to the results for the businesses starting with Banking. Total Banking revenues of $5.7 billion increased 4%. Treasury and Trade Solutions revenues of $2.3 billion were down 11% as reported and 7% in constant dollars as strong client engagement and solid growth in deposits were more than offset by the impact of lower interest rates and lower commercial cards revenues. Our average deposits were up 30% in constant dollars. We had strong growth in our instant payment and API volume, and our cross-border flows were resilient despite the significant macro slowdown. All of which give us confidence in the underlying health of the franchise. Investment Banking revenues of $1.8 billion were up 37% from last year, outperforming the market wallet and delivering the highest revenue quarter since the financial crisis. Results reflected strong growth in both debt and equity underwriting, partially offset by M&A. Private Bank revenues of $956 million grew 10% driven by increased capital market activity as well as higher lending and deposit volume, partially offset by lower deposit spreads. Corporate Lending revenues of $646 million were down 11% as higher volumes were more than offset by lower spreads. Total Market and Securities Services of $6.9 billion increased 48% year-over-year. Fixed Income revenues of $5.6 billion grew 68% reflecting strong performance across rates and currencies, spread products, and commodities. Equities revenues of $770 million were down 40% versus last year as solid performance in cash equities was more than offset by lower revenues in derivatives and Prime Finance reflecting a more challenging environment. Finally, in Security Services, revenues were down 9% on a reported basis and 5% in constant dollars as higher deposit volumes were more than offset by lower spreads. Total operating expenses of $5.9 billion increased 7% year-over-year as efficiency savings were more than offset by higher compensation costs, continued investment and volume-driven growth. Total credit costs of $3.9 billion were up significantly from last year. We built roughly $3.5 billion in reserves this quarter. The increase in reserves reflected the impact of changes in the economic outlook, as well as downgrades in the corporate loan portfolio during the quarter. As of quarter-end, our overall funding reserve ratio was 1.71%, including 4.9% on the non-investment grade. We provide more detail on the corporate portfolio in the appendix of our earnings presentation. Total non-accrual loans increased $1.5 billion sequentially this quarter reflecting the current environment, with roughly half of the increase coming from smaller-sized exposure. Overall, we remained vigilant in managing the portfolio and reserve levels relative to the stresses we saw out there today. Slide 10 shows the results of Corporate/Others. Revenues of $290 million declined significantly from last year reflecting the wind down of legacy assets and the impact of lower rates, partially offset by AFS gains, as well as positive marks on legacy security as spreads tightened during the quarter. Expenses were down slightly as the wind down of legacy assets was partially offset by higher infrastructure costs as well as incremental costs associated with COVID-19. The pretax loss of $343 million this quarter reflected loan loss reserves on our legacy portfolio, as well as lower revenues, partially offset by lower expenses. Slide 11 shows our net interest revenue and margin trend. In constant dollars, total net interest revenue of $11.1 billion this quarter declined $580 million year-over-year, reflecting the impact of lower rates and lower loan balances, partially offset by higher trading-related net interest revenue and the improved mix in branded cards that I mentioned earlier. On a sequential basis, net interest revenue declined by roughly $250 million, mainly reflecting the lower rate environment, partially offset by higher trading-related net interest revenue and the absence of an episodic one-time item. The net interest margin declined 31 basis points sequentially with lower net interest revenues, driving roughly one-third of the decline and the remainder representing balance sheet growth, reflecting an increase in liquid assets, driven by higher deposits as we accommodated the needs of our clients while also strengthening our own liquidity in the current environment. Turning to non-interest revenue. In the second quarter, strong performance in trading and investment banking drove a significant increase year-over-year. As we look to the third quarter, we expect both net interest revenues and non-interest revenues to decline year-over-year, reflecting the impact of lower rates and lower levels of activity related to COVID-19, as well as normalization in investment banking activities. On Slide 12, we show our key capital metrics. Our CET1 capital ratio improved to 11.5%, primarily reflecting the decline in risk-weighted assets. Our supplementary leverage ratio improved to 6.7%, primarily reflecting the benefit of the temporary relief granted by the FRB. Our tangible book value per share declined slightly to $71.15 due to the debt-valuation adjustment impact on OCI, as Citi’s credit spreads tightened during the quarter. During the quarter, we also received our stress test results including our preliminary stress capital buffer requirement of 2.5%. Incorporating this stress capital buffer and a GSIB surcharge of 3% results in a minimum regulatory requirement of 10%. In summary, the environment remains challenging this quarter, but we continue to perform well. We ended the period with a strong capital and liquidity position. The underlying business performance this quarter remained solid, and we were able to absorb the significant reserve build with strong results in our markets and investment banking businesses. Overall client engagement remains strong, bolstered by increased digital acquisition and engagement. While our consumer business has been impacted by COVID-19 related lower levels of activity, we have seen a pick up through the quarter. That said, we did see a significant headwind from the full quarter impact of the lower rate environment. Looking to the third quarter and the rest of 2020, we expect the environment to continue to remain challenging and uncertain. On the top line, we expect to see continued pressure in consumer, reflecting the impact of rates and lower levels of activity related to COVID-19. We would also expect the low rate environment to continue to weigh on our core businesses in ICG. Our markets and investment banking businesses should reflect broader industry trends. That said, we would expect normalization relative to the first half. Based on our best estimate, we would expect these headwinds in the back half of the year to result in full year revenues that are flat to down slightly, with the decline in net interest revenues more or less offset by non-interest revenues on a full year basis. On the expense side, we remain focused on protecting our employees and supporting our customers. We continue to feel good about the investments we are making, particularly in our digital capabilities and infrastructure and control. That said, we continue to explore all opportunities to operate more efficiently to fund these investments and offset headwinds created by COVID-19. Overall, we still expect expenses to be flattish to down slightly for the full year. Turning to credit, we do expect a higher level of losses going forward, given our current outlook. However, this should be offset by the release of existing reserves. Of course, the overall level of reserve in the back half of the year remains dependent on the environment relative to our current outlook. So, to wrap up, we are preparing for a range of outcomes and remain confident in our ability to maintain our overall strength and stability, as well as continue to support our customers. With that, Mike and I are happy to take any questions.

Your first question is from Glenn Schorr with Evercore. Your line is open.

Sorry about that. Can you hear me now? Sorry about that. My apologies. Quick question on cards; in your comments, you mentioned doing less balance transfer and tighter credit box impacting revenues. Could you dimensionalize maybe what portion of the book or remind us what portion of the book is promotional? Where this might take it to and how much pressure we're talking about on the card side? Appreciate it.

Yes. This is Mark. Good morning, Glenn. Look, I'd say a couple of things we're seeing take place. We're obviously managing through a crisis here, and what we've seen is less purchase sale activity, less loan volume take place and frankly less new card acquisitions both on the branded side as well as the retail side. In light of that, we've dialed back the marketing spend, we've dialed back balance-concentration and the like, and what happens as you know is that as you dial back that level of spending in the future you don't get the increase in average interest-earning balances, loan balances that ultimately drive forward-looking revenues. The comment there is simply meant to suggest as we prudently manage through this crisis. We've needed to dial back; we've decided to dial back. That's been and I think what's critically important is that we turn that back on as this crisis turns around, and that's the way we're kind of planning so that we start to get those promotional balances peeking back up as the economy turns as GDP turns as unemployment falls. We can start growing those balances again. The mix as you know is very important. It'll be pressured as we manage through this, but then we want to be very responsive to the economy as it changes which is slightly different from the way it was handled in the past.

That's fair. All prudent, I get it and apologies if I missed it in the prepared remarks. Related to the reserve build, I get that there's multiple scenarios, a lot of variables, but can you talk about where we were at the end of the first quarter versus where we at the end of the second quarter in the economic backdrop that you wrote reserves to just so we can do the compare and contrast. Thanks.

Yes. Let me try and dimension that a little bit because I think it's important to first to kind of understand how we approach the CECL modeling. I'll share with you the variables, the key variables that we used in the second quarter here specifically. So remember as we approach CECL we have to take a view on the forward look of the economic environment. The basic economic forecast called for U.S unemployment peaking at roughly 15% or so in the second quarter and GDP falling 35% plus quarter-over-quarter. What's important is the shape and the pace of the recovery including whether we see a significant second wave of the virus or what impact the crisis has on broader employment, etc. Our base scenario has GDP recovering sequentially in the third quarter and beyond, bringing it under 10% by the end of the fourth quarter of 2020 and then trending down from that through the fourth quarter of 2021. These assumptions kind of assume a potential second wave but one that is controlled, it assumes appropriate fiscal response if needed to maintain that pace of recovery but there's a lot of uncertainty there. Hopefully that helps.

Your next question is from the line of Matt O’Connor with Deutsche Bank.

Good morning. Could you talk a bit about the timing of when you think the charge-offs will actually start to go up? And obviously you've alluded to the large reserves and that may or may not hit earnings entirely, but just as we think about the loss recognition, maybe if you can speak to when you think we might start seeing that and what peak levels and when, and obviously it might vary by region. So any thoughts on those topics would be helpful. Thank you.

Sure. If you look at the information we reported, we aren't seeing significant NCLs yet. There are some increases, but they aren't substantial. We're not experiencing meaningful increases even in the 30 to 89-day buckets; in fact, they are declining. In North America, the 30 to 89-day delinquencies decreased sequentially in branded cards, while in retail services, they were relatively stable. Additionally, in Asia and Mexico, we observed a decline as well. Factors like government payroll protection programs and stimulus checks are supporting the economy, so the stress isn't showing up in those early buckets yet. As we progress to the latter half of the year, we expect NCLs to start increasing, particularly on the consumer side, likely peaking around the middle of next year. It's important to note that we are currently building reserves based on lifetime expected losses, and as the forecast unfolds, those losses are expected to rise.

And then just on a follow-up, I mean this is the first cycle that we've all been through with CECL, and I always think there's all these reserves being built that you're supposed to use as charge-offs hit. But that assumes that charge-offs aren't going to go up beyond the level of reserves, right? I guess I'm just wondering like it should be a little bit more coincident in terms of using reserves as charge-offs go up than maybe before CECL, but I would assume the backup this year when charge-offs go up, like you're not going to be using reserves yet until you're confident that the macro is not going to be worse than you preserved for, right?

Again, in every quarter, we're going to be taking a view on the forward economic outlook. If we get into the third quarter and we're seeing that our outlook is consistent with what it was at the end of the second quarter, then we're going to take a view related to balances. This qualitative approach is meant to account for some of that uncertainty and the prospect for a yet worse scenario.

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

Hi. Good morning. I hate to ask yet another question on the reserve, but just wanted to make sure we got the right takeaways from everything that you just said, Mark. As we think about your current outlook for the economy are you done with significant reserve building? Should we assume that once the charge-offs actually start to materialize that they're drawn against your reserves and you have a longer, reasonable, and supportable period versus peers? Wondering as investors start evaluating banks on normalized earnings how we should think about the end-state reserve to loan ratio relative to that longer RNS period?

I guess here's the way I think about it which is we obviously, you've heard us say, in terms of the uncertainty unprecedented crisis, we've taken a view on our forward look of the economy. We have reserve levels of $28.5 billion, 3.9% or so of funded loans. We're sitting with reserves that we feel comfortable about, but that is tied to the scenario that I've described for you. If GDP goes down, then we'll have to make adjustments accordingly. So hopefully that helps.

Your next question is from the line of Gerard Cassidy with RBC.

Good morning, Mark. Good morning, Mike. Mark, you gave us good detail in the slides, as you pointed out on the commercial portfolio, the wholesale portfolio and you showed us some of the migration trends from AAA to BBB, etc. Can you share with us what percentage of the corporate portfolio was reviewed and was downgraded? How often do you now need to review the portfolio for potential future either upgrades or downgrades in that portfolio?

Yes. We are constantly reviewing the portfolio. We ramped that timing up significantly as we've managed through this crisis. Companies have been impacted, and when I think about the sectors that drove a good portion of the reserve build we saw aviation, energy, autos, commercial real estate and retailing. We did see significant downgrades through the quarter, and we are actively reviewing the portfolio as we would imagine. We'll continue to do that and continue to work through the entire book there.

Thank you. And then as a follow-up shifting over to the consumer side, in the slides once again you gave us the relief efforts that you're making with some of your customers or forbearance. Is there any way of discerning what percentage of those customers are unemployed but receiving enhanced unemployment benefits so that the delinquencies across your portfolios, as well as your peers are quite low?

We don't have that. We do have early signs of both customers who took advantage of the forbearance globally and them still paying. So we've got if you think about it globally, we have 40% to 60% of the customers that were enrolled in the consumer relief programs continued to make payments. So that is a good sign. The first-time enrollment volumes have come down significantly, while we're offering re-enrollment, the rates are running below expectation. We’re seeing good signs of those rolling off enrollment continuing to remain current, which we think is a positive indicator. That said, there's still uncertainty out there.

Your next question is from the line of John McDonald with Autonomous Research.

Thank you. Mark, I was hoping you could drill down a little bit on the outlook for consumer revenues. You mentioned the outlook for continued pressure on the top-line there. Just wondering it sounds like maybe you're seeing some improvement in Asia; you're down 15% revenues in the quarter but sound like maybe a little bit improvement there. Latin America wasn’t sure, so maybe just a little bit of dimensioning what you see in the outlook for consumer revenues international and domestic.

We expect consumer revenues will continue to have some top-line pressure, and if we could break it into pieces; in the US, our branded cards, our retail services... The unemployment stats are important indicators for those businesses. We've seen improvement in purchase sales, but still in the 20s year-over-year, so we do expect continued pressure in those loan activities. In Asia, that large card business is focused on wealth; again purchase sales are still under pressure. In Mexico, the situation is similar given GDP deceleration. However, underlying indicators remain strong for us in terms of deposit growth, engagement, and digital access to offerings.

Your next question is from the line of Brian Kleinhanzl with KBW.

Great. Thanks. Maybe just a quick question for Mike. I know there's been a lot of changes in Hong Kong so a big piece of your portfolio and what are the operations over there? Is there any change in how you're thinking about the business there? And how you think about that in a go forward basis to start?

I would say one is that I think as we look at the region you can't just look at Hong Kong. I think you've got to take a broader view, it's complex. We have seen different health responses, different economic responses, and we've been in Hong Kong a long time. It's important to us, and I would say that we have found both the Hong Kong government and other entities very supportive of our business and our approach. Obviously, it's something we pay close attention to but we're committed to being there and we're monitoring things closely.

In a separate question. And Mark mentioned that there were some pressures from partner payments. Are those higher partner payments fully in the run rate now, or should we expect those to kind of increase on a go-forward basis? What were those exactly? Thanks.

We did announce an investment a number of years ago, we are largely through that; those investments were made in building out enhancing our technology and digital capabilities. The profitability estimate excludes ACLs so the reserves that we built. We think we're well positioned, but we believe we accounted for the level of profit-sharing that we would expect.

Your next question is from the line of Saul Martinez with UBS.

Good morning and thanks for taking my question. So, Mark, I want to go back to CECL and get your perspective on the stickiness of CECL reserves as its charge-offs start to happen. And I guess the willingness to release reserves, that I think we've all been focused on reserve builds, when we see the peak in reserves and less focus on the cadence and pace of releasing reserves and declines in reserves as the actual losses start to occur.

It largely depends on our outlook at that point in time in that given quarter. If that forward-looking view is still meaningfully uncertain or worse than it was in the second quarter, then we will likely continue to have to adjust reserves accordingly.

Your next question is from the line of Ken Usdin with Jefferies.

Thanks. Good morning. First question just on expenses, Mark, you've done a very nice job this year keeping the level flat in that $10.4 billion, $10.5 billion zone through the first half. Can you talk about just what optionality you do have to adjust the cost base lower?

As I mentioned, we expect to maintain our expense level roughly flattish, and we've got some headwinds that fall into a bunch of different categories including the things we do to support our employees, including building out our collection capabilities, including enhancing our fraud detection capabilities, and ensuring that people have remote access and the equipment to support that, all of which come with a cost. Yes, there are levers but there are also meaningful headwinds.

Got it. Thank you. My second question just on capital. This year you've been bound a little bit more on CET1 by the advanced approaches with advanced RWAs a little bit higher than standardized. Is there anything you can do to optimize the advanced RWAs vis-à-vis the standardized approach?

We're actively managing and optimizing the balance sheet to identify ways to impact or reduce risk-weighted assets. The regulatory minimum for CET1 is around 10%. We're still 150 basis points above that regulatory minimum, which we think gives us room to manage through this period of uncertainty.

Your next question is from the line of Jim Mitchell with Seaport Global.

Good morning. Mark, maybe just can you help us unpack a little bit how we think about the trajectory of NII? What are your assumptions around balance sheet growth and NIM? Where do you see kind of NIM bottoming out? Those kind of things would be helpful and just understanding your assumptions versus ours.

We continue to see as we mentioned a decline in NIM recently. We expect to continue to see pressure on the NIM line in the outer quarters. I think we’ll see some continued growth in the balance sheet but that will be driven by the client demand. But we will likely see some growth in the balance sheet from a GAAP asset point of view.

Just as a follow up on capital. Mike, do you think you need to see a vaccine before banks can return to buybacks or do you think it just needs to be a little more stable macro data?

I think it's based on projecting forward what we see from an economic perspective and how we're projecting loss rates. We would like to see a better sense of normalcy returning to the global economy.

Your next question is from the line of Charles Peabody with Portales.

Good morning, Mark. Good morning, Mike. Mark, I was wondering if the CARES ACT provided some capital relief around your tax position?

In terms of the CARES ACT, there is a benefit associated with that. I don't think that it is significant in our case to the CET1 ratio.

If tax rates are raised as Biden suggests, how much would that enhance your CET1 ratio?

We would have to make a number of adjustments, such as that would add to capital.

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

Hi. Good morning. I was wondering if you could share an update on your efforts to drive deposit growth in the US?

We've had very good consumer deposit growth through the quarter. We’ve benefited from the investments that we've made in our digital capabilities, and we expect to continue to capture upside from both new and existing clients.

Is there more room for the consumer to accelerate and move it forward from here?

We've had strong consumer growth across all regions. We are pleased with the growth that we're seeing here. Mike, do you want to add something?

Yes. Two-thirds of the digital growth is coming from outside our branch footprint.

Your final question is from the line of Mike Mayo with Wells Fargo Securities.

Hi. Thanks for letting me have my follow-up questions. So just to be clear, you are not guiding for positive operating leverage this year, Mark?

Yes, revenues are slightly down and expenses flattish.

And as far as the equities business, do you expect equities to improve? How do you think about that?

I would say that our cash trading performance was strong. We did not see as good performance in Prime or Delta One financing. In terms of ECM, that business was strong, it was up 56% year-over-year.

There is a feeling that I'm getting that either you're being more realistic, maybe you differ from the rest of the world on the realities of the world out there. Can you clarify your position?

It is not our intention to be negative. We are seeing positive signs, but the unknowns outweigh the knowns. The complexity of the current environment means we need to prepare for a range of outcomes.

This concludes today's second quarter 2020 earnings review. Thank you for your participation. You may now disconnect.