Citigroup Inc Q2 FY2022 Earnings Call

Hello and welcome to Citi’s Second Quarter 2022 Earnings Review with Chief Executive Officer Jane Fraser and Chief Financial Officer Mark Mason. Today’s call will be hosted by Jen Landis, Head of Citi Investor Relations. Ms. Landis, you may begin.

Thank you, operator. Good morning and thank you all for joining us. 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 SEC filings. With that, I will turn it over to Jane.

Thank you, Jen. And thank you everyone for joining us today. When we last spoke we said the macro and geopolitical outlook was complex and uncertain. So, in one sense, little has changed. However, the headwinds have certainly crystallized. And it's against that backdrop that I'm proud of the results our team delivered this quarter as we execute on our strategy and transformation. There are mounting costs to the series of supply shocks we've experienced. And now we need to pay attention to an additional 'S' in ESG, and that is security. In addition to energy and cybersecurity, food security has also come into sharper focus, threatening to spread the humanitarian cost of the war well beyond Europe. Resiliency is the new priority for governments and corporates alike. And all of this is adding to inflationary pressures, which are in turn being met with a more hawkish response from the Fed and other central banks, all contributing to sharply lower U.S. consumer confidence. Higher rates and Quantitative Tightening will keep volatility high. That said, wealth sentiment has shifted. Little of the data I see tells me the U.S. is on the cusp of a recession. Consumer spending remains well above pre-COVID levels with household savings providing a cushion for future stress. As any employer will tell you, the job market remains very tight. Similarly, our corporate clients see robust demand and healthy balance sheets with revenue softness attributed to supply chain constraints so far. So, while a recession could indeed take place over the next two years in the U.S., it's highly unlikely to be a sharper downturn as others in recent memory. I'm just back from Europe, where it's a different story. We expect a very difficult winter is coming, and that's due to disruptions in the energy supply. There is also increasing concern about second-order effects on industrial production and how that will affect economic activity across the continent. And the mood is, of course, further darkened by the belief that the war in Ukraine will not end anytime soon. In Asia, a rebound in China also faces some constraints given the potential for future lockdowns, the amount of leverage in the Chinese economy and stress in their property sector. Given this uncertain environment, I'm quite pleased with our overall performance. We reported net income of $4.5 billion and EPS of $2.19 and a RoTCE of 11.2%. We grew revenues by 11% year-over-year while remaining on track to meet our expense guidance for the year. Services continued to show excellent momentum with revenues up 28% year-over-year. While some of that growth is a result of the rate environment, we had double-digit fee growth, consistent with the strategy we presented to you in March. TTS in particular fired on all cylinders as clients took advantage of our global network, leading to the best quarter this business has had in a decade. The market volatility that we saw in the first quarter continued into the second, driving corporate clients in particular to be more active in risk management, contributing to revenue growth of 25% in markets. The volatility we saw in foreign exchange rates, commodities and equity derivatives favored our mix, and we were more efficient in our capital usage. And while this level of activity is related to where we are in the current cycle rather than a new baseline in markets, I believe we are helping our clients navigate this environment quite well. And it shows how our emphasis on our corporate clients globally given their consistent trading needs is a differentiating one for us in market. On the flip side, that same environment continues to put a great deal of pressure on the Investment Banking wallet with our revenues down 46%. However, we are seeing an increase of lending as our clients have been less inclined to obtain financing through the debt markets given the recent swings. In U.S. Personal Banking, the positive drivers we saw in our two credit card businesses over the last few quarters converted into solid revenue growth this quarter, most notably, 10% growth in branded cards. And you can see how resilient the consumer is in the U.S. through the elevated payment rates and the low level of credit losses. They have, however, shifted their spend far more to travel and entertainment, which are now outpacing 2019 levels. While volatility can be an opportunity for our trading desks, lower asset prices are a headwind for wealth management. Asia again was hit harder than other regions, leading to flat year-over-year wealth management revenues overall. That said, we continue to execute our wealth strategy across a number of fronts, including building our base of client advisors, expanding our Private Bank’s physical footprint to reach 20 countries with the additions of Germany and France, and increasing referrals from our branch network in the U.S. So, the underlying strategic drivers for the long-term growth of this business continue to advance. Overall, while we did have a slight build in reserves given the increasing possibility of a recession, we are operating from a position of strength. Our capital, liquidity, credit quality and reserve levels are strong, and our diversified business mix also positions us well for the choppy waters on the horizon. Well, while the world has changed since we presented our Investor Day to you in March, our strategy has not. We have continued to execute it with discipline and urgency. The quarterly report card on Slide 3 should help you hold us accountable for our progress. We are laser-focused on the long-term goals we set out in March, and I see this quarter's performance as validating that we are indeed on the right path. Simplifying the firm is a high priority, and we made good progress executing on our divestitures, such as closing the sale of Australia during the quarter. We're well into the sales process in Mexico, working through the regulatory and legal dynamics that can be expected in a transaction of this nature. In terms of Russia, we continue to shrink the size of our business and take steps to reduce our financial exposure. Given the complex environment, we are considering the full range of possibilities to exit our Consumer & Commercial Banking businesses, including portfolio sales. As divestitures such as Australia progress, we are beginning to eliminate stranded costs and simplify our model. And this discipline is critical to ensuring we have the resources to invest in the businesses where we want to gain or maintain a competitive advantage and to ensure the success of our transformation. To that point, we were particularly pleased that our AML consent order was lifted by the OCC in April. We are committed to ensuring our technology, controls and processes are up to the standards our regulators expect of us and we expect of ourselves. Let me end on capital. We increased our CET1 ratio to 11.9% this quarter while returning $1.3 billion in capital, including a rather modest level of buybacks. Our tangible book value per share now exceeds $80. Despite the strength of our balance sheet and reserves, our stress capital buffer is set to increase to 4% in the fourth quarter as a result of this year's stress test scenario. So, over the near term, we plan to build to a CET1 ratio of approximately 13%, including our 100 basis-point management buffer. Over the medium term, our CET1 target remains at 11.5% to 12%. We are prioritizing our dividend and are pausing our share repurchases as we build capital. We have a management buffer, which we can use to help ensure a smooth path to our required levels, and Mark will walk you through our approach in a few minutes. We will generate significant capital given our earnings power and the completion of pending divestitures. We know how important buybacks are to shareholder value creation, particularly when we are trading at these levels, and are committed to restarting them as soon as it is prudent to do so. We will make every effort to optimize our capital, especially in businesses such as Markets. So we balance the needs of our clients, our investors and our regulators. Overall, in a challenging macro and geopolitical environment, our team delivered solid results, and the bank is in a very strong position to weather uncertain times whilst playing to our strengths. I'm confident about the path ahead, and I'm pleased with our early progress. Now, I'd like to turn it over to Mark, and then we'd be delighted, as always, to take your questions.

Thank you, Jane, and good morning, everyone. I'm going to start with the firm-wide financial results, focusing on year-over-year comparisons for the second quarter, unless I indicate otherwise; then spend a little more time on expenses, capital and Russia; and then turn to the results of each segment and end with 2022 guidance. On slide 4, we show financial results for the full firm. As Jane mentioned earlier, in the second quarter, we reported net income of $4.5 billion and EPS of $2.19 with an RoTCE of 11.2% or $19.6 billion of revenues. In the quarter, total revenues increased 11% with growth in both, net interest income as well as non-interest revenues. Net interest income grew 14% driven by higher rates as well as strong volumes across ICG and PBWM. Non-interest revenue grew 5% driven by fixed income and services, which more than offset lower non-interest revenue in Investment Banking and PBWM. Total expenses of $12.4 billion increased 8%, largely driven by transformation, business-led investments and volume-related expenses. On a year-to-date basis, expenses were up 12%, but excluding divestiture-related impacts were up 9%, also driven by the factors I just mentioned. Cost of credit was $1.3 billion, driven by net credit losses of $850 million and an ACL build of approximately $400 million. At the end of the quarter, we had approximately $18.3 billion in total reserves with a reserve-to-funded loan ratio of 2.44% and are well capitalized with a CET1 ratio of 11.9%. On slide 5, we show an expense walk for the second quarter with the key underlying drivers. As I mentioned earlier, expenses increased by 8%. 3% of the increase was driven by transformation investments with about two-thirds related to risk, controls, data and the finance programs. Approximately 25% of the investments in those programs are related to technology. And as of today, we have over 9,000 people dedicated to the transformation. About 2% of the expense increase was driven by business-led investments as we continue to hire commercial and investment bankers as well as client advisers in wealth. And we continue to invest in the client experience as well as front-office onboarding and platforms. 2% was due to higher revenue and volume-related expenses, largely in Markets and Cards. Approximately 1% was driven by compensation as well as other risk and control investments, partially offset by productivity savings and the impact of foreign exchange translation. Across all these buckets, we continue to invest in technology, which is up 14% for the quarter. Before we move on from expenses, we wanted to provide some tangible examples of what we are working on regarding our transformation and some of the benefits we expect to see over time. The transformation is designed to improve our governance and processes, enhance our policies and leverage technology to strengthen our controls. We've been actively investing in technology to improve automation and hiring people to stand up these efforts. To this end, we are enhancing our risk management processes and capabilities across a number of areas. For example, in Banking, we've gone live with a new platform and now begun to consolidate our 37 loan processing systems to one loan servicing platform. We have continued to build out our infrastructure to enhance our stress testing capabilities across the firm, which is particularly useful in this market. Given the power and importance of data, we are redesigning our data governance and data organization, which will help us improve the timeliness and quality of our data. These foundational data-related changes will allow us to simplify and improve client onboarding and deepening, product development, as well as enhance our data analytics for every function. We are streamlining our financial planning process to allow for multiple scenarios with greater frequency, including more agile capital planning. We signed with a major software provider to begin a multiyear process of modernizing and moving our 16 ledger platforms deployed across 121 instances to one cloud-based ledger. While we are in the early stages of these initiatives, we expect the efficiencies from these investments to be key in helping us meet our Investor Day commitments. On slide 6, we show net interest income, loans and deposits. In the second quarter, net interest income increased by approximately $1.1 billion on a sequential basis driven by higher rates, day count, growth in loans as well as the impact of the European dividend season on our Markets business. On a year-over-year basis, net interest income increased by approximately $1.5 billion driven by higher interest rates as well as volumes across businesses. We grew average loans by approximately 3% in ICG, mainly in trade finance, and 4% in PBWM. Legacy franchise loans declined, largely driven by the reclassification of loans to held for sale. Sequentially, the gross yield on our loans increased by 35 basis points, and the cost of our interest-bearing deposits increased by 20 basis points. On slide 7, we show our summary balance sheet and key capital and liquidity metrics. We maintained a very strong balance sheet. Of our $2.4 trillion of assets, about 22% or $531 billion are high-quality liquid assets, or HQLA, and we maintained total liquidity resources of approximately $964 billion. Our end-of-period deposits increased by 1%, largely driven by TTS and wealth. On a sequential basis, deposits decreased by 1%, including the impact of seasonality in wealth. From an RWA perspective, we saw both advanced and standardized RWA come down year-over-year and sequentially as we continue to optimize RWA. We ended the quarter with a standardized CET1 ratio of approximately 11.9%, and standardized remains the binding requirement. Our tangible book value per share was $80.25, up 3%. On slide 8, we show a sequential CET1 ratio walk to provide more detail on the drivers this quarter and our goals over the next few quarters. First, we generated $4.3 billion of net income to common, which added 34 basis points. Second, we returned $1.3 billion in the form of dividends and buybacks, which drove a reduction of about 10 basis points. Third, the interest rate impact on AOCI through our investment portfolio drove a 12 basis-point reduction. Fourth, the decrease in disallowed DTA drove a 5-basis-point increase. Finally, the remainder was driven by a combination of our net RWA optimization efforts as well as the 12 basis-point benefit from the closing of the Australia sale. We ended the quarter with a CET1 ratio of 11.9%, 50 basis points higher than the first quarter and well above the regulatory requirement of 10.5%. We expect our regulatory requirement to increase to 11.5% in October of 2022 to account for the increase in our stress capital buffer from 3% to 4%. In January, our regulatory requirement will increase to 12% as a result of an increase in our G-SIB surcharge. A combination of our earnings generation, closing of divestitures and continued RWA optimization efforts will be important tools as we manage towards our CET1 requirement. Our management buffer, which was designed to temporarily address volatility, will allow us to build gradually while continuing to support our clients. Given all that, we do expect to build to a CET1 target of approximately 13% by midyear 2023, which accounts for the increased regulatory requirement and assumes a 100-basis-point management buffer. However, consistent with what we said at Investor Day, our medium-term target remains at 11.5% to 12%. And while we are pausing buybacks for now, as I've said before, we remain committed to returning excess capital to our shareholders over time. On slide 9, we provide an update on our exposure to Russia. In Q2, we reduced our exposure by $3.1 billion in local currency terms, which was more than offset by the ruble appreciation. As of today, the mix of our exposure has changed and is now reflecting a higher proportion of stronger credit names. Additionally, our net investment in our Russian entity is now approximately $1.2 billion, up from about $700 million due to the ruble appreciation. As a result of the actions that we've taken to reduce our risk, we now believe that under a range of severe stress scenarios our potential capital impact is estimated to be approximately $2 billion, down from the $2.5 billion to $3 billion last quarter. On slide 10, we show the results for our Institutional Clients Group. Revenues increased by 20%, largely driven by TTS, Markets, Securities Services as well as a gain on loan hedges, partially offset by a decrease in Investment Banking revenues. Expenses increased 10% driven by transformation, business-led investments and volume-related expenses, partially offset by productivity savings. Cost of credit was a benefit of $202 million with a net ACL release of $220 million and net credit losses of only $18 million. The release was largely driven by a reduction in Russia-related risk, partially offset by a build due to increased global macro uncertainty. This resulted in net income of approximately $4 billion, up 16%. We grew average loans by 3%, largely driven by TTS loans, which were up 17%. Average deposits grew 1% driven by the deepening of existing client relationships and new client acquisitions. ICG delivered an RoTCE of 16.6%. On slide 11, we show revenue performance by business and the key drivers we laid out at Investor Day, which we will show you each quarter. In services, we continue to see a very strong new client pipeline and deepening with our existing clients and expect that momentum to continue. In Treasury and Trade Solutions, revenues were up 33% driven by 42% growth in net interest income as well as 17% growth in NIR as we saw strong growth with both mid and large corporate clients. We continue to see healthy underlying drivers in TTS that indicate continued strong client activity with U.S. dollar clearing volumes up 2%, cross-border flows up 17% and commercial card volumes up 61%. Again, these metrics are indicators of client activity and fees and on a combined basis drive approximately 50% of total TTS fee revenue. Securities Services revenues grew 16% as net interest income grew 41%, driven by higher interest rates across currencies. NIR grew 8%, largely reflecting elevated activity levels in issuer services. Overall, Markets revenues were up 25%. The macro environment played to our strengths with the volatility leading to elevated corporate client activity. Fixed Income Markets revenues were up 31% driven by FX, rates and commodities due to active engagement with our corporate clients as we help them manage risk associated with volatile markets. Equity markets revenues were up 8% driven by strong equity derivative performance, partially offset by less client activity in cash and a net decrease in prime balances as lower asset valuations more than offset new client balance. Banking revenues, excluding gains and losses on loan hedges, were down 28% driven by Investment Banking as heightened geopolitical uncertainty and the overall macro backdrop impacted client activity, partially offset by higher revenue in corporate lending. We feel very good about the progress we are making here as we continue to deepen existing client relationships as well as acquire new clients. Now turning to slide 12, we show the results for our Personal Banking & Wealth Management business. Revenues were up 6% as net interest income growth was partially offset by a decline in non-interest revenue, largely driven by partner payments in retail services. Expenses were up 12% driven by transformation, business-led investments and higher volume-driven expenses, partially offset by productivity savings. Cost of credit of $1.4 billion was up as we added reserves given the increase in overall uncertainty in the macro environment compared to a net ACL release last year. NCLs were down 19% as we continue to see strong credit performance across portfolios. Average loans grew 4% driven by strong growth in branded cards as well as growth across retail services and wealth. Average deposits grew 6% driven by growth across retail and wealth. We continue to maintain a strong reserve-to-loan ratio of 7.5% in our U.S. Cards business. PBWM delivered an RoTCE of 6.8%. While a low return, this was driven by the ACL build and an increase in expenses in the quarter. On slide 13, we show PBWM revenues by product as well as key business drivers and metrics. Branded Cards revenues were up 10% driven by higher interest on higher loan balances. We are seeing encouraging underlying drivers with new accounts and card spend volumes both up 18% and average loans up 11%. Retail Services revenues were up 7%, also driven by higher interest on higher loan balances, partially offset by higher partner payments. So, despite payment rates remaining elevated, the investments we have been making have driven growth in interest-earning balances of 3% in Branded Cards and 2% in Retail Services, and we believe we will continue to grow these balances in the second half of the year. Retail Banking revenues were up 6%, primarily driven by deposit spreads and volumes. Wealth revenues were flat as investment fee headwinds offset NII growth driven by deposits and loan volumes. Excluding Asia, revenues were up 4%. We're starting to see the leading indicators pick up with average deposits up 7% and client advisers up 8%. We are seeing strong new client acquisitions, having added 800 Private Bank clients and over 50,000 Citigold clients since last year. On slide 14, we show results for legacy franchises. Revenues declined 15%, largely driven by the closing of the Australia consumer sale, the Korea wind-down and muted investment activity in Asia. As we mentioned, this quarter, we closed the sale of the Australia consumer business, which was a benefit of up to $1.5 billion of capital. On slide 15, we show results for Corporate/Other. Revenues increased largely driven by higher net revenue from the investment portfolio, and expenses were down. On slide 16, we briefly touch on the full year 2022 outlook. At this point, we continue to expect full year revenues to be up in the low single-digit range. Relative to Investor Day, the rate curve is certainly giving us a tailwind from an NII perspective, and Markets revenues are up for the first half of the year. However, as we mentioned earlier, we are seeing much lower levels of Investment Banking activity, and this will likely continue for the remainder of the year. In terms of expenses, we still expect to grow expenses by 7% to 8%, excluding the impact of divestitures. While we are seeing some impact from inflation, we believe the efficiencies that we're executing against and the impact of foreign exchange translation should offset these headwinds.

Our first question will come from John McDonald with Autonomous Research.

Hi. Good morning. Mark, I was hoping that maybe you could unpack the guidance for 2022 a little bit more. It seems like you've got more good guys than bad guys maintaining the guidance. But maybe within that, could you give us a little bit more color on what you're expecting on net interest income, where the trends seem strong? And then maybe what you're assuming for markets in the back half of the year? Thank you.

Yes. Thank you, John. Good morning to you. As you said, we have seen the benefit certainly in the quarter here of the pickup in rates. And certainly, all indicators are that the rate increases will likely continue through the balance of the year. As you've heard me say before, I do expect that we will see continued growth in loans, particularly on the card side. We saw some of that start to play in sooner than expected because I had talked about it being in the back half of the year. We saw some of that even here in the second quarter. We do continue to think we'll get some lift there. We also expect to see continued momentum on the services side, both in TTS and life with Securities Services as well. That growth is more than just rates, but certainly, a portion of that does come from rates as well. Where the pressure is going to come is in the non-interest revenue, and we saw that certainly in the quarter here on the Investment Banking side. We saw that obviously in some of the wealth businesses, particularly in Asia. That’s where some of the offset is that we'd expect against that NII momentum. Now, the reality, I think, is that we'll have to see how this plays out as it relates to markets. All the uncertainty that's out there in the environment thus far has played to our favor given our focus on corporate clients and what have you. But I'd tell you that as I look at the full year, based on what we know now and with the uncertainty that's out there, I continue to feel comfortable with that guidance probably to the higher end of that low-single-digit growth that I've talked about.

Okay. And then, maybe as a follow-up, just remind us where you are on net interest income sensitivity. You've updated the way I think you look at it relative to peers and relative to rates. Just remind us where you are on that and what kind of deposit pricing assumptions are embedded in that.

Sure. So, important to kind of just level set, John, great question. We got to think there are a couple of drivers that kind of come into play when we think about the sensitivity. One is obviously the mix. So, in our case, we've got about two-thirds of our deposits are wholesale, about a third are consumer. We've got obviously 70% of ours are in U.S.-denominated and the rest are kind of non-U.S. And that mix is important when you think about betas, when you think about sensitivity and how they play out, particularly in a rising rate environment at the pace that we've seen, and that pace varies for both the U.S. versus the non-U.S. currencies. And so, that's all going to be a factor in kind of how we think about it. You're right. In our disclosure, we forecast our IRE disclosure based on a runoff balance sheet assumption. And what I've been describing the past couple of quarters is an approach that's more consistent with peers, which assumes a static balance sheet. Under that analysis, if we were to look at an assumption for a 100 basis points parallel shift in rates, cross-currencies, we think that would generate roughly a $2.5 billion increase in NII. For us, that's going to skew towards non-U.S. dollars. About 80% of that would be non-U.S. dollar, about 20% U.S. dollar. That shift is in part because we've seen already a significant increase in the U.S. We've seen some increase in non-U.S. but nowhere near the magnitude that we've seen in the U.S. So, I'll stop there. Hopefully, that addresses your question.

Thank you. Our next question will come from Glenn Schorr with Evercore ISI.

Mark, I wonder if you could just elaborate on the headwinds in non-interest revenue within PBWM and Retail Services. It sounds to me like you extended a contract for a partner or something like that. And then, maybe bigger picture, in Cards, you just mentioned rising card loans. We all want rising loans. How do you decipher what's good rise in card loans versus a little concerning rise in card loans?

Sure. Let me address your questions in order. Regarding Retail Services, it is not related to an extension of a contract. What I mean is that we have a partnership in Retail Services, which involves sharing the profits from the business we generate. In this rising interest rate environment, we've noticed an increase in net interest income, resulting in more profits available to share with our partners. This profit-sharing reflects in the non-interest revenue line, showing up as a fee in contra revenue as we distribute these earnings with clients. This is what is influencing the shifts you're observing in PBWM concerning Retail Services. As for our growth in Cards, we are quite optimistic. There are certainly environmental factors in play affecting consumers and corporations. Our marketing and advertising efforts have ramped up, with an 18% increase in acquisitions. We are focused on expanding our customer base while adhering to our established risk guidelines, which have been very disciplined. This strategy is beginning to yield results, contributing to the loan growth we are seeing. We do not identify any significant risks as we grow these loans; they are within our focus, and we are not anticipating any major losses. To provide specifics, our loss rates for Branded Cards are at 1.5%, and 2.6% for Retail Services. These figures are about 50% of what we would typically classify as a normal loss rate throughout a cycle. We are confident in the loans we are adding, and while there is inherent risk, we are also reassured by the reserves we have in place.

Our next question will come from Erika Najarian with UBS.

My first question is actually a follow-up to John's question, Mark. I think that it's always been more challenging to forecast net interest income for Citigroup. And the net interest income and net interest margin certainly surprised to the upside. So, I guess, let me reask the question. Appreciate the $2.5 billion for each 100 basis points in parallel shift. But as we think about the U.S. forward curve, how should we think about the trajectory of net interest income from that 10.58 from here. And clearly, as we think about a deposit base that's two-thirds wholesale, how should we think about both deposit flow, deposit growth and deposit beta as we think about the second half of the year? In other words, does the rate of change quarter-over-quarter accelerate, flatten out or decelerate?

There's a lot there. What I'd say is a couple of things. One is, we've obviously seen a rapid increase in rates. The speed at which rates increase matters a lot as it relates to betas, particularly on the wholesale corporate side. We have seen betas increase there. They're probably slightly better than we would have expected. We would expect that momentum to continue in the back half of the year given the forecast for continued rate increases. The other thing that I'd point out, just giving you a point around the ability to forecast from a Citi point of view, if you look at the first half of the year, we did about $1.8 billion or so over the prior year, excluding Markets. So NII, ex Markets, increased 1.8 billion year-over-year in the first half. To give you a bit more guidance on how we're thinking about it in light of the rate curve and in light of our mix, I'd tell you that I expect about another $1.8 billion or so in the back half. That's likely year-over-year, 8ish percent or so on a full year basis based on, again, our mix, our assumption around betas and our current assumptions around how the curve would likely play out. Let me pause there and see if Jane wants to add anything to that.

Yes. I'd also add in our institutional deposits account for about 65% of Citi's deposit base, but 55% of them are operational deposits. The TTS deposits have increased by $134 billion since pre-COVID, but the operational deposits increased by $141 billion and the non-operating decreased. With Q2 on the horizon, we’d certainly expect the amounts of deposits in the system to shrink. We anticipate this would primarily impact non-operating balances. We feel very good about the stickiness the deposit base has got and particularly internationally, where these are operational accounts that are extremely sticky, frankly, in all environments.

Good point.

Thank you. My follow-up question is regarding the impressive capital build this quarter, especially given the concerns from investors since the SCB was released. I believe we may be overlooking the CET1 benefit mentioned on slide 19, similar to the 12 basis points gained from the Australia sale. Can you provide an estimate of how the upcoming deals in the Philippines, Thailand, Bahrain, and Malaysia could enhance your CET1 and help you approach the 13% target?

Yes. Let me kind of answer it in a more fulsome way, if you don't mind, and then I'll certainly make sure that I give you a sense for the contribution of what we expect from divestitures to the capital impact. There are a couple of drivers that are going to be important to us in building to ultimately the 13% for as long as that is in place given the SCB. One is obviously the income generation. We had a very strong quarter regarding income generation. I feel good about the back half of the year, as I've just given you some guidance on. Don't forget, we've had 160 basis points on the two-year since the beginning of the year to the end of the first quarter in terms of rate increases, another 60 in the second quarter. There were AOCI impacts from that, 34 in the first quarter, and as we point out here, another 12 in the second. There's a pull to par that we expect to start to play out and continue to play out in the balance of the year. That's going to be an important factor. The third, as you've heard us mention, is we've been working very hard to optimize our RWA, and we'll continue to do that. We paused the buybacks. That's a factor. As I mentioned, the divestitures close to $1.5 billion or so in Australia. I've talked about in the past about $4 billion for the year in terms of the capital impact. I'm at about $3.5 billion with Australia is what I'm currently expecting. It's a difficult market that we're managing through. That $3.5 billion total should give you a sense of how that translates into a CET1 impact that we're expecting, at least through the balance of this year. There will be more to come as we continue to close out and sign and close out some of the remaining deals.

Yes. I suspect that at the end of all of this, we're going to have an overabundance of capital. I really feel good that Citi is already very well positioned for any environment. As Mark said, we have a confluence of various factors going on at the moment, some of which are temporary that are causing this rapid buildup of capital for the industry. But, we are extremely well positioned for what lies ahead in terms of strong capital ratios, total liquidity resources. Portfolio credit quality is extremely high, well reserved. We are very much looking forward to resuming share buybacks once we've achieved this build, particularly given where we're trading. I want you to hear loud and clear that commitment.

Our next question will come from Mike Mayo with Wells Fargo Securities.

I'm trying to figure out if you're lucky or smart, and the reason I say that is at your Investor Day, I mean, right upfront you said you have 5 core interconnected businesses led by services, led by TTS. And then, a few months later, you have your best quarter in a decade. It just seems so coincidental that you highlight that as a growth area and then just a couple of quarters later, boom, here we are. So, how much of that TTS growth is simply because of one-off factors? How much of it is due to a higher baseline because of, say, interest rates? How much of that is due to market share gains? Just remind us what TTS and Securities Services is again, because I think you got everyone's attention with this quarter.

I would encourage you to sit at the beach this weekend and have an excellent read of the supplement because we've provided you with a lot of good facts and proof points and information, both around the services businesses and the others about the early progress on the strategy. TTS was able to fire, as I said, on all cylinders this quarter. About two-thirds of the performance was driven by business actions and one-third was by rates. As Mark said, very active management of the deposit base, beta discipline across all regions. The NIR growth that you saw was driven by cards, payments, receivables, and trade. Looking at the strategic drivers we laid out at Investor Day this quarter, cross-border transaction value is up 17% year-over-year; clearing volume is up 2% in U.S. Dollar; commercial card spend is up 62% as that business recovered; average trade loan balances are up 14%; average deposit balances are up 2%. This level of year-over-year growth is very pleasing, but we would expect to see it revert to the medium-term guidance we gave you at Investor Day over time. All elements are firing. Moreover, Shahmir, the Head of TTS, has really instituted a culture of intensity, focus, and discipline in how he is running the business as well, contributing to our confidence in the future.

As you've heard us describe, the TTS franchise is core to our business. It provides a network to large multinational clients in over 90 countries. We manage the full swath of their working capital and cash management needs. We also provide trade financing for them and the vendors and partners. This is differentiating for our franchise. Not only is it high-returning through the cycle, but it also helps to manage risk through managing and facilitating the investments.

The same is exactly true in Securities Services. I think the answer to your question is no, we're just being very disciplined.

Our next question will come from Ken Usdin with Jefferies.

Just a follow-up on the RWA. When you discuss the premium of the $3.5 billion, can you help us understand the difference between what constitutes a numerator impact and what represents the RWA impact from the sales that have been announced? Additionally, how far along are you in your RWA optimization efforts?

The $3.5 billion I referenced is all capital. It's a numerator impact I'm describing. It includes both the RWA that we had attributed to that business as well as the CTA impact coming back into capital. In terms of RWA optimization efforts, it's a continuous effort. We are constantly working through the balance sheet to make sure that it's allocated to clients who generate the highest prospect for growth and leverage the breadth of the franchise. So, we want to make sure that revenue ties to RWA. For the quarter, the team did a very good job in ICG and particularly in Markets to ensure appropriate progress. We're going to continue that work. We want to be there to serve our clients; we want to generate a return for capital usage.

It's part of the shift we're instituting in how we manage our capital and operations focusing on returns. It's multidimensional.

Our next question will come from Ebrahim Poonawala with Bank of America.

I guess just around capital, Mark, just a two-part question. One, are you not leaving the door open for buybacks until you get to 13%? Appreciating what Jane said about some of the transitory impacts from AOCI. Why not be a bit more opportunistic? And just tied to that, what's the risk that some of these deals get pushed out?

We're going to take it quarter by quarter regarding buybacks and from a capital point of view. The capital requirements with this SCB for the industry are higher. It's unfortunate. We feel the right amount of capital was already in the industry. We need to manage this right. There are certain temporary external factors causing this significant buildup of capital for the industry. We feel good about getting to a closure on the transactions. It's not an if, it's a when. We feel good about getting to closure with the timeline we've shared.

Our next question will come from Betsy Graseck with Morgan Stanley.

One more capital question. On slide 8, you do give the medium-term outlook here for what you see as your long-term goals for capital, the 11.5% to 12%. Implicit within that is an expectation that your reg mins would fall to around 200 basis points or so. Is there a sense you can tell us about the SCB benefit?

The 11.5% to 12% is consistent with what we talked about at Investor Day. You've got a couple of things that we're working through, not the least of which are the divestitures. They will certainly contribute to that, but so will some of the other things that I've mentioned, including utilization of the DTA, the AOCI pullback. The divestitures will help, but so will our stronger performance that will assist in achieving those targets. The mix change we expect from executing on our strategy will also be important. A simplified mix towards more sustainable, predictable earnings will contribute towards easing those capital requirements moving forward.

When we built our strategy, it wasn’t only to generate greater returns but to lower our capital requirements over time, as Mark said. We can see that in both how we're executing our strategy and the ongoing divestitures.

Our next question will come from Steven Chubak with Wolfe Research.

I had a follow-up question for Mark on NII. As the Fed continues down the path of balance sheet normalization, I just wanted to clarify whether that $1.8 billion increase in NII you cited for the back half assumes stable deposits or some Q2-related attrition. Are there any insights you can share on what drove the increase in Markets NII?

In terms of the back half of the year and quantitative tightening, I do expect continued deposit growth, as I mentioned earlier. The pressure from quantitative tightening will play out over time. But again, our focus is on growing operating deposits. Market NII included the European dividend that played out in the second quarter. What really matters is the total revenues that we're driving from that franchise.

Thank you. Our next question will come from Matt O'Connor with Deutsche Bank.

Can you elaborate on your comment about why the Russia exposure is kind of less of a risk or it's a better mix than it was a few months ago? Can you quantify how much of the $8.4 billion is to subsidiaries of MNCs?

We’ve been very active since the beginning of the year and in the quarter as well, working to reduce our exposure in Russia specifically with the clients that we serve there. That direct exposure in local currency has been brought down by about $900 million or so in the quarter. We’ve successfully brought down cash and deposits by approximately another $1.7 billion and continued to bring down third-party-related exposure by $400 million. The mix of our exposure has shifted to higher-quality names and global subsidiaries in the country. With the reduction in exposure, we were able to reduce reserves related to the direct exposure this quarter. While the ruble has played a role in the overall impact, we've made good progress, and we’ll continue with this effort.

It's important to note that while we are systematically reducing our franchise size, we're still managing some flows that are essential for the West and multinationals. This is a blended story where we're helping those that can exit but also maintaining our necessary role.

Our next question will come from Gerard Cassidy with RBC.

Mark, can you tell us how the market conditions have affected Investment Banking, as you both mentioned in your opening remarks? If these conditions persist in the second half of the year and into 2023, will you need to cut expenses in that division, or will you allow it to continue as is?

Strategic advice is essential for our vision to being the preeminent banking partner for multinational firms. We will continue to strategically invest in talent and the platform focusing particularly on tech, health care, and financial services, areas of future importance. It takes time to build share and relationships. We're focused on a long-term view rather than short-term cuts to expenses. We'll remain disciplined around expenses, as demonstrated this quarter, while taking the right investments for the future.

The business is capital-light and high-returning through the cycle. We want to be prepared when activity starts again. We've had strong revenue growth in Commercial Banking as well, which is part of our core growth strategy since Investor Day.

Those synergies are very important.

Our next question will come from Vivek Juneja with JP Morgan.

Jane, a question for you on Mexico. Given the comments of the Mexican President, would that limit the price that a buyer would be able to pay? What is your minimum price that you're willing to accept? What's plan B if the bids don't meet that hurdle?

I’m not going to answer your question directly, but I’ll share a few comments on Mexico. The interest in our Mexican franchise based on discussions with buyers is encouraging. The franchise is performing well, maintaining value. It contributes nicely to our financial results, but it's early in the process. We will communicate any developments swiftly, but we're committed to the process.

Our next question will come from Andrew Lim with Société Générale.

I’d like to have a better view from you on your outlook on recession. It is difficult to reconcile how investors feel about recession, which appears quite negative, and yet, for you and some of your peers, the outlook seems little worse than a quarter ago. How do you think about this?

As we've discussed, the current macro environment is shaped by the three Rs: Russia, rates, and recession. It depends on where you are; in the U.S., we're concerned about rates and an imminent recession. However, the consumer and corporate health are good. We are concerned about a recession next year, but feel the economy is well-positioned to withstand it. Europe has a different, more fragile energy supply situation. In Asia, concerns stem from China's COVID policies. We're prepared for various scenarios, running stress tests and have solid capital, liquidity, credit quality, and reserves. We enter the choppy waters ready and well-positioned.

We did take a reserve build driven by potential downside risks related to recession. We feel good about our reserve levels at $18 billion associated with our franchise.

It's unusual to enter choppy times with a healthy consumer and such a tight labor market.

Our next question will come from Mike Mayo with Wells Fargo Securities.

To regain investor credibility, you've mentioned various proof points. Can you remind us which proof points you've met and which ones we should hold you accountable to looking ahead?

I think you hold us accountable for all the different proof points we laid out. We meticulously came up with KPIs for the strategy transparently. This quarter, we exceeded expectations in some areas and faced headwinds in others. We've discussed our services, Markets, Investment Banking, and Wealth segments' performance. We're expected to keep our focus and adjust our strategies as needed.

This just shows that while we had strong results, it's still one quarter. We focus on a long-term strategy with sustained targets. There’s still much ahead, but we're committed to progress in our KPIs.

We're determined to get this done.

Our next question will come from Vivek Juneja with JP Morgan.

Don't worry, I won't trip you up on another one you can't answer, hopefully.

I did not say can’t; I said won’t. There’s a big difference.

Mark, your 8% NII growth for the full year. Is there something in Q2 that was unusually high that we should not carry forward?

Each quarter has different dynamics, rates, and volumes. There’s nothing specifically to point out beyond variations in those factors.

Thank you. There are no further questions at this time. I will now turn the call over to Jen Landis for closing remarks.

Thank you all for joining today's call. Please, if you have any follow-up questions, reach out to IR. Have a great day. Thank you.