Earnings Call Transcript
Citigroup Inc (C)
Earnings Call Transcript - C Q2 2024
Operator, Operator
Hello, and welcome to Citi's Second Quarter 2024 Earnings Call. Today's call will be hosted by Jenn Landis, Head of Citi Investor Relations. We ask that you please hold all questions until the completion of the formal remarks, at which time you'll 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.
Jenn Landis, Head of Investor Relations
Thank you, operator. Good morning, and thank you all for joining our second quarter 2024 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, CEO
Thank you, Jenn, and good morning to everyone. Before I discuss the results of the quarter, let me first address the regulatory actions by the Federal Reserve and the Office of the Controller of the Currency, which were announced on Wednesday. These actions pertain to the consent orders we entered into with both agencies in 2020. And those orders covered four primary areas: risk management, data governance, controls, and compliance. Addressing these areas is the primary goal of our transformation, our number one priority. It is a multi-year effort to modernize our infrastructure, unify disparate tech platforms, and automate processes and controls. This week's actions focused primarily on data quality management. We have been public this year about the fact that we were behind in this particular area and that we had increased our investment as a result. The regulatory actions consisted of two civil money penalties and under the amended consent order with the OCC, a new process designed to ensure we're allocating sufficient resources to meet our remediation milestones, and that is called the Resource Review Plan. We are currently developing a plan for submission to the OCC. Now by way of background, while the Federal Reserve is the primary regulator for Citigroup, our bank holding company, the OCC is a primary regulator for Citibank, N.A., which is our largest banking vehicle with approximately 70% of our assets. The amended consent order with the OCC allows Citibank to continue paying to Citigroup at a minimum the dividends necessary for debt service, preferred dividends, and other non-discretionary obligations. While we're developing and seeking OCC consent for our Resource Review Plan, dividend amounts above that would require the OCC's non-objection. Now these dividends are intercompany payments that are made from Citibank ultimately to the parent Citigroup. They should not be confused with the common dividends Citigroup pays to its shareholders. Indeed, there is no restriction on Citigroup's ability to pay common dividends to shareholders, nor is there a restriction to buying back shares. And let me be very clear, even with the investments needed for our transformation, Citigroup has more than sufficient resources to also invest in our businesses and make the planned return of capital to our shareholders. We will increase our dividend from $0.53 to $0.56 a share as we announced in late June, and we will resume modest buybacks this quarter. While these actions were not entirely unexpected to us, it is no doubt disappointing for our investors and for our people. We completely understand that. At the same time, we're confident in our ability to get these specific areas where they need to be, as we have been able to do in other areas of the transformation. And we are pleased that it was acknowledged on Wednesday that we have made meaningful progress in executing our transformation and simplifying our firm. A multi-year undertaking such as this was never going to be linear, but I can assure you, the investments we have been making are starting to come together to reduce risk, improve controls, and deliver very tangible outcomes. The tech investments we have made are making a difference. We have reduced the time it takes to book loans, automated controls for our traders to reduce errors, moved risk analytics to a cloud-based infrastructure, and increased the resiliency of our platforms to reduce downtime. The changes to our organization and our culture are making a difference. We have eliminated managerial constructs and layers while empowering our leaders. We introduced new tools to better manage human capital needs. Our focus on culture has increased accountability and attracted great new talent such as Vis Raghavan, Tim Ryan, and Andy Sieg. You have my and the entire management team's commitment that we will address any area of the consent order where we are behind by putting the necessary resources and focus behind it. We will get this work where it needs to be as we have with the execution of our strategy and the simplification of our organization. Now, turning to what was another good quarter, our results show the relentless focus we have in executing our strategy as we continue to drive towards our medium-term return target. We reported net income of $3.2 billion with an earnings per share of $1.52 and an RoTCE of 7.2%. Revenues were up 4% overall as well as up in each of our five core businesses, where all but one had positive operating leverage. Expenses were down 2% year-over-year. The steps we're taking to simplify our organization, right-size businesses such as Markets and Wealth, and reduce stranded costs are beginning to take hold even as we increase investment in our transformation. Over the medium-term, we expect these simplification and stranded cost actions to drive $2 billion to $2.5 billion in annual run rate savings. Services grew 3%, driven by solid fee growth, which we have prioritized. Treasury and Trade Solutions saw increased activity in cross-border payments and in commercial cards. Security services was up 10% with new client onboarding, deepening with existing clients, and market valuations helping increase our assets under custody by a preliminary 9%. At our recent Services Investor Day, we very much enjoyed the opportunity to talk to you in-depth about how we're going to continue to grow this high-returning business. And we're very pleased that people are starting to recognize why we describe it as our crown jewel. Overall, Markets had a strong finish to the quarter, leading to better performance than we'd anticipated. Fixed income was slightly down year-on-year due to lower FX and rates, but we had good issuance and loan growth in financing and securitization, an area which generates attractive returns. Equities was up 37%, driven by strong performance in derivatives, which includes a gain on the Visa B exchange offer. Banking was up 38%, as the wallet rebound gained some momentum and we again grew share. Our clients continued to access debt capital markets with investment-grade issuance near-record levels. Equity issuance increased, particularly in convertibles, as companies wait for a fuller opening of the IPO window. Investment banking fees were up 63% versus the prior year, and we’ve seen some healthy volumes associated with announced deals year-to-date, particularly in natural resources and technology. Combined with the strong pipeline, advisory activity looks promising as we think about the rest of the year. Wealth is starting to improve. Growth in client investment assets drove stronger investment revenue, especially in Citigold, and was up a preliminary 15%. Our focus on rationalizing the expense base is also starting to pay off with expenses down 4%. Andy and his team continue to attract top talent from the industry, as they focus on our investments business and enhancing the client experience. US Personal Banking saw revenue growth of 6% with all three businesses again contributing to the top-line. There was good revolving balance and loan growth in both branded cards and retail services, and we continue to see differentiation in the credit segment with the lower-income customers seeing pressure. Retail banking benefited from higher mortgage loans and improved deposit spreads, while delivering strong referrals to Wealth. Overall, while we saw operating margin expansion, our poor returns were pressured by the combination of credit seasonality and the normalization of certain vintages. We certainly expect USPB's returns to improve from here. The recent stress tests again showcased the strength of our balance sheet. Our CET1 ratio now stands at 13.6%, and we expect our regulatory capital requirement to decrease to 12.1% as of October 1, given the reduction of our stress capital buffer. Our tangible book value per share grew to $87.53. During the quarter, we returned $1 billion in capital to our common shareholders, and we are increasing our dividend by 6%. We expect to buy back $1 billion in common shares this quarter, and we will continue to assess the level of buybacks on a quarterly basis, particularly given the uncertainty around the Basel III endgame. Looking at the macro environment as we enter the second half of the year, the US is still the world's most structurally sound economy. After a break in progress, inflation now appears back on a downward trajectory. Services spending has remained on an upward trend, although there are clear signs of a softening labor market and the tightening of the consumer budget. And, of course, you might have heard there is an election in November. In Europe, while rate cuts have begun, the region's lack of competitiveness continues to be a drag on growth. In Asia, China is growing moderately, albeit with government stimulus, and their pivot to high-tech manufacturing is being challenged by tariffs on EVs and semiconductors. Despite this uncertainty, as you saw at our Services Investor Day when we went through our performance over the last two years, our business model can produce good results in a wide variety of macro environments, and there is plenty of upside for us across our five businesses. We have made an incredible amount of progress in simplification, both strategically and organizationally. We've completed most of the exits of our international consumer markets. We streamlined our organization to catalyze agility and faster decision-making. We are modernizing our infrastructure to improve our client service, and we are automating processes to strengthen controls. We are on a deliberate path. We will continue to execute our transformation and our strategy so we can meet our medium-term targets and then continue to further improve our returns over time. With that, let me turn it over to Mark, and then we will be delighted, as always, to take your questions.
Mark Mason, CFO
Thanks, 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, and then spend a little more time on the business. For the quarter, we reported net income of approximately $3.2 billion, EPS of $1.52, and RoTCE of 7.2% on $20.1 billion of revenue. Total revenues were up 4%, driven by growth across all businesses as well as an approximate $400 million gain related to the Visa B exchange offer. A significant portion of this gain is reflected in equity markets with the remainder reflected in all other. Expenses were $13.4 billion, down 2% and 6% on a sequential basis. The combination of revenue growth and expense decline drove positive operating leverage for the firm and the majority of our businesses. Cost of credit was $2.5 billion, primarily driven by higher card net credit losses, which were partially offset by ACL releases and all businesses except US Personal Banking, where we built for loan growth. At the end of the quarter, we had nearly $22 billion of total reserves with a reserve-to-funded loan ratio of approximately 2.7%. The decrease in expenses was primarily driven by savings associated with our organizational simplification, stranded cost reductions, and lower repositioning costs, partially offset by continued investment in transformation and the penalties from the Fed and the OCC. As we said over the past few months, we will continue to invest in the transformation and technology to modernize our operations and risk and control infrastructure. We expect these investments to offset some of our sales and headcount reduction going forward. However, based on what we know today, we will likely be at the higher end of the expense guidance range, excluding the special assessments and civil money penalties. With that said, we will, of course, continue to look for opportunities to absorb the civil money penalties. Before going into the balance sheet and the business results for the quarter, I'd like to also give more color on the transformation and address what the Fed and OCC announced Wednesday. We've made good progress on our transformation in certain areas over the last few years, and I want to highlight some of those areas before discussing the announcement. First, wholesale credit and loan operations, where we implemented a consistent end-to-end operating model and consolidated multiple systems with enhanced technology. This has not only reduced risk but enhanced operating efficiency and the client experience. We've also made improvements in risk and compliance as we enhanced our risk assessment and technology capabilities to increase automation for monitoring. And in data, while there's a lot more to do, we set up a data governance process and streamlined our data architecture to ultimately facilitate straight-through processing. Overall, we've improved risk management and consolidated and upgraded systems and platforms to improve our resiliency. These efforts represent meaningful examples of how we're making progress against our transformation milestones. That said, we have fallen short in data quality management, particularly related to regulatory reporting, which we've acknowledged publicly since the beginning of the year. As such, we've begun to put additional investments and resources in place to not only address data quality management related to regulatory reporting and data governance, but also stress-testing capabilities, including DFAST and Resolution and Recovery. We also reprioritized our efforts to ensure we're focused on data that impact these reports first. We take this feedback from our regulators very seriously, and we're committed to allocating all the resources necessary to meet their expectations. Now, turning back to the quarterly results. In the second quarter, net interest income was roughly flat. Excluding Markets, net interest income was down 3%, largely driven by the impact of foreign exchange translation, seasonally lower revolving card balances, and lower interest rates in Argentina, partially offset by higher deposit spreads in Wealth. Average loans were roughly flat as growth in cards and Mexico consumer was largely offset by slight declines across businesses. And average deposits decreased by 1%, largely driven by seasonal outflows and transfers to investments in Wealth as well as non-operational outflows in TTS. On key consumer and corporate credit metrics, across our card portfolios, approximately 86% of our card loans are to consumers with FICO scores of 660 or higher. While we continue to see an overall resilient US consumer, we also continue to see a divergence in performance and behavior across FICO and income bands. When we look across our consumer clients, only the highest income quartile has more savings than they did at the beginning of 2019, and it is the over 740 FICO score customers that are driving the spend growth and maintaining high payment rates. Lower FICO bands customers are seeing sharper drops in payment rates and borrowing more as they are more acutely impacted by high inflation and interest rates. That said, as we will discuss later, we're seeing signs of stabilization in delinquency performance across our cards portfolio. And we've taken this all into account in our reserving, and we remain well reserved with a reserve to funded loan ratio of 8.1% for our total card portfolio. Our corporate portfolio is largely investment-grade at approximately 82% as of the second quarter, and we saw a nearly $500 million sequential decrease in corporate non-accrual loans, largely driven by upgrades and repayments. Additionally, this quarter, we saw an improvement in our macro assumptions driven by property indexes, oil prices, and equity market valuations. Our credit loss reserves continue to incorporate a scenario weighted-average unemployment rate of nearly 5% and a downside unemployment rate of nearly 7%. As such, we feel very comfortable with the nearly $22 billion of reserves that we have in the current environment. Turning to our balance sheet, we remain very confident about the strength of our balance sheet and the quality of our assets and liabilities, which position us to be a source of strength for the industry and importantly for our clients. Were pleased to see the improvement in our DFAST results and the corresponding reduction in our SCB. That said, even with the reduction, our capital requirement does not yet fully reflect our simplification efforts, the benefits of our transformation, or the full execution of our strategy, all of which we expect to reduce our capital requirements over time. And as a reminder, we announced an increase to our common dividend from $0.53 per share to $0.56 per share following the SCB result. And as Jane mentioned earlier, we plan on doing $1 billion of buybacks this quarter. While we recognize there's a lot more to do on transformation, we are pleased with the progress that we're making towards our 2024 and medium-term targets and remain committed to these targets.
Operator, Operator
At this time, we will open the floor for questions. Our first question will come from Mike Mayo with Wells Fargo. Your line is now open. Please go ahead.
Mike Mayo, Analyst
Hi. Could you elaborate more on the amended consent order? Jane, you said it was disappointing to have gotten that this week. It's almost four years into the consent order. And a little bit why it hasn't been resolved? And what's on the loss column, and maybe a little bit more on the win column too. I mean, you have, what, 12,000 people thrown at the problem, billions of dollars. Is it not enough people? Not enough money? Do you need to look at it in a different way? Are you not talking the same language? I mean, you have John Dugan as your Lead Independent Director, exit of the OCC, and it seems like you got your report card, I guess you passed overall, they went out of the way to say some nice things, but it looks like you got failing grades in data and regulatory management. So, your confidence is going to be resolved, but it's already been four years and it hasn't been resolved. So, what is it going to take from here? And how can you resolve the regulatory concerns while continuing or serving shareholders better? And then, in the win column, since it's so nebulous this back-office, what are you achieving? You mentioned some items, but you could put more meat on those bones? Thanks.
Jane Fraser, CEO
Yes. Thank you, Mike. That's a few different parts of that. So, let's start by just taking a step back. Our transformation is addressing decades of underinvestment in large parts of Citi's infrastructure and in our risk and control environment. And when you unpack that, those areas where we had an absence of enforced enterprise-wide standards and governance, we've had a siloed organization that's prevented scale, a culture where a lot of groups are allowed to solve the same problem in different ways, fragmented tech platforms, manual processes and controls, and a weak first line of defense, too few subject matter experts. So, this is a massive body of work that goes well beyond the consent order. And this is not old Citi putting in band-aids. This is Citi tackling the root issues head-on. It's a multi-year undertaking as we've talked about, and you saw the statement by one of our regulators this week. We have made meaningful progress on our transformation and simplification. Mark, do you want to...
Mark Mason, CFO
We've made significant progress across various aspects of the consent order and transformation efforts. This includes improvements in risk management, controls, compliance, and data related to regulatory reporting. We have clear evidence demonstrating advancements in all these areas.
Jane Fraser, CEO
Thank you, Mark. So, to answer your question about how do we fix it and serve our investors at the same time, transforming Citi will drive benefits for our shareholders, our clients, and our regulators. This is not mutually exclusive. At the beginning of the year, we honed in on two priorities: the transformation and improving our business performance. And we are able to do so because we've largely cleared the decks. We have a clear focused strategy. We've executed the divestitures. We've got a much simpler organization, so we can focus on these two priorities and we are able to do both. You can see that in our results again this quarter, with multiple solid proof points on the execution of the strategy, and we know what we need to do on both fronts. We have plans in place on the transformation and on the strategy, and we're executing against them. We have been and we will be transparent when we have issues and how we're addressing them.
Mark Mason, CFO
Yeah. And just to add a couple of data points to that, Mike, you've heard us mention some of these before, but we've retired platforms. We've reduced the number of data centers. Platforms are down from 39 corporate loan platforms to less than 20. We've got 20 cash equities execution platforms down to one. We've reduced the six reporting ledgers down to one and 11 sanctioned platforms down to one. So, we've been making considerable progress over the past couple of years. With that said, there's a lot more work to be done around the data regulatory reporting work. If you think about Citi, we've got 11,000 global total regulatory reports. So, we've got to make sure that the data going into those reports is of the quality we want it to be and, more importantly, that we're doing it efficiently, so that it doesn't take thousands of people to reconcile that information. This is an end-to-end process in the way we're approaching it. One example is the 2052a liquidity report that we have. It has 750,000 lines of data, and that data is important. Again, that we're efficiently collecting it from multiple systems with standards and governance that ensures that it's of the quality we want it to be without having to have manual activity supporting it.
Operator, Operator
The next question comes from Glenn Schorr with Evercore. Your line is now open. Please go ahead.
Glenn Schorr, Analyst
Hi, thank you. Mark, I listened to your comments on credit this year regarding US Personal Banking. I appreciate your cautious stance on reserves. Currently, you have a 3% margin, and credit costs are nearly half of what revenues are in this sector. My question is, as we move forward in a slowing economy with potential rate cuts, how does the profit and loss evolve? How does it improve from here? Can we expect credit costs to decrease in a slowing economy? I'm trying to understand the path ahead because this could significantly affect USPB and its performance.
Mark Mason, CFO
Yes. Look, like I said, we do think that there is certainly upside to USPB. We're looking for that upside in the medium-term targets that we've set for ourselves. You've got to remember that when you look at the quarter and you look at the half, frankly, we're still in a period where we're seeing the normalization of the cost of credit. And as I mentioned in the prepared remarks, you have this compounding issue now maturing at the same time, which is playing through the P&L. That's not just true for us but for others as well. And so, we'd expect whether it is a normalization in losses as we go towards the medium-term as you see it. At the same time, we're investing in the business, and we're looking to see continued growth in volume and on the top-line. The combination of those things as we drive towards the medium-term will help us to deliver both the top-line growth and certainly improve returns from where we sit today and in line with what we've guided to. So, it's a combination of top-line performance from volume, and obviously, the environment plays into that, but we feel like we've got a reasonable assumption around top-line growth there, cost of credit normalizing, and continued discipline on the expense line, allowing us to get improved returns across that USPB business.
Glenn Schorr, Analyst
Okay. I appreciate all of that. And one quickie on DCM. You had amazing good performance. There's been plenty of conversation about pull-forward this year on just refi driving like three quarters of the activity. Could you just help us think through the second half, when thinking about DCM and just to make sure that we don't start modeling this into perpetuity?
Jane Fraser, CEO
Look, I think when we think about the back half of '24, we're going to see a different mix of activity in Banking. We do still expect demand to be quite strong across our capital market products because you've got a wall of maturing debt securities coming up in the second half that carry on for a couple of years. But we did see some clients accelerating issuances into the first half, getting ahead of potential market volatility. If you put it all together, I think we expect the rate environment and the financing markets to continue to be accommodative and as well as to a continued deal-making, with M&A being a bit larger in the overall mix, although some of the regulatory elements have put a damper on part of that.
Mark Mason, CFO
Yes. The only thing I would add to that is the wallet for the year is obviously going to depend on a couple of things. So, one, the return of a more normalized IPO market; two, the direction of volatility of interest rates; the ongoing global conflicts that we're all kind of seeing and witnessing; and finally, as Jane mentioned in her remarks, the elections and what those outcomes look like, not just in the US but abroad. There are a number of factors there that will play to the wallet, but as we said, we believe we're well-positioned to be there to serve our clients and to do so in a way that makes good economic sense.
Operator, Operator
The next question is from Jim Mitchell with Seaport Global. Your line is now open. Please go ahead.
Jim Mitchell, Analyst
Hey, good morning. Just Mark, maybe on NII down almost 4% year-over-year, it seems a little bit more than the guidance, but down modestly for the year. So, can you discuss sort of the puts and takes this quarter and how we should think about the quarterly trajectory for the rest of the year?
Mark Mason, CFO
Yes. So, I'd say a couple of things. So, one, as I mentioned in the quarter, ex-Markets were down about 3%. That's largely driven by some FX translation that played through, but also some seasonally lower revolving card balances and then lower interest rates in Argentina. And what that is in Argentina, we have capital there, and the policy rate was adjusted downward. Whenever that happens, we obviously earn less on that capital that flows through the NII line. As I think about the back half of the year and the guidance we have of modestly down, there are a couple of puts and takes to keep in mind. One is going to be rates, right? As I think about the higher yield that we can earn on reinvestment, that will be a tailwind that plays through from an NII point of view. The second would be volume growth, particularly in our card loans portfolio. And we do expect to see continued volume growth across the branded portfolio, and that will be another tailwind. In terms of the headwinds, you've got the lower NII earned in Argentina from rates that will continue to play through. We've assumed higher average betas in 2024, specifically on the non-US side. We still have in our forecast the impact of the late fees from the CFPB. So, assuming that that goes into effect for this year, that will have an impact and it's in the forecast. And then the impact of lost NII from the exits that we have. The combination of those things will probably mean that NII in the back half of the year is a little bit higher than the first half, but again, consistent with the guidance that we gave of modestly down.
Jim Mitchell, Analyst
That's helpful. And maybe just quickly, kind of a similar question on expenses, better-than-expected this quarter, but there was no restructuring or repositioning charges. I think to get to the high end of your range, you'd have to be up a little bit in the back half from 2Q run rate, is that because you expect more repositioning/restructuring in the second half, or maybe just talk through the expense trajectory from here?
Mark Mason, CFO
Yes. So that's right. When I talked about at the first quarter, I talked about kind of a downward trend for each of the quarters after Q1. The second quarter came in a bit lower than we were expecting. I'm sticking with the guidance and that does mean that the back half of the year will likely come in higher than the second quarter. That's a combination of a couple of things, including the pace of hiring and investment that we will do in the transformation work that has to be done. It also includes repositioning charges that we might take or need to take as we continue to work through our businesses across the firm and the franchise. The second quarter did have some delayed spending that will pick up in the third and fourth quarter around advertising and marketing and some of the other line items. So, yes, the second quarter will be higher than the second quarter but consistent with the guidance that I've given.
Operator, Operator
The next question is from Erika Najarian with UBS. Your line is now open. Please go ahead.
Erika Najarian, Analyst
Hi. I had two questions, and I'll ask the first one on expenses first since it's a good follow-up to the previous. Mark, just to clarify, let's just say take the highest end-of-year range at $53.8 billion, just trying to think about how consensus will move. So, we take that $53.8 billion and then add the $285 million of FDIC expenses year-to-date so far and add the civil money penalties of $136 million, so that gets us to $54.2 billion for the year and any other repositioning charges in the second half of the year would already be included in the $53.8 billion?
Mark Mason, CFO
So, yes, the answer to the last part of your question is yes. So, in the range that I've given, $53.5 billion to $53.8 billion, that includes our estimate for the full year of repositioning and any restructuring charges. That range excludes the FDIC special assessment that we saw earlier in the year and it excludes the CMP of $136 million.
Erika Najarian, Analyst
Got it. My second question is for Jane. I'm sure you're getting tired of the capital return question. You plan to buy back $1 billion this quarter, but it seems you didn't buy back any in the second quarter. I'm asking in this context because the consensus has a buyback of nearly $1 billion in the fourth quarter and expects this rate to continue into the first half of next year and increase. Is the $1 billion figure meant to catch up since there wasn't any buyback in the second quarter? I also recognize that you have the Banamex IPO coming up, which is different from other peers who are waiting for Basel clarification. Do we need to await the Banamex IPO for the company to feel comfortable moving away from the quarter-to-quarter guidance? Lastly, I want to revisit the initial part of the question about the pace.
Jane Fraser, CEO
We will not provide guidance on our buybacks moving forward. Instead, we will make decisions on a quarterly basis. This approach is largely due to the uncertainty surrounding upcoming regulatory changes. We were pleased to see a slight decrease in our stress capital buffer, which reflects the financial strength and resilience of our business model. Additionally, it's encouraging to see our strategy yielding positive results. However, because of the uncertain regulatory landscape, we believe it is prudent to continue our quarterly guidance.
Mark Mason, CFO
Yes, that's right. On the first part of your question, Erika, I'd say, look, we were in discussions with our regulators and we made a prudent call as it relates to buybacks in the quarter for Q2, while Q3, as we talked about, would be at $1 billion and that should not be necessarily viewed as a run rate level. As Jane mentioned, we'll take it quarter-by-quarter from here.
Operator, Operator
The next question is from Gerard Cassidy with RBC. Your line is now open. Please go ahead.
Gerard Cassidy, Analyst
Thank you. Hi, Jane. Hi, Mark.
Mark Mason, CFO
Good morning.
Gerard Cassidy, Analyst
Mark, regarding the comments you made about the higher credit losses, the three factors that you gave us, can you also talk about if this was a factor at all for you folks? Was there any FICO score inflation back during the pandemic that might be playing into these kinds of credit losses? And as part of the credit card question, you mentioned the CFPB, the fees that you have factored them, the lower fees, you factor that into your forward look, where do we stand on that? Do you guys have any color on that as well?
Mark Mason, CFO
Yes. So, on the first part of the question, look, we all kind of have talked about in the past the prospect of FICO inflation back during the COVID period of time. We've been very focused on ensuring that acquisitions that we've made have been appropriately kind of analyzed in the underwriting to get comfortable with the quality of new customers that we've been bringing on. In light of the environment, we looked at moving towards higher FICO scores for new account acquisitions. But as I think about what we're seeing now, there is that dichotomy that I mentioned where we have the higher FICO score customers that are driving the spend growth and have maintained strong balances in savings, while it's really the lower FICO band customers where we're seeing sharper drops in payment rates and more borrowing. FICO inflation has effectively fizzled out when we look at the mix and dynamic of the customer portfolio that we have at this point. And in terms of the CFPB, late fees, well, I don't have an update on that. Like I said, we've built in an assumption in our forecast, but in terms of the timing, I don't have a formal update on the certainty of it.
Operator, Operator
The next question is from Ken Usdin with Jefferies. Your line is now open. Please go ahead.
Ken Usdin, Analyst
Hey, thanks, good morning. Hey, Mark, talking about the NII outlook and the fact that now we've got a little bit of a discrepancy starting between US rates, maybe higher for longer, and then the beginnings of some of the non-US curves starting to at least put forth their first cut. I know we've got that good chart that you have in the Qs about the relative contributions, can you just help us understand a little bit of just generally how you're thinking through that discrepancy and how that informs the difference between US-related NII and non-US-related NII as you go forward?
Mark Mason, CFO
Thank you. As we consider the medium-term outlook, we anticipate continued growth in net interest income, although at a more modest rate compared to historical levels. This expectation is influenced by our balance sheet management, which has allowed us to reinvest as securities mature and earn higher yields compared to previous earnings. Some of these securities had five-year terms, and we still see potential for further upside in reinvestment. Regarding non-US dollar rates, we expect that lower rates will have some impact on the beta increases we anticipate outside the US. If these rates decline significantly, we could experience less pressure on net interest income than we initially forecasted. Overall, considering the expected growth in loans and deposits, the higher yields we can achieve on our assets, along with our pricing strategies, we believe we will sustain net interest income growth. It’s important to note that the IRE analysis reflects a shock to the current balance sheet and assumes a simultaneous movement across currency curves. In that scenario, a 100 basis point decrease would result in a negative impact of $1.6 billion, primarily from non-US dollar currencies, which does not factor in the rebalancing of the balance sheet or the potential for higher reinvestment yields.
Ken Usdin, Analyst
Got it. Okay. I have a follow-up regarding the OCC amendment, particularly about the resource review plan. Can you provide an estimate of how long it will take to complete? Should we focus on this aspect to understand what needs to be accomplished regarding the other language mentioned in the order?
Jane Fraser, CEO
So, Ken, look, the Resource Review Plan is just that: it's a plan to ensure that we have sufficient resources allocated toward achieving a timely and sustainable compliance with the order. Essentially, if an area is delayed or looking as if it could be, we'll determine what additional resourcing, if any, is required to get back on track, and then we'll share that with the OCC in a more formalized way than we do today. We obviously review this pretty constantly ourselves. We're already working on the plan after it's finalized with the OCC. So, it will be confidential supervisory information that we can't disclose. We won't be able to tell you the nature of the plan, but it won't be much more complicated than what we talked about. We're expecting to get it, and we're not expecting this to take long.
Operator, Operator
The next question is from Betsy Graseck with Morgan Stanley. Your line is now open. Please go ahead.
Betsy Graseck, Analyst
Hi, good afternoon.
Mark Mason, CFO
Hello.
Jane Fraser, CEO
Hi, Betsy.
Betsy Graseck, Analyst
Okay. So, I know we talked a lot about expenses. I just have one overarching question here, which is on how we should think about the path of expenses between now and the medium term, as we have come quite a long way in the simplification process, maybe if you could give us a sense as to how far along simplification impact on expenses we are? And overlapping with the regulatory requirements, do these net out or are we skewed a little bit more towards regulatory requirements being a bit heavier than what's left on simplification from here? Thanks.
Mark Mason, CFO
So, thank you, Betsy. I guess, I’d say a couple of things. The target for the medium-term, I think 2026 is somewhere around $51 billion to $53 billion of expenses. As we’ve said, we'll have about $1.5 billion in savings related to the restructuring we’ve done and another $500 million to $1 billion related to net expense reductions from eliminating stranded costs as well as additional productivity over that medium-term period. We’ve made good headway, as Jane has mentioned, in org simplification and the restructuring charges associated with that. Those savings will have started to generate in the early part of that, meaning this year will likely be offset by continued investment that we’re making in areas of the business like transformation, but also in business-led or driven growth. You should expect a downward trend towards 2026 in achieving that range.
Jane Fraser, CEO
And I just want to reiterate, we remain confident that we will meet our 11% to 12% RoTCE target over the medium-term. We have the ability to manage the different elements we’ve been talking about today, making sure that we’re investing sufficient resources into the transformation so we can be on-track with that, as well as in our businesses, as well as the return of capital to our shareholders. We feel confident about that and good about that we can manage this.
Mark Mason, CFO
Yes, I think that's a great point, Jane. The reality is, as was pointed out earlier, we spent about $3 billion last year, a little bit under that on transformation-related work. The plan has been to spend a little bit more than that this year. In the first half of the year, as we work through the transformation work and some of the areas we've mentioned earlier in the year that we’ve been focused on like data and data related to regulatory reporting, we've had to spend more than we had planned for in the first half. We’ve done that and funded that. We've been able to find productivity opportunities that allow us to still stay within the guidance that we have given for the full year. So, we are managing this entire expense base, not just the whole $53 billion of it. We are actively managing that with an eye toward what's required from a transformation point of view to keep it on track, to accelerate in areas where we’re behind, and to shore up areas where we are tracking in accordance with what the order requires and where there are other inefficiencies that can allow for us to free up the expense base.
Betsy Graseck, Analyst
Okay, great. Thank you very much. Appreciate that.
Operator, Operator
The next question is from Vivek Juneja with JPMorgan. Your line is now open. Please go ahead.
Vivek Juneja, Analyst
Hi. Okay, let me just clarify this, Mark and Jane, just to make sure that we all have it right. The $53.5 billion to $53.8 billion does not include anything thus far on what you think you may need to spend on the Resource Review Plan, meaning what additional resources you would have to put to fix the consent order, am I right there?
Jane Fraser, CEO
No, you’re not right. So, I think as you've heard us talk about, Vivek, for a while now that we knew the areas that we were behind in elements of our transformation program and that we began addressing those and making the investments. Some of that is in people, some of that is in our technology spend, it's using different tools and capabilities to get areas addressed earlier and we began that earlier in the year. You saw that acknowledged as well by our regulators, who pointed to the fact that we've begun addressing the areas that we're behind. Mark?
Mark Mason, CFO
That's right, Jane. What you have heard is that, despite having to spend more, some $250 million or so more, we're not changing the guidance, right? And so, we have, as Jane mentioned, worked on areas already that we've needed to and we have looked for ways to absorb that and are doing so within our guidance.
Vivek Juneja, Analyst
Okay. So, going forward, even though this plan is still to be sort of put together and approved by the regulators, we should not expect any change to this expense?
Mark Mason, CFO
Look, the plan – the Resource Review Plan, as Jane mentioned, is what we're working through now with the regulators. That will be a process for demonstrating to them that we are spending and allocating the appropriate resources to accomplishing the commitments that we have. Appropriate resources can range from people to technology to enhancing our processes and ensuring better execution. If you think about what that will entail, it will entail areas where we are delayed or behind, as we identify those areas, being able to tease out the root cause of any delay, and ensure that we've got proper funding allocated to get it back on track. That’s me framing out how I think about what something like this might look like. What we’re saying here is that, if we identify issues in the quarters to come that we haven’t identified already, that’s the process we’re going to apply to those issues. As you’ve heard us say repeatedly, we’re going to spend whatever is necessary to get those things back on track, and as we’ve done thus far this year, we’re going to look for opportunities to absorb those headwinds. I hope that’s clear.
Operator, Operator
The next question is from Matt O'Connor with Deutsche Bank. Your line is now open. Please go ahead.
Matt O'Connor, Analyst
Hi. Apologies if I missed it in the opening remarks, but what drove the decline in credit card revenues from 1Q to 2Q? It looks like they were down about 6% in aggregate even though average loans went up, spending went up. What was the driver of that?
Mark Mason, CFO
Credit card revenues seasonality playing through there. Jane?
Jane Fraser, CEO
Yeah, seasonality playing through there. Sequentially.
Mark Mason, CFO
Yes.
Jane Fraser, CEO
But nothing that's particularly worrying us, Matt.
Mark Mason, CFO
Look, let's be clear. This action does not impact our ability to return capital to our shareholders. The dividends that are referenced are just intercompany payments from Citibank to the parent. First of all, don’t confuse what a dividend is here. It’s not going to impact how we run the company, the subsidiary, the capital, or the liquidity at all, and the dividends are not capped.
Jane Fraser, CEO
Indeed, there is no restriction on Citigroup's ability to pay common dividends to shareholders, nor is there a restriction to buying back shares. And let me be very clear, even with the investments needed for our transformation, Citigroup has more than sufficient resources to also invest in our businesses and make the planned return of capital to our shareholders.
Mark Mason, CFO
Yes. I think the reference to the dividending from out of Citibank up to the parent is referenced there between now and establishing that Resource Review Plan, but as Jane mentioned, that does not constrain the parent from doing the things that it will need to do. It’s not a cap. What it is is that anything above the debt service of the parent or the preferred dividends and other non-discretionary obligations would require a non-objection from the OCC until the resource plan is agreed.
Jane Fraser, CEO
As you'll have seen, the resource plan needs to be submitted within 30 days. And as I indicated, we're working on that one and not anticipating that to be a problem.
Operator, Operator
The next question is from Saul Martinez with HSBC. Your line is now open. Please go ahead.
Saul Martinez, Analyst
Hi, good afternoon. Thanks for taking my question. I would like to follow up on the previous question to be clear. What you're indicating is that the requirement for Citibank to receive a non-objection for dividend transfers to the parent does not affect your capital flexibility or restrict you in any way. This shouldn't impact your ability to benefit from potential relief related to Basel endgame rules or the simplifications you've mentioned. So, you believe this won't affect your ongoing capital flexibility or your ability to repurchase stock going forward if these scenarios materialize?
Mark Mason, CFO
No. No, I don't.
Saul Martinez, Analyst
Okay. That's fair enough. That's clear as it can be. Good.
Mark Mason, CFO
Yes, thank you. So, on the first part of the question, look, we all talked about in the past the prospect of FICO inflation back during the pandemic. We’ve been focused on ensuring that acquisitions we’ve made have been appropriately analyzed in the underwriting to get comfortable with the quality of new customers we've been bringing on. In light of the environment, we looked at moving towards higher FICO scores for new account acquisitions. But as I think about what we’re seeing now, there is that dichotomy that I mentioned where we have the higher FICO score customers who are driving the spend growth and maintaining high payment rates, while lower FICO band customers are seeing sharper drops in payment rates and borrowing more as they're more acutely impacted by high inflation and interest rates.
Operator, Operator
There are no further questions. I'll now turn the call over to Jenn Landis for closing remarks.
Jenn Landis, Head of Investor Relations
Thank you all for joining us. Please let us know if you have any follow-up questions. Thank you.
Operator, Operator
This concludes Citi's second quarter 2024 earnings call. You may now disconnect.