Earnings Call Transcript
Citigroup Inc (C)
Earnings Call Transcript - C Q3 2020
Operator, Operator
Hello and welcome to Citi's Third Quarter 2020 Earnings Review with the Chief Executive Officer, Mike Corbat, and Chief Financial Officer, Mark Mason. Today’s call will be hosted by Elizabeth Lynn, Head of Citi Investor Relations. Also as a reminder, this conference is being recorded today. If you have objections, please disconnect at this time. Ms. Lynn, you may begin.
Elizabeth Lynn, Head of Investor Relations
Thank you, operator. Good morning and thank you all for joining us. On our call today are CEO, Mike Corbat will speak first. Then Mark Mason, our CFO will take you through the earnings presentation which is available for download on our website, citigroup.com. Afterwards, we will be happy to take questions. Before we get started, I’d like to remind you that today’s presentation may contain forward-looking statements, which are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results, capital and other financial conditions may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our SEC filings, including, without limitation, the Risk Factors section of our 2019 Form 10-K. With that said, let me turn it over to Mike.
Mike Corbat, CEO
Thank you, Liz and good morning, everyone. Today, we reported earnings for the third quarter of 2020. We had net income of $3.2 billion and earnings per share of $1.40. We continue to navigate the COVID-19 pandemic extremely well. Credit costs have stabilized, deposits continue to increase and revenues are up 3% year-to-date. As you know last week we entered into consent orders with the Federal Reserve and the OCC and I will discuss how we are approaching those after I go through our business and financial performance. Our institutional clients group continues to perform extremely well. Investment Banking had another strong quarter accessing the capital markets for our clients and private bank revenues are now up 9% year-to-date. Treasury and Trade Solutions, the backbone of our global network is down only 4% for the quarter and 5% for the year in constant dollars, despite significantly lower interest rates. Trading performance were strong as well, with fixed income and equities up 42% and 18% respectively year-to-date. Global consumer banking revenues remained under pressure due to the economic impact of the pandemic, predominantly driven by the decline in credit card spending. At the same time, deposits continued to increase significantly, credit costs decreased and we saw more investment activity from our wealth management clients. On balance, our global consumer banking franchise has shown resilience in light of the challenges we're facing. Our capital position strengthened during the quarter with our common equity tier one ratio increasing to 11.8% well above our regulatory minimum of 10%. Our tangible book value per share increased to $71.95 up 4% from a year ago, and we remain committed to returning capital to our shareholders over time. Turning to the consent orders, they focus on four areas that impact our risk and control environment: risk management, data governance, controls, and compliance. What ties these areas together is the need to modernize our infrastructure, governance and processes. We've had remediation programs in place, and while we've been making progress in these areas, we're simply not where we need to be. While this is disappointing, we're committed to thoroughly addressing the issues identified in the orders and modernizing our bank. As many of you know, we've been making structural changes and accelerating investments. We've centralized program management and brought in external firms to perform unsparing root cause analysis. We're laser focused on reducing manual touch points, automating processes and ensuring accurate data can be accessed quickly when we're producing management and regulatory reports. More importantly, we're strengthening our risk and control environment and achieving operational excellence is a strategic priority for the firm going forward. This won't be a quick or easy fix. We need to conduct an in-depth gap analysis to ensure our solutions are tailored to the issues we face and get us to the necessary end state. While we can't fully scope out the cost yet for a multi-year transformation, I can tell you with certainty that we're committing all the necessary resources while continuing to serve our clients. Importantly, we're aligned with our regulators as far as timelines are concerned, so we won’t jeopardize quality or completeness for speed. Collectively, these investments will not only further enhance our safety and soundness, they'll also create a digital infrastructure that will make us more efficient, more competitive, and significantly improve our ability to serve our clients and customers. So these are investments we need to make. In hindsight, we should have done them faster and prevented it from coming to this. But our firm has made tremendous progress in recent years, whether it's de-risking our balance sheet or improving our efficiency and business performance, to close the gap in returns with our competitors. Our foundation is sound, stable and secure. Our performance during this pandemic shows the progress we've made; achieving excellence in our risk and control environment and our operations is necessary for Citi to take the next step forward. Our franchise is made up of committed and capable people who make us proud every day. They've done everything asked of them and I know they'll continue to do so in the times ahead. Ahead of the transition in February, change is driving this transformation and the entire management team is committed to getting Citi to where it needs to be and doing it the right way. With that, Mark will go through the presentation and then we'd be happy to take your questions.
Mark Mason, CFO
Thank you, Mike and good morning everyone. Starting on slide three, Citigroup reported third quarter net income of $3.2 billion, which included a modest increase in credit reserves of roughly $300 million this quarter. Reported results also include the $400 million civil money penalty in connection with the consent orders that Mike just mentioned, which negatively impacted EPS by $0.19. For the quarter, revenues of $17.3 billion declined 7% from the prior year. While trading and investment banking remains strong, this is more than offset by the combined impact of lower interest rates and lower levels of activity in consumer. Expenses were up 5% year-over-year, as we continue to invest in infrastructure supporting our risk and control environment. Credit cost of $2.3 billion were meaningfully lower relative to the first half of the year. Our effective tax rate was 20% for the third quarter. Looking at year-to-date results, we delivered net income of over $7 billion, even as we increased credit reserves by roughly $11 billion. We grew revenues by 3% predominantly reflecting continued strength in our markets and investment banking businesses, while expenses increased 1% year-over-year, allowing us to deliver positive operating leverage and a 6% increase in operating margin. In constant dollars, end of period loans declined 4% year-over-year to $667 billion, reflecting a higher level of repayments across institutional and consumer, as well as a slowdown in draws in our institutional businesses, and lower spending activity in consumer. Deposits grew 16% with consistent client engagement, reflecting the benefits of our global platform across both the institutional and consumer franchises, which also serve to strengthen our available liquidity. And three quarters of the way through the year, we continue to manage well through this crisis, with significant capital and liquidity, as well as a significant cushion in the form of credit reserves. As of September 30, our CET1 Capital ratio was 11.8% close to 200 basis points above our regulatory minimum requirement. We have over $950 billion in available liquidity. We have more than doubled credit reserves since the end of last year. Today, they stand at nearly $29 billion, and including the modest increase taken this quarter, our reserve ratio was roughly stable at 4% on funded loans. And as we discussed last quarter, we feel good about our ability to continue to support our clients as we all manage through this crisis. On slide four, we provide additional detail on reserving action so far this year. As a reminder, these reserves include our estimate of lifetime credit losses tied to a specific base scenario, as well as a management adjustment for economic uncertainty, which provides some room in the event of a more adverse outcome. In the first quarter, our base scenario reflected a short lived downturn followed by recovery in the back half of 2020 with unemployment falling to 7% by year end, and full year GDP close to prior year levels. By the end of the second quarter our base case assumed a more severe and protracted downturn this year, but with a sharper recovery into next year. And now you can see we are expecting a somewhat more muted and slower recovery in both unemployment and GDP through 2022. I would note, however, that our forward looking view on a rolling 13 quarter basis in unemployment, as an example, is continuing to improve as we move further beyond the peak of the crisis. Outlook for other variables like VIX and oil prices is also important and generally improved this quarter. So on a net basis we did not see a significant impact on reserves from the change in our base macro outlook this quarter. But we did add to our management adjustment for economic uncertainty, which grew from $2.3 billion to $3.1 billion during the quarter, partially offset by lower loan volumes and other small items. Today, we are factoring in a downside scenario that is more adverse relative to our base case. For example, we are incorporating a more significant deterioration in U.S. GDP growth rates, which is now close to 9% lower than our base case in 2021 versus our second quarter outlook that was only 1% lower than the base case. So all else being equal, if the management adjustment had not changed, we would have seen a reserve release of roughly $500 million in the quarter. Looking at the level of reserves we hold today, we believe that we're well prepared for expected credit losses, having reserved for something worse than our base case. And given the lifetime nature of the CECL methodology and the conservative nature of our management adjustment, it is now more likely than not that we'll see reserve releases and our ACL come down in 2021 to offset future losses as we continue to progress through the crisis, assuming our base case holds. Although this may be offset somewhat as we would likely need to build additional reserves to cover future loan growth as the economy recovers and we support our client’s needs. Turning now to each business. Slide five shows the results for global consumer banking in constant dollars. GCB delivered EBIT of $1.4 billion. While revenues remain under pressure, credit costs were down considerably this quarter, reflecting a small ACL release, and lower net credit losses in particular in the U.S., where we're seeing a continued benefit from government stimulus and other relief. Revenues declined 12% as continued strong deposit growth and momentum in Asia wealth management was more than offset by lower card volumes and lower interest rates across all regions, and expenses decreased 2% as lower volume related expenses, reduction in marketing and other discretionary spending, and efficiency savings were partially offset by increases in COVID-19 related expenses. Slide six shows the results for North American consumer in more detail. Total third quarter revenues of $4.5 billion were down 13% from last year. Branded Cards revenues of $2.1 billion were down 12%, reflecting lower purchase sales and lower average loans. As seen across the industry purchase sales have continued to recover during the third quarter, up 16% sequentially, but still down 9% versus last year. At the same time, we're seeing an increase in payment rates as consumers remain liquid and we have not yet seen stress in their overall ability to pay. So while purchase activity has improved, our clients are also paying down more quickly resulting in pressure on our loan balances. This is creating a revenue headwind, but it is also benefiting cost of credit as delinquencies and losses have outperformed our initial expectations for 2020. Retail services revenues of $1.4 billion were down 21% year-over-year, reflecting lower average loans as well as higher partner payments. Net interest revenues were down 16% as average loans declined by 10% on lower purchase sales activity and higher payment rates. Similar to Branded Card, purchase sales recovered sequentially this quarter up 18%, but remained down 8% year-over-year. Higher partner payments drove the remainder of the revenue decline versus last year, reflecting the impact of lower loss expectations in 2020, and therefore higher income sharing. During the quarter, we launched a new digital credit card program with Wayfair. With this partnership, we further diversified our portfolio with a leading e-commerce retailer and now provide half of the top 10 U.S. e-commerce companies in 2020 with consumer credit card programs. Retail banking revenues of $1.1 billion were down 2% year-over-year as strong deposit growth and higher mortgage revenues were more than offset by lower deposit spreads. Average deposits were up 19% including 26% growth in checking. We saw continued momentum in digital deposit sales with more than two thirds coming from customers outside of our branch footprint. And we will continue to look for opportunities to deepen our relationships with these customers, including through our investments in digital wealth capabilities. Total expenses for North American consumer were down 3% year-over-year, as we managed our marketing and other discretionary expenses, while recognizing efficiency savings and lower volume related costs, which more than offset incremental COVID-19 related expenses. Total credit cost of $1.2 billion decreased 23% from last year, reflecting lower net credit losses as well as a modest reserve release. On slide seven, we show results for international consumer banking in constant dollars. In Asia, revenues declined 13% year-over-year in the third quarter. Cards revenues declined by 23% reflecting lower activity levels with purchase sales down 17% year-over-year. We're continuing to see a disproportionate impact on Asia card revenues from the decline in travel spending, including lower travel related interchange and foreign transaction fees. However, our strength in wealth management continued. We saw record investment revenues this quarter up 16% reflecting continued strong client engagement with 7% growth in Citi Gold clients and 13% growth in net new money versus last year. And average deposit growth remains strong at 13% this quarter. Turning to Latin America, total consumer revenues declined 10% year-over-year. Similar to other regions, we saw good growth in deposits in Mexico this quarter, with average balances up 13%. However, deposit spreads remained under pressure and lending revenues were impacted by branch closures and a continued decline in the macro environment. In total, operating expenses for our International consumer business were down 1% in the third quarter, reflecting efficiency savings and lower volume related expenses. And cost of credit declined to $392 million, with lower net credit losses and a modest reserve release this quarter, reflecting a change in accounting for third party collection fees. Slide eight provides additional detail on global consumer credit trends. As I noted earlier, credit trends remain broadly stable to improving this quarter, given high levels of liquidity in the U.S., lower spending and the benefits of relief programs. However, we do expect losses to begin to rise next year and likely peak towards the end of 2021 as government stimulus and other programs roll off, and unemployment remains elevated. Turning now to the Institutional Clients Group on slide nine, ICG delivered EBIT of $3.7 billion this quarter and $10.8 billion year-to-date. Revenues of $10.4 billion increased 5% in the third quarter, as strong performance in fixed income and equity markets, investment banking and the private bank was partially offset by lower revenues in TTS, corporate lending and securities services. In the third quarter, we continue to see strong client engagement across all of our institutional businesses given our highly differentiated global platform, our progress in creating new digital solutions for clients and our full service model which allows us to capture natural linkages that exist across the franchise. Turning now to the results for the businesses, starting with banking. Total banking revenues of $5.3 billion declined 2%. Treasury and trade solution revenues of $2.4 billion were down 6% as reported, and 4% in constant dollars, as strong client engagement and solid growth in deposits were more than offset by the impact of lower interest rates, and lower commercial cards revenues. Our average deposits were up 26% in constant dollars, and we had solid growth in underlying drivers despite the significant macro slowdown. One example of the continued client engagement that we have seen is in instant payments, where we are now live in 26 countries and have seen significant client demand for these capabilities. Investment Banking revenues of $1.4 billion were up 13% from last year, reflecting solid growth in capital markets and continued share gains. Capital markets continue to be extremely strong, equity underwriting in particular, which allowed us to continue to support our clients in raising liquidity through IPOs, convertibles and follow on offerings. Private Bank revenues of $938 million grew 8% driven by strong client engagement, particularly in capital markets, as well as improved managed investments revenues, and higher lending. Corporate lending revenues of $538 million were down 25% as higher volumes were more than offset by lower spreads. And while we continue to provide new loans and facilitate additional draws, we also saw significant repayments as we helped our investment grade clients access capital markets, which led to the decline in end of period loans. Total markets and securities services revenue of $5.2 billion increased 16% year-over-year. And as we've seen over the prior two quarters, we continue to actively make markets for both our corporate and investor clients as we help them navigate through the continued uncertain environment. Fixed income revenues of $3.8 billion grew 18% driven by strong performance across spread products and commodities. Equities revenues of $875 million were up 15% versus last year, as solid performance in cash equities and derivatives, reflecting strong client volumes and more favorable market conditions were partially offset by lower revenues in prime finance. And finally, in securities services, revenues were down 5% on a reported basis, and 4% in constant dollars, as higher deposit volumes were more than offset by lower spreads. Total operating expenses of $5.8 billion increased 3% year-over-year, reflecting continued investments in infrastructure, risk management and controls as well as higher compensation costs. Total credit costs of $838 million were up meaningfully from last year, although down significantly on a sequential basis. We built $529 million in reserves this quarter. The increase is largely due to continued uncertainty in the economic environment going forward. As of quarter end, our overall funded reserve ratio was 1.8% including 5.7% on the non-investment grade portion. Total net credit losses were $326 million. Finally, total non-accrual loans declined roughly $400 million sequentially to $3.6 billion, reflecting write-offs and repayments across the portfolio. Slide 10 shows results for Corporate/Other. Revenues declined significantly from last year reflecting the wind down of legacy assets and the impact of lower rates, as well as marks on securities. Expenses were up as the wind down of legacy assets was more than offset by investments in infrastructure, risk management and controls, incremental costs associated with COVID-19 and the $400 million civil money penalty that I mentioned earlier. Excluding the one-time impact of the penalty, the pre-tax loss for corporate/other was $657 million this quarter. And looking ahead to the fourth quarter, we would expect a similar quarterly pre-tax loss. Slide 11 shows our net interest revenue and margin trends. In constant dollars, total net interest revenue of $10.5 billion this quarter declined $930 million year-over-year, reflecting the impact of lower rates and lower loan balances partially offset by higher trading related NIR. On a sequential basis, net interest revenue declined by roughly $670 million driven by lower loan balances as well as lower trading related NIR and net interest margin declined 14 basis points, reflecting lower net interest revenues. Turning to non-interest revenues. In the third quarter, non-NIR declined 2% to $6.8 billion given lower levels of consumer activity, partially offset by strong trading and investment banking revenues year-over-year. As we look to the fourth quarter, we expect the continuation of these dynamics with both net interest revenues and non-interest revenues down year-over-year, reflecting the impact of lower rates and lower levels of activity related to COVID-19 as well as the normalization in trading and investment banking activity. On slide 12, we show our key capital metrics. Our CET1 Capital ratio improved to 11.8% driven by net income, our supplementary leverage ratio was 6.8%. And our tangible book value per share grew by 4% to $71.95 driven by net income. Before I conclude, let me spend a few minutes on our outlook for the fourth quarter. On the top line, we expect to see continued pressure in consumer reflecting the impact of rates and lower levels of activity related to COVID-19. And we would also expect the low rate environment to continue to weigh on our core businesses in ICG. Our markets and investment banking businesses should reflect broader industry trends. In total, we expect this to result in full year revenues that are roughly flat, with the decline in net interest revenues, more or less offset by non-interest revenues on a full year basis consistent with prior guidance. On the expense side, we remain focused on protecting our employees and supporting our customers. We are making targeted investments in the franchise where we see the best opportunities for the future. And we are accelerating investments to achieve excellence in our risk and control environment and enhance our operations for a fully digital world. As a result, we could see expenses that are up a couple percent or so on a full year basis. Turning to credit. As I mentioned already, if our macro outlook holds, we wouldn't expect additional reserve builds. But given the remaining uncertainty, we are also unlikely to see any material releases this quarter. And for the fourth quarter, we would expect a level of losses similar to those seen this quarter. In summary, the environment remains challenging this quarter, but we continue to perform well. Year-to-date, we have demonstrated the significant earnings power of the franchise, we ended the quarter with a strong capital and liquidity position. Overall client engagement remains strong. We grew book value this quarter, and we have remained focused on supporting employees, customers, clients and communities. With that, Mike and I are happy to take any questions.
Operator, Operator
Your first question is from John McDonald with Autonomous Research. Similar to what we saw this quarter, the environment remains challenging, but we continue to perform well. Year-to-date, we have demonstrated the significant earnings power of the franchise. We ended the quarter with a strong capital and liquidity position. Overall client engagement remains strong. We grew book value this quarter, and we have remained focused on supporting employees, customers, clients and communities. With that, Mike and I are happy to take any questions.
John McDonald, Analyst
Hi, good morning. Mike, just wanted to ask a question in terms of lessons learned on the consent order and the need to invest here. I guess the question is why weren't these issues addressed earlier? Was there a misread of regulatory expectations? Or was management attention and resources just needed elsewhere and you didn't get to it yet? Can you hear me?
Mark Mason, CFO
John, this is Mark, can you hear me?
John McDonald, Analyst
Yes, sorry. Could you hear the question?
Mark Mason, CFO
Yes, we did hear the question. I think Mike's mic may be muted—you muted.
Mike Corbat, CEO
Oh, can you hear me? I'm sorry. Over the past decade or so I think we've done a lot of work in terms of positioning the firm from both a financial and a strategic perspective. I think we've made a number of investments across areas that we felt were critical and we're going to continue to make targeted investments. At the Barclays Conference, Mark spoke about our next phase of our transformation. I think as we think about that, we have always been focused in terms of how we operate. But I would say we haven't gone fast enough. We feel that, again, if you think about COVID and the way we've come through it, I feel quite proud about what we've done and what we've been able to do. We've initiated a number of significant remediation projects along the way to strengthen our controls, our infrastructure and our governance. But that being said, we didn't do it fast enough and we've got to move faster. That's certainly where we're going to be focused. In terms of how we're going to approach that, I think really four pillars that we're going to be focused on. One is the organizational component. You've seen this already with the establishment and hiring of our Chief Administrative Officer, Karen Peetz, coming in, and creating a framework around the way we'll go at this. Second is the strategic component, which is really agreeing on what the end state vision for our processes should be, and being critical that we have brought people in to give us an external assessment of what needs to be done and where we fell short. It's making sure that the work that we do comes together across the institution so that instead of simply addressing specific issues, we're solving holistic problems. Third is the operational component, making sure that around things like data and technology we are driving proper automation, eliminating manual touch points and other things that we've discussed. And finally, the cultural piece—making sure that all the businesses, all the regions, all the functions understand that it's everyone's responsibility to get this right. So I would say it hasn't been from lack of effort and commitment, but we certainly could have worked smarter around getting to the endpoint.
John McDonald, Analyst
Okay, that's helpful. And then a follow up for Mark. With the consent orders and the work required, additional expense and investment will be needed in the coming years. Do you still think you can make progress closing the profitability gap to peers? Will that still be a goal? And also, if you can't do significant M&A or portfolio acquisitions, are there opportunities potentially to slim down and simplify the company over time that could help profitability? Thanks.
Mark Mason, CFO
Thanks, John. The answer is yes. Our intent is over time to continue to narrow the gap, to continue to increase profitability and improve returns over time, and that hasn't changed. With every crisis, in some ways comes a unique opportunity to take a hard look at your business model, and that's what we're doing. With the benefit of a new incoming CEO, and as we manage through this crisis, we'll continue to look at our business model and our strategy and see what makes sense as we come out of this and how we can best capture opportunities to serve our clients.
John McDonald, Analyst
Okay. Thanks. One quick follow-up. Is it clear to you what will be deemed significant acquisitions or portfolio additions versus ordinary course? Or is that something that's still to be defined?
Mike Corbat, CEO
It's still to be defined. There are some things that are obvious in terms of BAU activity, such as securitizations and other types of activities that we do within different parts of the franchise. But we still have to define what significant means and get regulatory agreement on that.
John McDonald, Analyst
Okay. Thank you.
Operator, Operator
Your next question is from the line of Glenn Schorr with Evercore ISI.
Glenn Schorr, Analyst
Hi there. Good morning. Quick follow up on the consent: are the expenses going to be inside of Corporate/Other and outside of the businesses? And related to that question is it clear to you that if and when the group comes off capital return suspension that you will be able to act as any of the other banks will act on the capital return front?
Mark Mason, CFO
In terms of the first question, as you heard me mention before, we're spending more than $1 billion in incremental spend in 2020. That is split between Corporate as well as some of the other businesses depending on the nature of the spend. I would expect that as we go forward it would be a similar dynamic; depending on the nature of the spend it would be booked in Corporate/Other or in one of the respective businesses. To give a quick example, some of the consulting spend that we do to help scope out a target state or a key process would likely be booked in Corporate/Other because it benefits the entire franchise. In terms of capital actions going forward, there's nothing in the Consent Order that prevents us from making capital action decisions going forward. So we would expect to be able to act similarly to our peers as we come out of this crisis.
Glenn Schorr, Analyst
Appreciate that. One quick one on cards if I could. You are down well into double digits in Asia and Mexico, but overall. I wonder if you could parse out how much you think that the macro environment and other factors are driving this. We're trying to build back to what takes us to the other side where we have a bottoming out and building off bottom. That includes how you're marketing — are you holding back on promos and teasers given the macro backdrop and how you're marketing into the banking base? Thanks.
Mark Mason, CFO
There are a couple of different dynamics that are important. The key one is we're still in the midst of a crisis, and we're very much still seeing pressure on purchase sales. It's better than it was in prior quarters, but there certainly is still pressure there across the franchise. One of the big drags this quarter is retail services, which is in part tied to partner revenue sharing where an improved forecast in loss expectations results in us sharing more revenues with the partners. The dynamic that's important to watch is how unemployment and GDP evolve and what that means for purchase activity starting to pick up. We'll keep a close watch on that. We have dialed back advertising and marketing spend and we want to be thoughtful about when we ramp back up as we see signs of things turning. We don't want to be late in doing that. We'll be proactive at increasing spend where it makes sense and testing where we see good signals. But as of right now, the pressure on volumes is a direct byproduct of the crisis we're managing through.
Glenn Schorr, Analyst
Thanks, Mark.
Mark Mason, CFO
Yep.
Operator, Operator
Your next question is from the line of Jim Mitchell with Seaport Global.
Jim Mitchell, Analyst
Hey, good morning.
Mike Corbat, CEO
Good morning.
Jim Mitchell, Analyst
Maybe just a question, a follow-up on expenses. You guys have done a pretty good job over the last few years investing, spending on investment and offsetting with efficiency savings. Obviously, that may not happen perfectly this year because of the incremental spend. How do we think about that going forward? Is this ramp up starting to stabilize next year and you can get back on that path? Or how do we think about beyond the fourth quarter?
Mark Mason, CFO
We have an incremental spend of about $1 billion this year that has gone towards infrastructure, risk and controls. We started that incremental spend path in 2019. To some extent our run rate is more spend towards those types of activities. There will be an opportunity to look at that $1 billion and recalibrate it or reprioritize it. Some of it is a one-year spend that we'll have an opportunity to reallocate in 2021. The order requires that we step back and come up with a target and state vision for some of these key processes and the risk management and controls around them. We need to do that to appropriately dimension the reprioritization of the spend we already have and what incremental spend is necessary. We'll do that over the time period allotted to us within the order. It is an investment. Many of the things Mike described—automation, reduced manual touch points, straight through processing—will yield benefits in the way we run our organization and in the way we're able to go to market and compete and serve our clients. I do expect benefits to accrue from these investments down the line. Separate from that, we'll continue to be responsible managers of the firm, ensuring we look across the franchise and spend wisely.
Jim Mitchell, Analyst
Okay. That's helpful. And maybe just pivoting to NII. I appreciate the year-over-year guidance. But where and when do you see it kind of stabilizing, given where the rate picture is right now?
Mark Mason, CFO
There are a lot of factors that played through the quarter: rates, volumes, liquidity in the market. I'd expect NII to stabilize and stay relatively flat as we go into the remainder of the year assuming current trends play out. We project some NII growth on the accrual businesses as COVID diminishes a little bit. However, the markets NII could be somewhat volatile. We're looking at stabilization as we come through the end of the year.
Jim Mitchell, Analyst
Okay. Thank you.
Operator, Operator
Your next question is from the line of Mike Mayo with Wells Fargo.
Mike Mayo, Analyst
Hi. My question is for Mike. Look, Mike, we've agreed a lot about Citi's improved resiliency. Since you started, Citi is simpler, stronger and safer and when you look at CDS spreads they were four times wider when you came in as CEO and that's progress. But what we've disagreed on is the pace and need for more restructuring. Where is the sense of urgency? Speaking on behalf of investors, people I speak with have a collective sense of extreme disappointment with technology, the new regulatory order and that the root problems were not transparent to investors, and execution has not gone fast enough. You said this new tech fix will take time and on the business mix many questions continue on why you have this global consumer footprint which has terrible efficiency and returns, worst in class ROTC this quarter 8%. Even if we give you the 12% from last year, that's still below the 19% of JPMorgan this quarter alone. So where is the sense of urgency? Recognizing the improvement that you've had with the balance sheet, but still a long way to go with strategy, why not step aside now and have the new CEO, Jane Fraser take over as a way to demonstrate an increased sense of urgency? Thank you.
Mike Corbat, CEO
I would start by saying it is important to the board and to the company that we have a real transition. When I committed to the board I agreed to stay throughout the year and close out the three-year plan which we announced in 2017. We are starting the transition now. That allows Jane to be very much involved in our financial plan. When I started, I thought it was important that the CEO own the budget and planning process, and I was fortunate in terms of timing. With Jane coming in, she will be accountable for delivering next year and into the future. Jane has taken on the transformation work and is working on the gap analysis and related things to the Consent Order. She continues to have a day job running consumer and overseeing our return to the office in North America. I think the orderly transition is the right thing to do. In terms of accomplishments, grounding where we started: net income increased from $7.5 billion to north of $19 billion at the end of last year. Our return on assets went from 39 basis points to about 100 basis points. Return on tangible common equity went from 5% to 12%, closing a lot of the gap. We've gone from returning hardly any capital in 2012 to returning nearly $80 billion over the last six years and reducing our share count by about 30%. I don't think you accomplish those things without a sense of commitment and urgency. I feel great about the team in place and their commitment. Jane has a foundation to build on and I think she'll act with a sense of urgency coming out of COVID and into the future. Shareholders absolutely matter. We work hard on pay structure alignment, and compensation scorecards are very linked to performance. The board and compensation committee work to create that alignment. From a disclosure perspective we've been public and transparent in terms of metrics and the scorecard process leadership and broader management are held to at the firm.
Mike Mayo, Analyst
If I can squeeze in one more just for Mark. Given the disappointment with execution, strategy, controls, transparency, but looking forward now with financials: as far as expenses, you're already spending a billion dollars. You see some of this as a one-year spend. You have to do a review and you don't really know the exact spending to fix these problems. Should we think in terms of billions? Is this $10 billion? Is this $5 billion? Frame this the best you can given you're at the early stages.
Mark Mason, CFO
If you look back, we have been responsible in managing our investments over the past number of years. People should expect we'll continue to be responsible around that. These are investments and necessary to improve the way we operate and our ability to compete. It's hard to pinpoint a number at this time. I would expect that we will continue to increase profitability and improve returns, but I can't dimension the exact number for next year or the year after. We are still running the firm and performing through the crisis. When we get more clarity on the actual spend and get through budgeting and the response to the order, we'll give you more color.
Operator, Operator
Your next question is from the line of Matt O'Connor with Deutsche Bank.
Matt O'Connor, Analyst
Good morning. First, thanks for taking my questions. It doesn't sound like Jane is on the call, which is fine and not surprising. When should we expect to hear from her in terms of the transition and her thoughts on the regulatory issues and process forward?
Mike Corbat, CEO
We should let her get her feet under her, go through some of these processes, get educated and start to form her opinions. We'll probably start to introduce her on the January call with more of a forward look, and then by the quarter after that she'll have a more comprehensive view.
Matt O'Connor, Analyst
That makes sense. And understanding there could be more views in a room, for now is addressing the regulatory issues a matter of spending money and fixing processes, or could there be structural strategic changes as well? Is this the business model Citi will have going forward or are more structural changes potentially coming to address the regulatory issues and better position the company?
Mark Mason, CFO
To clarify, we have a Consent Order that we need to address, which is an opportunity to take a step back and look at key processes and the infrastructure, controls and compliance that support them. Separate from that, the crisis has created opportunities for us to learn about our business and identify areas to accelerate investments—for example, digital has been a wise investment and may warrant acceleration. The wealth management traction presents opportunities as well. With a new CEO, you would expect an opportunity for that person to take a step back and assess the business, growth trajectory and return opportunities and determine the right path forward. Jane will likely do that when she starts in February.
Matt O'Connor, Analyst
Yes. It does. Thanks for the color.
Operator, Operator
Your next question is from the line of Erika Najarian with Bank of America.
Erika Najarian, Analyst
Hi, good morning. Mark, I apologize but I'm going to re-ask the question that's been asked many times. As we think about productivity savings versus investment in risk management for 2021, is $11.9 billion, or rather $10.9 billion a good starting point in terms of how we should think about quarterly expenses over the next several quarters?
Mark Mason, CFO
The expenses in the quarter you referenced include a $400 million civil money penalty that is part of operating expenses. In terms of 2021, we're in the midst of constructing our plan now, so it's hard for me to give you an exact number or run rate for 2021. I don't have much beyond what I've already said.
Erika Najarian, Analyst
Thanks. And a question to Mike: since your consent order came out last week, many investors asked why Citi isn't like another bank that had an asset cap and business activity limitation some time after its consent order. Without listing accomplishments, how can you reassure current and prospective investors that Citi won't go down a similar laborious regulatory remediation route that could result in business activity restrictions?
Mike Corbat, CEO
One very important part of this is there was no widespread customer harm and the company did not profit from the activities. There were industry-wide reviews of sales practices and other areas. In this case, we've identified the four areas of focus and we'll do a thorough gap analysis. We've been working on these items for a while and will be open to the findings and what needs to be done. It's important to understand the process failures that got us here. We believe the remediation and investments will have an ROI—improving data aggregation, automating processes, and moving risk and controls through the firm in a more automated way will give us the ability to improve processes and deliver long-term benefits. Lastly, while we will invest to address these items, there remains significant work we can do on business improvement and efficiency that is separate from the remediation spend.
Operator, Operator
Your next question is from the line of Steven Chubak with Wolf Research.
Steven Chubak, Analyst
Hi, good morning. A question for Mark: one of the things that has happened recently is that the advanced CET1 has now become your binding constraint. One of the key questions we've been getting is whether we would see a significant uptick in RWAs relating to operational risk, and it looks like there hasn't been much movement in terms of RWA divergence. Could you speak to whether the impact from recent events is fully reflected in that number or whether we could see further upward pressure in the fourth quarter?
Mark Mason, CFO
You're speaking to the civil money penalty. Yes, we have reflected our estimates of the impact in the RWA for operational risk associated with that. Given how it falls relative to other operational risks, there was not a material change in the RWA as a result of it.
Steven Chubak, Analyst
Got it. One follow-up: you plan to do an Investor Day that was delayed. Will management provide refreshed targets in the coming months and are there plans to hold an Investor Day to provide a more fulsome update?
Mark Mason, CFO
That's a tough question to answer. I'd like to give Jane the opportunity to get in the seat and work through the things Mike and I referenced. Historically, in the fourth quarter we've given context on full year performance and what we're seeing going forward. We'll see how this fourth quarter plays out, and on the fourth quarter earnings call we'll give an updated perspective on what we think performance might look like in 2021 and the timing for a more comprehensive view going forward.
Operator, Operator
Your next question is from the line of Saul Martinez with UBS.
Saul Martinez, Analyst
Hey guys, good morning. I'm going to beat a dead horse a bit more on the consent order and potential costs. I know it's hard to know the time horizon or exact cost. These processes can be expensive and you have to improve outcomes in the short term while building systematic solutions that require longer term investments. When do you think you will know what you're really up against—not only incremental expenses, but in absolute terms how much you're going to have to spend and the time horizon to fix these issues? When will you have a better handle on these dimensions?
Mark Mason, CFO
We spend roughly $42 billion to $43 billion a year in total expenses, with about $9 billion of that in technology. There are multiple areas to consider when thinking about incremental needs. One is the $1 billion of incremental spend we've already made and the opportunity to reprioritize or re-spend those dollars. There's also spend we make on current operations and infrastructure each year that we can re-evaluate and reallocate. Multiple categories exist where we can re-point dollars to address items highlighted in the order. In terms of timing, the order points out that we have about 120 days to identify the gap between our current state and an end state target, and then about 90 days to develop and have a plan approved, after which we can move toward executing or continuing to execute. That gives you a sense for how we're thinking about timing and dimensioning of this. We have a track record of being thoughtful and responsible around investment dollars and our total expense base, and you should expect that we will continue to be disciplined and responsible.
Saul Martinez, Analyst
Okay. That's helpful. And a quick follow-up and a little clarification: you mentioned in the fourth quarter that Corporate/Other pre-tax losses should be similar to this quarter excluding the civil money penalty. Is that correct?
Mark Mason, CFO
Yes. Excluding the $400 million civil money penalty, the pre-tax loss was roughly $657 million this quarter, and we would expect similar levels in the fourth quarter.
Operator, Operator
Your next question is from the line of Ken Usdin with Jefferies.
Ken Usdin, Analyst
Thanks. Good morning. Mark, you mentioned that you don't really expect NCOs to start peaking until the end of next year. Can you walk us through how you're expecting the loss curve to appear over the next year or so?
Mark Mason, CFO
When you look across the portfolio, we're seeing payment rates coming in higher than we expected and consumers are proving to be quite resilient given stimulus and forbearance programs. As we look at loss curves and delinquency buckets over the next number of quarters, the aggregate level is likely to see losses towards the fourth quarter or back end of 2021. Assumptions around GDP and unemployment will influence this, and it will vary by region—Asia and Latin America may see peaks earlier—but that's what the aggregate portfolio data suggests.
Ken Usdin, Analyst
Got it. And a follow-up on taxes: if corporate tax rates move to 28%, do you have an estimate of impact to DTA and other items?
Mark Mason, CFO
Hard to know exactly what happens, but if we did see a corporate tax rate increase to about 28% and it went into effect in the latter part of 2021, it would likely result in our DTA increasing by about $4 billion, a one-time increase. That would also affect our effective tax rate and thus income contributing to CET1. In terms of disallowed DTA with a higher corporate tax rate, we would expect usage levels of roughly $1 billion per year.
Mike Corbat, CEO
An important nuance is what happens between remaining territorial taxation or reverting to a global tax. What people discuss today would likely remain territorial, and with an average global tax rate around 25%, that would benefit us in some of the jurisdictions where we operate.
Operator, Operator
Your next question is from the line of Brian Kleinhanzl with KBW.
Brian Kleinhanzl, Analyst
Good. Thanks. One quick question on the NII: you said it's going to stabilize after the fourth quarter as you look to 2021, but what gives you confidence that it's actually stable at that level? Did you think about the potential for stimulus and further consumer deleveraging which could change the picture?
Mike Corbat, CEO
That is based on current trends showing improving unemployment and GDP. Talk of additional stimulus and its timing is important; we assumed something perhaps in early 2021. It also assumes purchase sales activity continues to improve quarter-over-quarter which we've seen in Q3 and into early October. What happens with overall liquidity in the market also influences mix and NIM.
Brian Kleinhanzl, Analyst
Second question on NIM: are you getting closer to the bottom on earning asset yields as you think about repricing and where rates are stabilized? Are earning asset yields closer to bottom as well?
Mark Mason, CFO
We've seen pressure on NIM from rates, the mix of assets, and deposit levels coming in quite high with limited loan demand. How liquidity evolves and what happens with asset pricing will be important. NIM is an output of those variables and the balance sheet evolution. There's some continued uncertainty, but we see it stabilizing toward the end of the year.
Operator, Operator
Your next question is from the line of Jeff Harte with Piper Sandler.
Jeff Harte, Analyst
Good afternoon. One more consent order related question: do you have a feel for regulators' views on the adequacy of existing remediation projects that have been underway versus the view that things just haven't moved fast enough?
Mike Corbat, CEO
I would say that remediation programs and work streams have been underway, but they haven't moved fast enough and in some areas haven't been holistic enough. The gap analysis will give us a better sense of that. We'll see what the final analysis yields, but we have a sense of the right approach and direction.
Jeff Harte, Analyst
Not necessarily starting over?
Mike Corbat, CEO
Broadly speaking, no. There may be some refined areas where it makes sense to do more or change approach, but not a broad restart. We've managed through this crisis in real time and we have been able to get data, make decisions and act in a timely manner. The pandemic has shown the need to accelerate digital and the ability to make faster and better decisions will be critical.
Jeff Harte, Analyst
Okay. Just a follow-up: Mexico is a relatively large exposure for Citi and there's macroeconomic concern in that market. Can you talk about credit related trends specifically in Mexico and what your expectations are? How much have deferrals helped down there?
Mike Corbat, CEO
Mexico, similar to other parts of the world, had forbearance programs. Unlike the U.S., in Mexico customers needed to be less than 30 days past due as of the end of February to be eligible. When you look at our loss rates for the quarter, you see a tick up in Latin America largely driven by Mexico as customers move through delinquency buckets into losses. That said, Mexico also comes with higher NIM relative to overall performance. We would expect losses there to peak sooner than the end of 2021. Our total country exposure to Mexico is about $57 billion, down a bit since Q2. At the end of Q3, about $30 billion of loans were between GCB and ICG in Mexico—about $13 billion consumer loans and about $16 billion corporate loans. Slightly more than half of the consumer loans are credit card and personal loans. We target a higher quality customer segment than many peers and price risk accordingly. About 81% of our payroll loans are concentrated in sectors with lower risk of layoffs like government, employers, and pensioners. Mortgages have LTVs weighted toward less than 50% in many cases. Overall, we feel appropriately reserved and are managing reasonable performance there.
Operator, Operator
Your next question is from the line of Charles Peabody with Portales.
Charles Peabody, Analyst
I had some follow-ups on net interest revenue guidance. You kept using the word stabilization as we enter 2021. Does that imply further weakness in the fourth quarter before it stabilizes? And a related question: on page 11 you show the mix of NIR between the core bank and markets related; you saw a big drop in markets related NIR—can you talk about what drove that and which pieces you expect to stabilize first?
Mike Corbat, CEO
To be clear, the stabilization I referenced is as we go into the fourth quarter. I'd expect NIR to stabilize in the fourth quarter for total Citi, given the factors I mentioned earlier. For markets revenue, it's important to look at total revenue rather than just NIR because transactional structuring affects whether revenue shows up as NIR or non-NIR. Total markets revenue in the quarter was up driven by strong fixed income and equities performance. That segment may normalize compared to prior peak quarters but remains strong given the environment. As we go into Q4 with the election, Brexit and vaccine speculation, clients may reposition and cause puts and takes. Overall, we expect near revenue to stabilize though markets performance will have variability.
Charles Peabody, Analyst
And would you expect core bank NIR to actually grow in the fourth quarter sequentially?
Mike Corbat, CEO
I would expect our fourth quarter to show net interest revenues and non-interest revenues down year-over-year, but the aggregate of the two relatively stable.
Operator, Operator
Your next question is from the line of Vivek Juneja with JPMorgan.
Vivek Juneja, Analyst
Thanks for taking my questions. Mike, on the regulatory issue, it's disappointing to read in the consent orders that incentive compensation did not account for risk management and the comments about practices regulators made. What changes should we expect in senior management incentive comp? And why wasn't risk management prioritized earlier, which is a cornerstone since the last crisis? What changes should we expect in the board as well as other senior executives as a result?
Mike Corbat, CEO
The notion of accountability goes broader than just the executive management team. There are many work streams and people involved. In many instances people working on these processes have primary roles in business lines or functions and have been seconded to remediation work. The question is how to create the proper balance and accountability around that—ensuring people who are responsible for each process have the appropriate authority and accountability. It's not simply about executives; it's about striking the right balance across the organization.
Vivek Juneja, Analyst
Does that mean you'll be adding more people to hold some fully responsible for this?
Mike Corbat, CEO
We have added thousands of people in risk and controls since the beginning of the year and also added resources last year. We've brought in subject matter experts from other firms and industries and made strong external hires and internal moves. We've been making positions where remediation is the primary responsibility for some people. We're committed to having the right resources, expertise, and accountability to deliver on this.
Operator, Operator
Your next question is from the line of Betsy Graseck with Morgan Stanley.
Betsy Graseck, Analyst
Good morning. Karen was brought in in June and Mike, you became CEO of Citibank USA around that time. Is it fair to say you must have expected regulators to require some action here and you were already partially executing on some of these items? Is the consent order a surprise to the street but was it really a surprise to you?
Mike Corbat, CEO
We've been working on these work streams for a while. It's not that we suddenly decided to start projects. What became apparent is we needed to join these projects together and create a body to manage them holistically. Historically we've addressed issues serially or individually which hasn't yielded the desired outcomes. We were fortunate to bring Karen in who has experience and expertise to bring work streams together. For example, data feeds through risk, compliance and controls and we need a holistic approach so we do it once and do it right.
Mark Mason, CFO
To that point, the incremental $1 billion we're spending started earlier this year and we spent incremental dollars in 2019 as well. That $1 billion wasn't arbitrary, it was what we thought was required to make traction in the year while managing total expenses responsibly.
Betsy Graseck, Analyst
When I look at the stock it's priced for effectively a 5% ROE. If the market thinks expenses will go up sufficiently, that points to lower ROE. Mark, you're hoping to execute improved profitability that is above that. Can you help us understand the main threads of profit improvements over the next couple of years? Is it better deposit mix, doing more with the current customer base, adding customers? What are the drivers?
Mike Corbat, CEO
There are multiple components. There are additional linkages we can capture across franchises—doing more with TTS clients, more integration with capital markets and trade lending, and unique structuring opportunities. There are linkages across the franchise that will help top-line performance. There are opportunities to grow in wealth management; we saw strong investment revenue growth in Asia this quarter. Operational benefits come from removing manual activity with automation and improved technology—this improves quality and over time reduces cost. We expect improved profitability from both top-line opportunities and expense benefits, plus capacity adjustments as we come out of the crisis, and credit-cost improvements will also play a role.
Operator, Operator
Your next question is from the line of Gerard Cassidy with RBC.
Gerard Cassidy, Analyst
Good morning, Mark and Mike. Mark, can you share what you're seeing in the commercial portfolio in terms of rating migrations? The IG to BB, B, CCC breakdowns haven't moved much since Q4 2019. What are you seeing in sectors like energy and leisure and hospitality where risk may be elevated over the next 12 months?
Mark Mason, CFO
Since the last crisis we adjusted our risk framework and appetite and refocused on clients that take best advantage of our breadth—multinational investment grade clients. About 80% of our portfolio is in investment grade names. We have deep experience in sectors we operate in and have focused on client selection. For sectors in this crisis, we've been thoughtful. Aviation exposures tend to be secured and often guaranteed by export credit agencies with collateral valuation expertise. Autos often sit in securitization vehicles so consumer obligors buffer risk. Energy exposures are often reserve-based lending with periodic redeterminations which reduce exposure if oil prices fall. We've taken proactive actions: exposure reductions pre-crisis, aggressive downgrades early in the crisis and enhanced monitoring. We feel good about the portfolio and the reserves we hold and our ability to manage through this with our clients.
Operator, Operator
I will now turn the call back over for any closing remarks.
Elizabeth Lynn, Head of Investor Relations
Thank you all for joining today. Please feel free to reach out to Investor Relations if you have any additional questions. Thank you again and have a nice day.
Operator, Operator
This concludes today’s third quarter 2020 earnings call. Thank you for your participation. You may disconnect at this time.