Hello, and welcome to Citi's Second Quarter 26 Earnings Call. Today's call will be hosted by Jennifer 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 will be given instructions for the question and answer session.
Also as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Ms. Landis, you may begin.
Thank you, operator. Good morning, and thank you all for joining our second quarter 26 earnings call. I am joined today by our chair and chief executive officer, Jane Nind Fraser, and our chief financial officer, Gonzalo Lucchetti.
I would 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 will turn it over to Jane.
Thank you, Jennifer, and good morning to everyone. Our momentum continued. And the second quarter capped a very good first half of the year.
This morning, we reported net income of $5.8 billion for the second quarter, with an EPS of $3.15 and an ROTCE of 13%. This was Citi's best quarterly revenue in a decade. Which we delivered with over 9% positive operating leverage.
Once again, we saw double digit revenue growth for the firm and in 4 of our 5 businesses. We improved our ROTCE for the firm by 430 basis points, and had significant improvement in the returns of every single business. The combination of our investments disciplined execution, and focus on clients is delivering improved returns and more durable results.
Let me take you through our 5 businesses. Services delivered its highest ever quarterly revenue, and an ROTCE of over 30%. Clients continue to lean on our global network more and more.
We saw a 13% increase in cross border transactions and a 19% increase in deposits. Our assets under custody and administration were up over 20% as we onboarded funds and deepened existing relationships. This is the power of our network.
And it is a franchise that is very hard to replicate. Markets revenues were up 17% and crossed $7 billion again, as sentiment stayed positive throughout the quarter. Equities was up over 40% with prime balances up nearly 60%.
Underneath fixed 7% growth, FX and spread products continued to shine, in yet another example of our global network doing exactly what it is built to do for clients. This offset rates lower performance. Banking revenues climbed 34%, led by a sharp increase in financing activity amidst an overall strong wallet.
Investment banking was up 44%, as we gained share in equity capital markets. We played a role in the majority of the top equity and debt issuances in the quarter, including lead roles on the high profile IPOs such as SpaceX, and Cerebras. As we enter the second half, the pipeline looks healthy.
And we are continuing to invest in talent to fill the gaps in our coverage to gain share. Including in M&A. Wealth revenues increased for the 9th straight quarter. up 13%, with growth across all 3 businesses. While returns improved to over 14%.
Client investment assets were up 14% and net new investment assets have reached $30 billion so far this year. Almost 2/3 of that NNIA growth came from deepening relationships with our existing clients. And referrals from the retail bank to Citigold were up 23%.
So you are now starting to see the tangible benefits of integrating our retail branches into wealth. In US consumer cards, investments in our product and partners which shows up in both revenues and expenses, impacted our operating leverage this quarter. But it is these investments such as our acquisition of the AA Barclays portfolio in April, Plus our strongest showing in the Fed stress test last month.
And we plan to increase our dividend by 12%. We launched $30 billion common stock repurchase commitment by buying back $4 billion during the quarter. Our CET1 ratio stood at 12.8% and remains about 120 basis points above our current regulatory minimum.
We continued to make progress in our transformation with a large body of work passing internal audit validation. As much of the transformation work winds down, we are not only taking down expenses, we are applying what we learned about large scale implementation to integrate AI into our businesses and functions wherever it makes sense. Nearly 9 out of 10 of our people are using our AI tools. that is not only driving productivity and client experience, but also growth.
Helping us bring products to market significantly faster, as we are doing with Payment Express and services and with our Citi Wealth Advisor Insights. Platform. On the macro front, the conflict in The Middle East has weighed a bit on global growth.
Whilst giving inflation a second wind. In The US, growth is roughly where it was a year ago, and the labor market remains stable. But it is a nuanced story because that growth is not lifting all boats.
The extraordinary investment in AI and its supporting cast of semiconductors data centers, and related infrastructure is providing a tailwind in The US and parts of Asia. While a more vulnerable Europe faces yet another competitive headwind. Above all these dynamics, we see real resiliency in our corporate clients who bring strong balance sheets and a proven adeptness of managing the complex environment.
You have heard me say many times that city success will not follow a straight line. That the rigor and consistency with which we have executed the strategy we first laid out for you in 2022 and reinforced at our investor day in May has put City back in the game. And our people deserve enormous credit for getting us to this position.
We have elevated Citi into a new growth mode, Our returns are improving, and the conversation around this firm has changed. We continue to do the things we said we would do, such as investing in the businesses whilst we take down our transformation and stranded costs. Despite the usual seasonality in the second half of the year, we feel very good about our ability to hit our 2026 return target.
Target. And then to reach the targets we shared with you in May. And to be clear, if conditions stay constructive, we intend to take advantage of that.
We will lean in, with additional investments and other actions to create value for our shareholders over the medium term. A stronger environment is not just upside to report. it is an opportunity we will put to work. And finally, as you are all aware, this is Jennifer Landis' final earnings call before she becomes our chief financial officer for markets.
Jennifer came to Citi almost 5 years ago. Just after I became CEO. Over that time, she has reestablished trust and credibility with the investor community.
And we built our investor relations team which is now recognized as 1 of the best on the street. You can see her fingerprints on our disclosures, our financial communications, and events, such as our recent Investor Day. She has worked, tirelessly to make sure you understand where we are going and how we will get there.
So, Jennifer, thank you very much indeed. Before I turn it over to Gonzalo, I would like to thank FIFA for scheduling, Argentina's semifinal match in Atlanta for tomorrow and not. For today.
I shudder to think. What choice Gonzalo would have made in that situation. Gonzalo, over to you.
And then we will be delighted as always, to take your questions.
Gonzalo Luchetti
Head of US Personal Banking
Thank you, Jane, and good morning, everyone. First, I can neither confirm nor deny what decision I would have made in that situation. And second, I would like to echo Jane's sentiment regarding Jennifer's final earnings call as head of investor relations.
Jennifer has been a great partner to me to Jane, and to the broader leadership team. Since taking over investor relations in 2021, she has built strong relationships across the investor and analyst community and helped to ensure that Citi's strategy is communicated with clarity credibility, and consistency and we look forward to seeing her continue to make an impact in her new role. On behalf of the entire management team, thank you, Jennifer, for your leadership, your counsel, and your many contributions.
I am also very pleased to have Margot Pillich stepping into the role of head of strategy, M&A, and investor relations. Margot comes to this role after 5 years as Jane's chief of staff and brings deep knowledge of our strategy priorities, organization after more than 2 decades at the firm. I look forward to working with Margot in her new role, and I know she will do a tremendous job.
Now getting to the quarter, I will start with the firm wide financial results focusing on year on year comparisons unless I indicate otherwise. Then review the performance of our businesses in greater detail. On slide 4, we show financial results for the full firm, which demonstrate the progress we have made and the momentum of our strategy.
This quarter, we reported net income of $5.8 billion EPS of $3.15 and an ROTCE of 13% on $24.8 billion of revenues generating positive operating leverage. Total revenues were up 14%, with growth driven by each of our businesses and legacy franchises, including the impact of FX translation, partially offset by a decline in corporate other. Net interest income excluding markets which you can see on the bottom left side of the slide, was up 6% driven by growth across all businesses and legacy franchises, partially offset by a decline in corporate other.
Non interest revenues excluding markets were up 39%, driven by growth in all other banking, services and wealth. Partially offset by a decline in US consumer cards. Excluding all other, as well as markets, non interest revenues were up 18% and total markets revenues were up 17%.
Expenses of $14.2 billion were up 5%, with an efficiency ratio of below 58%. Which I will provide details on shortly. And cost of credit was $2.5 billion primarily consisting of net credit losses in US consumer cards as well as a firm wide net ACL bill of $118 million Looking at the firm on a year to date basis, we generated positive operating leverage with total revenues up 14% driven by growth across all businesses and legacy franchises including the impact of FX translation, partially offset by a decline in corporate dollar, and expenses, up 6%, as we reported an ROTC of 13.1%.
On slide 5, we show the expense and efficiency trend over the past 5 quarters. As I just mentioned, expenses increased 5%, primarily driven by our continued investments in the front office as well as higher volume and revenue related expenses, This increase is reflected in compensation and transactional and product servicing costs. And we also saw an impact from FX translation across our expense base.
The benefits of our past investments and productivity efforts have allowed us to gain efficiencies across our expense base and reduce our headcount to 219 thousand. With over $800 million of severance incurred year to date. We continue to invest in areas such as technology, including AI, and we would expect an increase in productivity saves over time.
And it is worth noting that this expense increase was against 14% revenue growth. Resulting in an improvement in our operating efficiency of over 500 basis points. On slide 6, we show U.S. Consumer Cards and corporate credit metrics.
As I mentioned, the firm's cost of credit was $2.5 billion primarily consisting of net credit losses in U. S. Consumer cards, as well as a firm wide net ACL bill. Our reserves incorporate an 8-quarter weighted average unemployment rate of 5.3% which includes a downside scenario average unemployment rate of nearly 7%. At the end of the quarter, we had over $22 billion in total reserves, with a reserve to funded loans ratio of 2.5%, We continue to maintain a high credit quality card portfolio, with approx. 86% of balances extended to consumers with FICO scores of 660 or higher, and a reserve to funding loan ratio in our US car portfolio of 7.6%.
Looking at the right hand side of the slide, you can see that our corporate exposure 79% investment grade and in the quarter, corporate non accrual loans as well as corporate net credit losses remained low. We are confident in the high quality nature of our portfolios, which reflect our robust risk appetite framework rigorous client selection, and our focus on using the balance sheet in the context of the overall client relationship. Turning to capital and the balance sheet on slide 7.
Where I will speak to sequential variances. Our total assets of $2.9 trillion increased 4%, driven by growth in trading related assets. Net end of period loans increased 4%, primarily driven by growth in markets and US cards.
Our $1.5 trillion deposit base remains well diversified and increased 3% driven by growth in services as we continue to deepen with clients with a focus on high quality operating deposits. We maintained a 114% average LCR and over $1 trillion of available liquidity resources. In the second quarter, we continued to deploy capital to support client driven growth while at the same time prioritizing the return of capital to common shareholders, as evidenced by the $4 billion in buybacks.
We ended the quarter at 12.8%, CET1 ratio under the binding standardized approach, approximately 120 basis points above the 11.6% regulatory capital requirement as we continue to target a CET1 ratio around 12.6% under the existing rules and requirements. While our SEV remains at 3.6% as Jane announced, we were pleased to see the continued improvement in our DFAST results and the corresponding implied SEV of 3.3% which marks a reduction for the 3rd consecutive year demonstrating the execution of our strategy and improved business performance which has resulted in growth in PPNR and greater resilience in stress. And as a reminder, we plan to increase our quarterly common stock dividend by 12% beginning in the 3rd quarter subject to quarterly board approval.
Turning to the businesses on Slide 8. shows the results for services in the second quarter. Revenues were up 18%, driven by growth across both TTS and security services. Reflecting the benefits of our continued investments in the business.
NII increased 18%, primarily driven by higher average deposit balances. NIR increased 16% as we continue to see strong activity and engagement with both corporate and commercial clients and across key high growth segments, including e commerce and fintech. Driving momentum across underlying drivers, with cross border transaction value up 13% and assets under custody and administration up 22%, which includes the impact market valuations, as well as new assets on boarded.
Expenses increased 5%, driven by higher volume related expenses as well as higher performance and other compensation expenses. Average loans increased 10%, primarily driven by agency finance and working capital loans. Average deposits increased 19% with growth across both North America and international, largely driven by an increase in operating deposits as we continue to deepen relationships with existing clients and onboard new clients.
Services generated positive operating leverage and delivered net income of $2.6 billion with an ROTCE of 30.9% in the quarter, and 29% year to date. Turning to markets on slide 9. Revenues were up 17%, driven by growth across both equities and fixed income.
With strong momentum across client segments including corporates, asset managers, hedge funds and banks. Fixed income revenues were up 7%, driven by growth in spread products and other fixed income, as well as rates and currencies. Spread products and other fixed income was up 25%, driven by growth across both financing and credit trading in spread products, as well as growth in commodities.
And rates and currencies was up 1% with growth in currencies on higher volumes reflecting strong client engagement, primarily offset by lower revenues in rates. Equities revenues were up 45%, driven by continued momentum in derivatives and prime services, as we grew prime balances by nearly 60% with growth across both new and existing clients as well as higher market valuations. Expenses increased 8% driven by higher performance related compensation and volume related expenses.
Average loans increased 29%, primarily driven by financing activity in spread products. Markets generated positive operating leverage and delivered net income of $2.4 billion with an ROTCE of 17% in the quarter, and 17.8% year to date. Turning to banking on slide 10.
Revenues were up 34%, driven by growth in investment banking, partially offset by a decline in corporate lending excluding mark to market on loan hedges. Investment banking revenues increased 44%, reflecting a strong wallet driven by growth in DCM and ECM, partially offset by a decline in M and A. DCM was up 65%, resulting in our second best quarter ever with growth across leveraged finance and investment grade. ECM was up 92% amid very strong market conditions, with growth across all products led by strength in IPOs and follow ons, where we participated in 8 of the top 10 ECM deals of the quarter.
And while M&A was down 4%, we maintained a healthy pipeline continue to have meaningful strategic dialogue with our clients. Corporate lending revenues, excluding mark to market on loan hedges, declined 4%, Expenses increased 7%, driven by higher performance related compensation and investments, as well as higher volume related expenses. Cost of credit was $242 million consisting of net credit losses of $138 million and a net ACL build of $104 million. 5% growth in loans associated with investment banking activity more than offset the decline in corporate lending balances.
Banking generated positive operating leverage and delivered net income of $350 million with an ROTCE of 18% in the quarter and 16.9% year to date. Turning to wealth on slide 11. Revenues were up 13%, driven by growth across all businesses, with 17% growth in Citigold and the retail bank, 5% in the private bank, and 3% in wealth and work.
NII, which you can see on the bottom left side of the slide, increased 18%, driven by higher deposit spreads and average balances, partially offset by lower mortgage spreads. NIR was up 4%, as we continue to see growth in investment fee revenues, which were up 20% primarily offset by the absence of the approximate $80 million gain on sale of our alternatives fund platform which occurred in the second quarter last year and the loss of fee revenue from the sale of the trust business in 2025. Net new investment asset flows were $15.7 billion in the quarter, contributing to $56 billion in the last 12 months representing 9% organic growth.
Overall, client investment assets were up 14%, which also includes the impact of market valuations and was partially offset by the sale of trust business assets. Expenses increased 3%, driven by higher technology costs and higher performance related compensation. Average loans were up 5%, as we continue to grow securities based lending and deploy balance sheet to support clients and drive client investment as a growth.
Average deposits were up 4%, primarily driven by growth in the private bank, Wealth had a pre tax margin of 23%, generated positive operating leverage, and delivered net income of $583 million with an ROTCE of 14.4% in the quarter and 12.6% year to date. Turning to U. S. Consumer cards on slide 12. As Jane mentioned, this quarter we completed the acquisition of the additional American Airlines cobranded car portfolio, and our results reflect the impact of the over $6 billion in loans for more than 2 million accounts onboarded in April, In the quarter, revenues were up 1%, driven by growth in NII primarily offset by a decline in NIR.
NII was up 5%, driven by higher interest earning balances. NIR was down 47%, driven by higher accruals for partner payments and new account acquisition costs reflecting increased investments partially offset by higher annual fees and net interchange. Including the additional American Airlines portfolio acquisition and momentum across underlying drivers, we saw general purpose cars acquisitions up 135%, spend volume up 12%, and average loans up 8%, partially offset by declines in private label cards.
Expenses increased 10%, driven by higher severance customer engagement costs, legal expenses, and increased marketing as we invest to drive future acquisitions and continued customer engagement. Cost of credit was $1.6 billion consisting of $1.9 billion of net credit losses and a net ACL release of $232 million driven by improved portfolio quality including seasonal changes largely offset by higher volume and changes in macroeconomic variables. US consumer cards delivered net income of $852 million with an ROTCE of 22% in the quarter and 20.6% year to date.
While we expect ROTCE to remain around our through the cycle target for the business, in some of the next few quarters, we do expect expense growth to outpace revenue growth as we invest in the business to drive engagement, and acquisitions with some of those investments reflected as contra revenue and others as expenses. Turning to Slide 13, we show results for all other on a managed basis, which includes corporate other and legacy franchises and excludes divestitures related items. Revenues were up 1%, driven by growth in legacy franchises, offset by a decline in corporate other.
Growth in legacy franchises was driven by Mexico consumer, which included momentum in underlying business drivers and the impact of Mexican peso appreciation, partially offset by the impact of continued reduction from our exits and wind downs. The decline in corporate other was driven by lower NII, which included actions taken such as those to reduce Citi's asset sensitivity due to a lower interest rate environment, largely offset by higher NIR reflecting episodic activity. Expenses were down 3%, driven by a decline in legacy franchises as lower expenses related to exits and wind downs were primarily offset by the impact of Mexican peso appreciation as well as a decline in corporate other which included lower transformation expenses and severance charges.
As a reminder, we will continue to look for opportunities to drive structural efficiencies including severance to improve productivity, and actions to improve our funding profile. Cost of credit was $438 million primarily consisting of net credit losses of $366 million driven by loans in Mexico. And we have reduced the total DTAs deducted from CET1 capital held in corporate other by over $500 million year to date.
To close, we have included our full year 2026 outlook on Slide 14. We have made significant progress in terms of improving returns, on the back of our investments, generating a year-to-date ROTCE of 13.1%. Having said that, we continue to target an ROTCE of 10-11% for the full year, supported by: NII ex-markets growth of approximately 5-6% and continued NIR ex markets growth driven by momentum in services banking and wealth partially offset by USCC.
We expect the USCC NIR to remain in line with the second quarter's absolute level in the third and fourth quarters of this year. In markets we historically have seen revenues decline approximately 20% between the first and second half of the year. And given the strong performance year to date, the magnitude of that decline could be greater this year.
And as we have said before, we expect our full year efficiency ratio to be around 60%, as we ramp up investments across the businesses in the second half and incur additional severance as we target future efficiencies. As it relates to credit, we continue to expect total U.S. credit cards NCL rate between 4-4.5% while the ACL will continue to be a function of the macroeconomic environment and business volumes. And we remain well positioned to return capital to shareholders under our $30 billion share repurchase program, As we take a step back, the results in the second quarter and first half of this year represent significant progress towards our goal of improved firm wide and business performance.
We remain steadfast and focused on executing our transformation and confident in delivering our ROTC target of 10-11% this year, with a clear path to delivering higher sustainable returns going forward as we laid out at investor day. With that, Jane and I would be glad to take your questions.
At this time, we will open the floor for questions. If you would like to ask a question, please press 5 on your telephone keypad. You may remove yourself at any time by pressing 5 again.
Please note you will be allowed 1 question and 1 question. Again, that is 5 to ask a question. We will now pause a moment to assemble the queue.
Okay. Our first question will come from Glenn Schorr with Evercore ISI. Your line is now open.
Please go ahead.
Hi. Thank you. So I am a huge fan of investing back in the business during great times.
So and I heard your message loud and clear, and we see your guidance. But people are trying to parse through the not upping of the RTC target this year. How much do not know if you can quantify in numbers, that is what I am asking, is how much of it is conservatism and not knowing what is ahead in the second half versus investments you have already made versus investments you are going to make in this in this second half?
I am just trying to get through the parsing of it. Thank you.
Okay. I may take that, Glenn. Well, I have to say with a good first half under our belt, we have shifted our focus from the 2026 waypoint to the near term and medium term targets and the investments behind them.
As you say, we have operated in a good environment so far this year. Think the whole industry has benefited from revenue growth and benign credit. What I think I am most proud of is that we have generated real alpha. it is outperformance that we created. it is not just a rising tide, and you have seen us pair that with consistent expense and capital discipline whilst investing.
Now, as you say, how strong the second half turns out largely depends on the macro and the market backdrop. And that is true for everybody. We are deliberately investing for long term growth.
And for improved returns. Of weeks or a few weeks ago, we laid these out in the investment plan in detail at investor day. And you see we just have a lot of opportunities here.
And we are funding these investments whilst holding our efficiency ratio for the year around 60%. And there is real discipline beneath that number. So to be clear, if conditions stay constructive, we intend to take full advantage of that.
We will lean in, bringing forward investments and other actions that will create value for our shareholders over the medium term. As I said in my opening, a stronger environment is not just upside to report, it is an opportunity that we are going to put to work. So I am very comfortable with our 10 to 11% number.
Is the is the comp the tenth you know, doing I am good at math. A 13% for a half and 10% to 11%. Would mean significantly lower in the second half I am just trying to get at is that conservatism based on, like you said, 20% seasonality and more this year because the first half was so good.
So should we I just wanna get our collective mindset in the right spot. Is the second half possibly a single-digit to 10% return with no additional investment Well, thank you, Glenn.
Gonzalo Luchetti
Head of US Personal Banking
I will take this 1 though I may disappoint you in not giving you the precise math on every month in the forthcoming couple of quarters. But I think it is a fair question. And just to, emphasize a couple of things that I think, you know, Jane just mentioned, Number 1, and you alluded to them too.
Number 1 is there is a pocket of uncertainty. That we want to make sure that we navigate and we are able to land, and we have spoken about this in the past even for our near term and medium term targets. We want to be able to deliver under a variety of environments.
Secondly, the seasonality that you just mentioned and I alluded to in my remarks especially relates to markets, not only, right, because other businesses also have pockets of seasonality, but markets is the most pronounced 1. And the third 1 is what Jane just spoke about, which is making sure that we have the flexibility to take advantage of those opportunities if the markets are constructive. And that could come in a couple of flavors.
It could come-- we have spoken about the investment themes at investor day a couple of months ago across each of the 5 businesses. So we will consider leaning into those and accelerating more of those. We will also look at you will remember that I spoke about, you know, sources of structural efficiency to fund our growth over the next couple of years.
We may look at accelerating some of the structural efficiency actions and, in that case, take more severance in the second half As you can see, so far to date, we are already at $800 million for half of the year. We are already basically at the level that we did a year ago. So if we see opportunities, we may do a bit more than we originally envisioned.
And then the third piece, as Jane was mentioning actions as well, is we will also look not only at structural efficiency opportunities, but it could also be structural funding opportunities. If we see any opportunities to take actions to improve our funding profile, over the long run, we will do those. You saw us do a little bit of that in the second quarter where we tender $1.2 billion of debt.
And so we will look at those opportunities To James point, not to maximize the waypoint, but to actually look at the durability of the returns, going forward. Thank you.
Your next question will come from Mike Mayo with Wells Fargo. Your line is now open. Please go ahead.
I think, yeah, if you are Gonzalo, if you are going to be the Messi of CFOs, I think we need to understand a little bit more about your prior answer. And I think what you are saying is you will use kind of the excess earnings above what you had expected to front load or accelerate structural changes that will improve your future funding efficiency and growth? But the problem is, again, 13% return in the first half of the year, that would imply 9%.
The second half of the year efficiency, 57% in the first half of the year. To get to 60%, that would imply maybe 63%. So, I think I think what the stock market's saying right now, I think what we are hearing is that you are guiding for a much worse second half of the year than the first half, and that may or may not be your intention.
So if you could simply clarify what you really are saying about the expenses and what areas would you like to kind of accelerate spending on when it comes to revenue growth? Thank you.
Mike, let me just jump in here. What we are saying is we are focused on the near term and the medium term targets. Not on the waypoint.
I think the I cannot imagine this investor that does not want us to make sure that we are taking full advantage of the market conditions, particularly if they are good in the second half, to be able to make the investments and take actions that will drive growth for the next number of years. And that is where and that is the message that the street should be taking from this. But, Gonzalo, over to you.
Gonzalo Luchetti
Head of US Personal Banking
No. I think that is, you know, 100% in sync with what we are saying. We are not saying, Mike, that we are expecting a worse second half.
There is seasonality to it. Right? If you look at the historicals, you will be able to see it And that plays through not only on the revenues that I highlighted in my remarks, as it relates to markets, you will see that playing through generally in returns and operating efficiency over the, you know, over a reasonable period of time in the past.
But what we are looking forward to is to Jane's point, making sure that, we put the opportunity to work where we see a chance in order to really solidify that path to near term and medium term returns, which is the ultimate goal. Right? it is really driving the durability and the improvement that we want to that we want to drive in order to close the gap with our peers as we said we intend to do. Yep.
We are playing the long game.
And a question related to your remediation efforts. Last quarter, you said you are 90%+ done, and do you expect it to be 100% done sometime in the near term? I think you said that in at investor day.
Are you at 93%, 99%? Do you think you get to 100% and then you turn it over to the regulators? to make their decision?
I am not going to get in I am not gonna get into the game of whether we are at 95%, 96%, 97%. You know, we are largely now operating at the city target state, I think the important piece I mentioned in my opening remarks is a large amount of our work on the consent order successfully passed through audit validation this past quarter. And therefore can get handed over to our regulators.
And as you know, we have still got remaining work, that relates to enhancing data governance, particularly for regulatory reporting and we continue to make steady progress on it. In terms of the timing of the removal of the consent orders, that is fully at the discretion of our regulators, in terms of reviewing the work that we have done, as we hand it over, and then going through their closure process, and that takes time. But I do reemphasize for our investors whenever we complete each body of work, we begin taking down the remediation expenses and you can see that in our expense line. it is creating the capacity to further invest in the businesses that is the additional $5 billion of investment that we talked about in May, and we do not need to wait for the orders to close to do this.
That is happening already.
Your next question will come from Ken Usdin with Autonomous Research. Your line is open. Please go ahead.
Thanks. Hi. I have a question on the NII side, on the ex markets spaces.
Strong start also here in the first half of the year where you are already above the 5-6% in the first half. And deposit growth continues to pace, obviously, as you discussed, especially in services. I want to understand also, do you have any conservatism in terms of that outlook, in terms of why you may not be able to do better than that 5% to 6% on the core NII X markets given the trends that we are already seeing so far?
Gonzalo Luchetti
Head of US Personal Banking
Thank you very much, Ken, for the question, and good morning to you. I think we can see in through NII ex-markets, I think is a good a good window into, you know, number 1, our strategy working. Number 2, I think the operating rigor And, yes, we continue to be constructive on our progress forward and we are comfortable with the guidance that we provided would be the short answer.
But just to unpack that for a little bit, So just to recap the guidance for everyone, the guidance on NII x markets for the year is 5% to 6% revenue growth. that is anchored by mid single digit growth in the underlying drivers. In the second quarter, our NII X markets growth was 6%. So it is it is within the range of the guidance that we provided for the second quarter.
And that is in line with seeing deposits growing at about 12% on average As you mentioned, services really good momentum at 19%. Wealth 4%. Most of it coming from the private bank.
And loans growing in that mid single digit range at around 6% for the quarter year on year. Supported by services, cards and wealth. And so, when we step back and we look at the picture of NIIX markets, we are comfortable with that guidance.
I think Shamir alluded to this in our Investor Day. As it relates to you know, not expecting that deposit growth that we have seen of 19% would not normalize over a period of time. And so we expect that normalization to play through, but we are pleased with the trajectory that we are seeing.
Of course, services had a very strong quarter. We reached $1 trillion in deposits for the first time ever. And the good news about that, I think, is that those deposits are coming from operating deposits.
We are not chasing low value deposits. The team has been very disciplined on pricing and that is where you are seeing the NII pop up there. Thank you.
Okay. And then just 1 follow-up. You mentioned potentially some additional severance in the second half.
Can you remind us of just the severance you took year-to-date in the first half? And then what is the maybe you can help us about the type and magnitude of severance that you might book in the second so we can kind of understand also some of that future, like you said, you know, to get future efficiencies. Right?
Is it help us understand, like, how bulky that might be in terms of, being run rate of your. Thanks.
Gonzalo Luchetti
Head of US Personal Banking
Yes. No. Thank you.
While we may not provide exact guidance on what we expect from second half of severance, let me recap a little bit what we had said and the position that we are in now. So the first quarter was about $500 million The second quarter just now is another $300 million for an $800 million year to date You are kind of seeing the acceleration of those actions play through in the headcount You see it there on slide 5. And then to recap last year, it was about $800 million also.
When we gave guidance for the year, we expect it to be at around that same level or slightly below from prior year. Obviously, sitting here now and to the point that Jane and I were making, we will still be open minded about the second half if we see opportunities If I anchor it back to what we said a couple of months ago at Investor Day, remember, what I said about structural efficiencies to help fund those investments that we wanna make over the near term. Are anchored in 3 legs.
Right? Leg number 1 is stranded cost, and you are seeing those already come down from $1.3 billion a year ago to about a run rate of $800 million if you look at our second quarter numbers. for $200 million that you can annualize. We talked about transformation cost and Jane just mentioned that.
As we reach completion of the programs, we are taking action on the portion of the transformation cost that is temporary. That sits in corporate other. I had mentioned that at Investor Day.
You remember the peak was $3.3 billion of that total expense, about half of those sitting corporate other, which are the ones that are temporary in nature, not the ones that are structurally in nature. And we are starting to see those come down. And then the third leg of that structural efficiency push is the productivity opportunities that we see from technology and AI automation.
And I spoke about how we have more than 100+ processes that we are mapping end to end where we see opportunities for further automation. We look at this every week. Anand, our COO, and Tim Ryan, our head of technology.
And we are very purposely trying to make progress on that So as we see opportunities and if we see opportunities, this is what I was referring to. I am trying to connect the dots here. In the second half, to accelerate some of those productivity opportunities, we may take, more severance in the second half, but we are not, you know, we are not providing a specific number now.
Thank you.
And our North Star with all of this is pulling forward. Higher sustainable returns.
Your next question will come from Ebrahim Poonawala with Bank of America. Your line is now open. Please go ahead.
Hey. Good morning. I guess maybe, Gonzalo, just to follow-up, I think and hey, Jane.
On this, I think with the stock's down 5%. I think to Mike's question earlier about the back half being worse than the first half, I understand that is not what the message was. The message was if the revenue environment is stronger, you are gonna take advantage of that by investing.
But maybe as we look in terms of the momentum you had in the first half, yes, there is some seasonality as we look into the third quarter and later in the year. But is there an obvious reason? Or is the point here that if the revenue backdrop is strong, we could still maybe replicate the strength more or less that we have seen in the first half?
Or are you expect should we be expecting a step shift due to 2 reasons? 1, seasonality. And second, the pull forward in the investments that you have talked about multiple times this call. Thanks.
Gonzalo Luchetti
Head of US Personal Banking
Well, good morning, Ebrahim, and very much. May maybe let me start by not reiterating, but, you know, emphasizing a couple of points. The first 1 is we are pleased to see and we are not expecting to stop, just to be clear.
The commercial intensity that we are driving our execution, rigor and focus the, you know, the already you know, good results we are seeing from past investments. that is we are not planning on that to stop. And, of course, if the environment is constructive, we expect to see continued momentum. Right?
I spoke for a minute just now about NII. We have good momentum in our services business where we are seeing good engagement and, you know, higher win rates with new mandates. Deepening relationships with existing clients, and some of the investments that we made in our platform paying off.
We had a very good quarter in markets as you can see. We are making investments in talent. In technology, The market is constructive. it is it is good to see the business model working in a diversified way so that not every cylinder needs to be firing right, completely in order to have very good results as we just did.
Banking, of the investments we are making, the momentum, the intensity that this is driving in the business playing through. You are seeing the improvement on wealth. Right?
In terms of the returns being driven there, both NNIA growing at 9% our deposits growing, our NII growing. Many of those things have an element of sustainability in them as well. And cards, I mentioned a little bit of the dynamics because we are trying to invest in the business.
But you can look at the drivers right, even for the last few quarters, not just the ones this quarter that have the element of Barclays and American Airlines portfolio coming in. And they are healthy because we are investing in the business, and we know that is a high return business. All those things we expect to continue to play through in the second half.
And the only thing we are saying is that we wanna make sure that we are accounting for uncertainty, We are accounting for seasonality. And we have the flexibility to position the firm even better for the future to come. Got it.
And maybe just, Gonzalo, I think you talked about the USCC in the back half around revenue versus expenses. If you do not mind, double clicking on that in terms of the trend we should expect in the back half and just over a more longer period of time, what you expect on the revenue versus expense trajectories there. Yes.
No, thank you for the question. So think when you look at cards, there is a couple of things that stand out to me, and you can see them in the second quarter so that you can actually anchor them on numbers which you have seen. The first thing is we spoke about how the through the cycle return target for our cards business is low twenties.
So the first principle for us is the returns discipline. Right? And you can see that we are while we are investing, and I will talk about that more in a second, we are keeping that high focus on returns and the rigor, and this is true across our proprietary book, but also every single 1 of our partner relationships.
And you have seen us Pam mentioned at Investor day, exit relationships that do not pass our return targets. So that discipline to me is super important. Even in a quarter where you can see our investment level you still can see a 22% return there high for our firm.
The second piece is we spoke about our strategy. And our strategy had 2 components, 2 big elements that we spoke about. 1 of them was the shift to what we call general purpose credit cards. that is been driven by the customer behavior. You see it in the drivers.
If you look at the bottom at the bottom right side, of the cards page, is page 12, you can see the bifurcation of the drivers and that those are the customers telling us how their behavior is, you know, is driving the business. And you can see that already in our numbers, right? At the end of last year, 82% of our book was general purpose cards.
This quarter, we are at 84%. So over time, you are gonna continue to see us increase that purely because 1 is going to grow faster than the other. And the second leg is we said we were going to make investments Right?
And now you are seeing that play through this quarter. And as I mentioned in my earlier remarks, you can expect that over the next few quarters, there is going to be a few quarters where the expense growth will be greater than the revenue and than the revenue growth. And you should know that we are comfortable with that because number 1, we are keeping the return focus very sharp.
And number 2, we know that these investments pay off. So this is a deliberate choice to invest in a high return in business while keeping that return focus in the forefront. And then last piece I will mention on investments, Some of what you are seeing remember, as a reminder, the investments in the card business, they play both in of expenses, but they also have a contra revenue component.
Because a lot of the acquisition activity plays as a contra revenue. Right? And so what you are seeing us do is you are seeing us invest in acquisitions.
You are seeing us invest in our product capabilities, into our client experience. Into the loyalty and engagement, which is something that is key so that we can be top of wallet. As well as in our partnerships as we did with the Barclays portfolio as well.
And so those key pieces are critical. You are seeing as co brand you know, airport lounges with American Airlines, into the US. You can already see in a few airports.
So you are seeing us lean forward in a business that is high return. Thank you very much.
Your next question come from John McDonald with Truist. Your line is open. Please go ahead.
Yes. Hi. Good morning.
Gonzalo, could you remind us in terms of the capital target, you mentioned 12.6 for now. At Investor Day, you noted 13.1 by 2028 to accommodate, a higher G-SIB. But broader, what could lead that to be better along the way between, you know, potential rule changes, drug structural improvement for Citi, and maybe your own lowering of your own discretionary buffer.
Can you give us some thoughts on the capital path, please.
Gonzalo Luchetti
Head of US Personal Banking
Sure. Thanks very much, John, for the question. Good morning to you.
So, yes, just to recap where we are in this quarter, we are at 12.8% CET 1 a 120 basis points above our regulatory requirement of 11.6 as you mentioned. And then maybe playing the and thank you also for reminding everyone about the 13.1 because of course, we embedded as far as capital assumptions for our return targets in the near and medium term equates to the reality and the regulatory regime that we are operating under today. Right?
We do not we did not bake in any assumptions about what would like potentially. So think you hit on, you know, a couple of those areas already, but let me, you know, piece them out a little bit. So, of course, we are waiting for the finalization of the rules as it relates to Basel 3.
Fujisib and in particular the SUV. As I mentioned in the past, Basel III and G SIB provide us in our early analysis with a moderately net positive position and that emanates from, on the positive side, the GZ coefficient playing through. As well as some of the RWA weights in retail and corporate and that is, you know, partially mitigated by the, you know, operating risk and, you know, the market's risk factors that I think lot of people are familiar with at this point.
And so that could be 1 element that plays through. The second piece is the stress capital buffer. Stress capital buffer, there is a couple of vectors there.
Right? 1 of them is of course, the final rules, and we think there should be you know, opportunities for us to benefit from that when they become final. But importantly and more within our control and hopefully the DFAST results, if they do not take hold, really, for this year, and we will see on the back of the new rules in October 2027 the real changes hopefully, as a signal you can take away, and that is how we saw it, the 30 basis point improvement, the third year in a row of improvement of that SCB that came for us down from the 4.3% to the 3.6% that we are under right now and the DFAST results that just came out take it down to another 30 basis points through 3.3. That tells you that how the strategy is working.
Right? And we talked about this at investor day. Strategy work in terms of we have exited the international consumer franchises, number 1.
Number 2, our PPNR position continues to sequentially improve year after year. So our loss absorption capacity improves. Even in the absence of any model enhancements that come out from the rules, you can see our strategy at work already also being a tailwind and we hope that those 2 factors will pay through an important role.
Then to your last point on the buffer, I think, of course, we will wait until, you know, all 3 sets of rules are solidified to, you know, evaluate our position for now. We are comfortable where we are. And we are managing to around that target of 100 basis points that we mentioned before.
Thank you.
Okay. And then maybe a follow-up on that. Is on the DTA utilization.
Could you give some more color on what drove the nice step down in DTA this quarter? And just a reminder of the path that you are hoping to see over the next 2 years for that to come down from, I think, ending this year at $13 billion, going down to $7 billion Yes.
Gonzalo Luchetti
Head of US Personal Banking
Thanks very much for the question. And we know that DTA is an area where we have to demonstrate the performance because the last couple of years, we have not consumed as much. But hopefully, you are starting to see a couple of dots there on the page.
So just to recap, you know, briefly, our starting position at the end of last year $13.9 billion of the disallowed portion of the DTA. Our position right now is $13.4 billion. So year to date, we have consumed about $500 million of that As a reminder, there is carryback support that builds up in Q1 and then starts to wear off during the year.
So you have an element of that playing through. And then our US profitability that we disclosed last year was about $4 billion This year, we expect to make you know, good progress in that. And you heard, you know, from all my colleagues, the business heads, talk about it at investor day.
And you are seeing it play through in second quarter. Right? When you look at the deposit growth in services, the 19%, a good portion of that growth comes from North America.
When you are seeing the strong quarters in markets and banking, a good portion of activity in both of those businesses comes from The U. S. The improvement in returns from wealth, right? Wealth coming from 7.7% to 10.8% to now 14.4 ROTCE. A good portion of that activity comes from the improvements in the affluent business, in the retail bank and across the franchise that are North America-centric.
And then finally, of course, high returns in cards, which are also improving year on year. So all of those areas and the focus and I have spoken about before how Jane has made sure that we are all held accountable in our scorecards for this. We will hopefully over time you know, demonstrate to you through the numbers, you know, how that comes through.
As I always say internally and I repeat it externally, you need 2 dots to draw a line. So we are pleased to see the first dot here in the second quarter and we look forward to, you know, continue to demonstrate progress in this space. And sorry, final reminder, I guided earlier in the year that the full year target was $800 million of burn down of DTA.
And so we have done $500 million of the $800 million year to date. Thank you.
Your next question will come from Manan Goswami with Morgan Stanley.
Hi. Good morning. Good afternoon.
So for the elevated investment spend in the back half of the year, can you help us with any specifics there in terms of these specific investments you were planning to make in 2027 that you now have the opportunity to do in the back half of the year? And I guess, how quickly do you expect to see the returns of this higher investment spend does that give you the ability to get to the medium term targets maybe sooner than before?
So at investor day, we laid out the specific investments that we are making in quite a in quite a lot of detail. So we will be looking at what are the opportunities to pull some of those forward as we talked about, and it would be pretty well across the board. there is nothing specifically I also do want to emphasize these are we are not looking at anything inorganic. I think I have been very clear about that at Investor Day and in the last couple of earnings calls.
When we are talking investments, these are purely organic. Manan, just assume we are looking at a number of the different investments we talked about where we can pull them forward and as Gonzalo alluded to, if there is any severance and other pieces as we accelerate productivity gains, we will do so too.
Got it. Thank you. And maybe if we can talk about pipeline in investment banking, clearly very strong performance here.
I think you noted that M&A pipelines are strong, but if you can talk about in general how you are seeing revenue opportunities across that business as we look out into the next year or so?
Look. The level of activity is very strong. The pipeline is very healthy.
And we are also in a financial market that is sort of looking for reasons to buy. I think the central CEO question right now across sectors is, do we invest for growth now, or are we preserving optionality? And AI is dominating a lot of the conversations, so tech, data center, energy, defense CapEx is accelerating.
Companies are accessing the public equity and bond markets, alongside bank debt in size. SK Hynix for example, last week is another testament to that. An offering, by the way, that we led Wherever there is a bottleneck, in that whole energy power compute memory we are seeing a lot of activity.
So we have to see. We will probably have the summer lull as everyone takes a bit of a break. We will have midterms coming up, and the wildcard really is geopolitics.
But we are certainly entering the second half with a good pipeline.
Next question will come from Jim Mitchell with Seaport Global. Your line is open. Please go ahead.
Hey, afternoon. Maybe just a follow-up on capital As you noted, the stress test, saw about 30 bps of improvement. Based on similar rules for last year.
Seems like model enhancements are likely to lower the volatility in the SCB going forward and likely improve it And profitability is getting better. We will have more certainty on the other regulations. Is there a time when you start to question 100 basis point buffer, I guess, is my question?
And can you can you run a thinner buffer and use that excess capital while your stock is still at the low tangible book multiple still kind of in the low 1, 1.5 range. Yeah.
Let me reemphasize what Gonzalo said earlier. We are not looking at changing the buffer right now. there is quite a lot of uncertainty in the certainly, geopolitical and other environment, so we are not looking at changing it. But we are looking forward to the continued strengthening of our PPNR, the continued lower stress losses, and also getting the models to be an accurate reflection of our business.
We think they overstate risk in a number of areas, Treatment of our DTA is a sizable example. Double counting of operational and market risk. Is also another area that has a sizable impact.
So the biggest upside is going to come from what we hope we will see, which is the new models coming out that are an accurate reflection of the actual risk, and that will have the biggest impact on SCB but until they are issued, we will not know. And obviously we hope G SIB will be addressed better than it has been in the initial proposal. Okay.
Fair enough. Okay.
Just on cards and consumer delinquency is down. Despite sort of fears, I guess, that many have had around rising inflation and the impact on the consumer. So what are you seeing in consumer credit and consumer behavior and does it look like these favorable trends are continuing?
Gonzalo Luchetti
Head of US Personal Banking
Yes. Thank you. So I think a couple of thoughts there.
First, we are seeing a stable credit environment. The US consumer is showing up as and I know it sounds like a broken record from, you know, a few quarters, but The US consumer has been resilient Right? And you can see that with the spend, Even if you take out in our spend the part of, you know, the Barclays American Airlines book, this quarter, you still see, you know, 6% to 7%, 7% and ex the gas inflation in the quarter.
You are hearing around 6%. that is very healthy as it relates to the spend. And in line or on the higher end versus the last few quarters. Then when you look at the delinquencies and the net credit losses, you can see that across the portfolios, right, both delinquency and credit losses are down year on year.
So across another 4 key metrics. And when we look at our leading indicators of you know, collections and the usual pockets that you look at when you are trying to seek for stress. You are really seeing an environment that is, you know, stable.
As Jane mentioned in her remarks, you know, credit has been in line or better than our expectations. that is also why when we guided the range for this year, the 4 to 4.5, we anchored it on if you if you actually I know we use to look at the business with slightly different lens. But if you do the math, this is a lower range than the 1 we have had in the past and that is a reflection of what we are seeing in the environment. And as you know, because of the right of rules, which are 180 and a 120 depending on the card or loan, we have a pretty decent sense as to what the rest of the year entails and we see that over stability.
Again, subject to the watch outs. Right? And you mentioned some of them.
Right? They watch out on inflation and what happens with that, which, I know we had a better read just now. Was the relationship between that inflation and the wages.
Right, the savings rate impact on that for clients and ultimately unemployment, which has been relatively in equilibrium for the last few weeks. And so we are constantly looking at that. But so far, it is it is it is a constructive environment.
Thank you.
Your next question will come from Erika Najarian with UBS.
Hi. Thank you for taking my question. Just 1 follow-up.
It was actually part of Manan's question. Heard you loud-- we are hearing you loud and clear in terms of the second half investment spend. I guess the question I wanted to reask is, you know, Jane, you are not focused on the waypoint.
You are focused on the near term, which is 11 to 13% ROTCE. In 2027, 2028, and 14% to 15% medium term. You know, if sort of pulling forward the investment agenda Will that enable you to not just hit those return targets, but potentially be sort of in the, you know, better half of that range.
And additionally, does the consent order getting lifted free up additional expenses that you can reinvest back into the franchise?
Hey, Erika. Look. The outperformance possible outperformance that we have been seeing and the benefit, it allows us the optionality to invest or pull forward where that makes sense.
You know, if we did not see accretive opportunities, we would, of course, let it play through the bottom line. And to the return side. But I think the message you should be taking away loud and clear is seeing opportunities to invest that will be driving you know, higher sustainable returns, and we are going to take advantage of that opportunity.
Do not read anything more into it. And in terms of the consent order, the timing of the lifting is in the hands of the regulators. Not in ours.
The timing of taking expenses down is in ours. And we have begun to do so as we finish the different bodies of work, we take those expenses down, and those are helping us fund further investments into the businesses. So that is all going ticking along nicely.
that is all for me. Thank you. Thanks, Erika.
Next question will come from David Chiaverini with Jefferies. Hi.
Thanks for taking the questions. So you had strong growth in deposits this quarter and good to see the cost of interest bearing deposits stable at 2.71%. How should we think about deposit costs going forward?
Gonzalo Luchetti
Head of US Personal Banking
Thanks very much, David, and good afternoon to you. I think when let me piece that out maybe between the 2 large businesses that are driving our deposit base. Right?
So we have services. Where I was mentioning a little bit earlier, We were able to drive 19% growth year on year on average deposits and reaching our $1 trillion milestone there. And I mentioned a little bit briefly, but a good portion of those are operating deposits.
And so when you think about pricing and, you know, and rates and also what to expect, going forward, at least as based on what we are seeing as of now, is, yes, we have seen with an environment that is pointing to a bit higher for longer we have seen some catch up pricing. But as I mentioned earlier, the betas are well within our expectations. Right?
So they are in line with what we thought they would be And the team has been Shamir and the team have been very disciplined on pricing. So what is pleasing for me to see and what gives me comfort is that we are not chasing, you know, low value deposit volume. And that these share gains come from really driving those operating deposits across both international and North America.
Now you look at the spread, in addition to the pricing dynamics, the more we grow North America, just because it is a more competitive market, not because you are giving away price, in relationship to international, you may see some mix factor playing a role there. But other than that, I think, you know, generally working well in line with expectations. Little bit of catch up, The team is all over the pricing, and we are comfortable that our competitive advantage, which is really driving those operating deposits across our payment network, really plays through.
On the wealth side, you know, similarly, Andy, you know, very thoughtful about pricing there. And the only highlight I would mention in terms of customer behavior that we, you know, we have to monitor for as it relates to how rates evolve especially if they go up is, you know, how much of those clients are seeking yield. And you do see pockets of customers seeking yield.
Sometimes you may see it more as synthetic beta in terms of you know, mix shifting into time deposits. So we have a couple of pockets of that, but as you can see from the NII, pretty robust and generally spreads, you know, expanding in our business in wealth. So comfortable with the position that we are in and what we are seeing there.
And very important that we will keep discipline very thoughtfully. Thank you.
Great. Thanks for that. And then shifting over to the services business, very strong growth and momentum this quarter at 18% year over year revenue growth.
Can you frame this level of growth relative to your medium term outlook from the Investor Day of low to mid single digit? What might lead you to see slower growth towards that guide from Day.
Gonzalo Luchetti
Head of US Personal Banking
Well, thanks for the question. it is a good question, David. And I think some version of that is, I think Shamir alluded to at Investor Day as well. I think there is a couple of factors that probably play a role into how we think about it over the longer range And 1 of the primary ones is the normalization of that deposit growth.
Right? If you look at the deposit growth between 2022 and 2025, the annualized growth rate there was about 3%. So we are hitting and we are very pleased with the momentum, the commercial intensity, and the investments playing through.
We are seeing a growth spurt for the last several quarters right, that puts us in the position in Q2 at 19%. Now we do expect some normalization, right, as Shamir mentioned a little bit earlier, we are not expecting that we will grow at, you know, 4x to 5x money supply you know, over a long period of time. But at the same time, we continue to make investments, and we are pleased with the momentum that we are seeing in the drivers that underpin that NII.
On the NIR front, where this quarter services delivered 16%, and you are seeing there, a combination of the, you know, cross border transactions, right, and how customers are thinking about their supply chains and global commerce playing through. And at the same time, the work that we are doing on security services and how we are driving that And that obviously has an element of deposits, but has an element of AUCs and AUAs. And there you have a combination.
You have alpha, of course, because we are you know, we have very good win rates on new mandates and deepening relations with existing clients. Some of those are public. And we and there is also a pocket of beta with market valuations as well.
So as you think through you know, the near term and remember, right, the 1 reminder for the near term and the medium term is that I mentioned this at, you know, a couple of months ago at Investor Days, we have planned for our returns and our targets to be delivered under a range of different environments. Right? And 1 of the things that we are thoughtful about, we are not assuming right, just because we are sitting at a at a high part of the mountain with the sun shining and the wind on our backs, given how constructive the environment has been across the industry, we are not assuming that will perpetuate over the next few years.
So we are looking and being thoughtful about for a range of outcomes, will still be able to deliver the returns and the growth that we promised. But if you ask me, there are scenarios where you could do better Yes. There are.
But it is also partially market dependent. Thank you.
Your next question will come from Vivek Juneja with JPMorgan.
Hi. Just a clarification. Gonzalo, you mentioned something about, you know, you were talking about expenses that historically revenues in markets have fallen in the second half versus first half.
Keeping all the comments you are hearing from us back to pipeline is being very strong, which could continue to therefore drive probably market revenues to hold up better than expected. of a seasonal-- Vivek, you are breaking up a bit. Can you repeat the question? Okay.
Sorry. Yes. Gonzalo mentioned that, you know, historically, you have seen market revenues decline 20% in the second versus the first half.
Given the comments we are hearing from you as well as others about how pipelines and market conditions are looking very good, is that historical decline less, you know, less likely to occur as in the past, and therefore, the efficiency ratio increase that 1 has seen in the market business in the second half versus first half is probably that may be lesser given what is going on in the overall market environment, both the ITS as well as markets.
Gonzalo Luchetti
Head of US Personal Banking
Well, thank you, Vivek. I the conversation was breaking up quite a bit, but I think I got good portion of it. So let me have a go, and you tell me if I answered your question or if I did not, if that is okay with you, because it was breaking up quite a bit.
I think you asked-- just to recap, I think you asked a question on our view on the second half for markets. And you were anchoring on my remarks around how historically we see a 20% decline or thereabouts between the second half and the first half And I thought 1 part of your question was, because you are seeing, you know, across the industry, and the client momentum being strong, would that be less of a decline this year right, versus what I said in my remarks? If I got that right, Yes.
Yes. That is Sorry about the bad connection. No.
No. No worries. Thank you.
So know, it is first of all, it is very hard to take a position, especially in the markets business because you know that you know, from experience, that this can swing in a relatively short period of time to, you know, to a negative position for the industry as a whole. And so it is hard to look forward to 6 months or 5.5 months and say, you know, with certainty, it is going to land on 1 way or the other. The historical analysis tells us that 20% that I shared before.
If you could take 1 point of view, it could be right, as highlighted in my remarks that first half has been very strong. Right? So if that does not repeat, apples to apples, if the second half just putting seasonality to the side, if the environment is not as constructive in the second half as in the first half, you would expect a decline once you layer on the seasonality on top of it that could be worse than the 20% half on half.
Now you could also, you know, take a different view and say, hey. If this continues to be disconstructed, right, where clients are very active you know, in the equity space, and we continue to see good momentum in spreads, and, you know, and currencies as we saw this quarter. And we see those pockets remain robust.
Could you be better than the 20%? it is not an impossibility either. Right? So I am not gonna sit here and tell you that is not possible.
The historical tells us 20. First half was really strong. You will need to have, you know, an equally constructive set of external parameters in order to justify you know, narrowing that seasonal decline, I guess, is what I would say, if that makes sense.
Right. Thank you. Thank you.
Our next question will come from Gerard Cassidy with RBC.
Good afternoon, Jane. Hi, Gonzalo. Hi, Gerard.
Can Jane, can you share and Gonzalo, can you share with us your view of your-- excuse me. me. You at Citigroup, has a unique lens as a US domiciled bank on the global view. In your service business in particular, is obviously very engaged globally and had a very, very strong quarter.
Can you share with us how are the companies being able to produce such strength in view of the geopolitical situation being fairly intense or elevated, is it because they have learned lessons from the pandemic and they are just better managed and more conservative. what is your guys take on the health of that global corporate customer?
Yeah. I mean, they I do believe that the global corporate client base that we serve has been the source of resiliency as well as growth. They have extremely strong balance sheets, and they have diversified revenue streams, so they are able to balance out tariffs and the various shocks that have come through.
And everyone's just learned how to be very adept at supply chain repositioning and adjustments and to energy shocks and other elements coming through, and so they are just very adept at getting their business models to adapt swiftly to whatever is thrown at them, and we see that pretty consistently around the world. If you are a European company, you have got very low growth in Europe. They are focused on The US and in Asia for growth.
In The States, a lot of roads are leading here, so companies are getting a lot of growth from the multiple innovations that occurring in The States and the continued resiliency of The US consumer and China. Is deriving a lot of its strength from the export intensity, and Chinese companies growing rapidly abroad. And finally, the AI driven electronics upcycle is a genuine tailwind for many parts of Asia, so there is a lot of different dynamics here.
That are really benefiting sort of the unique client base that Citi serves. And that coming through in their growth as well as in their balance sheet strength.
And just tying into that, Jane, obviously, many of us on the call understand the environment in The US and the supportive regulatory environment when it comes to M and A. And this administration seems to be supportive of M and A. Do you see that in other parts of the world, governments being as supportive of facilitating business growth and allowing consolidation?
In a word, no. Europe is almost the opposite. They are not allowing the emergence of emerging market champions.
You have seen much more national consolidation at best in Europe, which is a shame. We need Europe to be strong these days. And in Asia, you are seeing some but The US is unique in the American entrepreneurs' innovation the breadth and depth of the funding markets here in the investor base.
I am as well as how much American companies are on the front foot in AI. And transformation, and that is also driving some of the boldness we see. it is a good it is a good environment.
Your next question will come from Matt O'Connor with Deutsche Bank.
Hi. You guys have successfully exited about a portion of Banamex and I think you said further exits would be after this year. Just wondering what the latest thoughts are on the timing and why not maybe sooner just given the positive macro backdrop and successful exit of half?
Yeah. Thanks for the question, Matt. We do not expect any additional sales in 2026, and that is in 2010 It gives us and the new investor group the runway to drive value creation We are already seeing some of that performance kicked in.
Gonzalo alluded to it to it in legacy franchise. Mexico has been improving in its performance. We expect to deconsolidate our ownership in early 2027, followed by an IPO as and when market conditions allow and further sell downs.
Okay. And just remind us in terms of how much capital might still be freed up. Obviously, it is a little bit dependent on the valuation.
You also have capital against the business. So maybe just give us a rough estimate and kind of current valuation, how much capital would be freed up to offset the earnings give up?
Yeah. And just before we get there, I do remind you when we do we will take a big CTA hit. That is capital neutral.
So I am I do not I think that very much bears repeating for the beginning of 2027. But, Gonzalo, over to you.
Gonzalo Luchetti
Head of US Personal Banking
Yes. Thank you. Now the short answer on the cap piece is around $5 billion.
And the RWA tied up there is about almost $40 billion a little bit over $40 billion of RWA. Thank you.
Our next question will come from Saul Martinez with HSBC.
Hi. Thanks for taking my question. So just 1 question.
But I wanted to hover on the investment theme as it relates to the cards business. You know, you have you have invested there quite a bit. You rolled out Strata Card.
You bought the Barclays portfolio. And but when I look at your business versus your best in class peers, Capital 1, Amex, their spending, I think, around $6 billion in marketing, Chase is in sort of that mid single digit billions in marketing. And I and I know there is there is some probably, some differences in terms of reporting and accounting classification.
But it is it an acknowledgment that maybe you need to be more aggressive on promotions, marketing, campaign, benefits? And just how should we think about the magnitude of the incremental investment in the second half that you talked about going, you know, you mentioned expenses exceeding revenues, but that was already the case in this quarter, I think. So just is there any way to sort of think about, you know, the size of the headwind going forward?
Or the size of the investment going forward?
Okay. Yep. Let me kick that 1 off.
Yes. In short, we are going to be increasing our marketing spend and that is the scenario Pam laid out at Investor Day We are making investments across the flywheel, so it is in investing in our products, marketing for customer acquisitions, also in our partnerships. it is in our lifestyle platform. it is also importantly in AI to drive scale economics as well, and all of this will translate into growth, but you can expect us to be increasing marketing spend to drive that. Customer acquisition for the long term.
These things do not pay off quickly, and I also want to clarify the positive when you talked about the operating leverage, that is only in cards. it is not for the rest of the businesses.
Gonzalo Luchetti
Head of US Personal Banking
Yes. Understood. Yeah.
Absolutely and thanks. So I do not think I have much to add. I think Jane was very clear.
We are we are not at this point, we are not providing guidance specifically on the level of investment in each of the businesses. Including cards, but as you know, and Jane just mentioned, this is a business that is built over several years It is what you highlight in terms of, you know, competitors really spending a lot. it is a highly competitive space. Because, obviously, it is a space that allows you to access, you know, good returns We are pleased to be, you know, a number 3 or number 4 player depending on what metric you look at.
I do not know. Outstanding spaces for number 3. And so our, you know, our focus, as we spoke about our investor day, is to really drive that growth.
And make, you know, share gains over the near and medium term. And so we are focused on that. You can see us playing a combination of the portfolio acquisition with Barclays and American Airlines.
But also, even if you take that out, you are gonna see us you can see us-- you alluded to the strata portion of that, and there is a little more, you know, behind that as Jane just alluded to on the loyalty front and so on. So we are focused high returning business, and we know it will take some time. Thank you.
Alright. Thank you. Your next will come from Chris McGratty with KBW.
Thanks for fitting me in. Just on the wealth business on Slide 11, improvement in the pretax margins year on year is notable as is the NNA growth. Maybe a comment or 2 on what is changing.
I know you are you are investing here heavily. Any color on recent wins would be great. Thanks.
Yeah. Look. I think it is it is not a lot of difference from what Andy laid out, at investor day.
They are doing a very good job steadily translating growth into returns. So with revenues up 13% year on year, that is more like 16% normalized for those 1-timers. You are then seeing this translating into the higher returns.
We have got a clear path to the 15% to 20% and we have got a number of different drivers beneath that. Be it the integration of the retail bank with wealth, helping us drive more of the customer conversion from deposits to also having wealth activity. As well as what we are seeing from capturing wealth creation globally from our global network and the relationships we have got.
So it is kind of firing on all cylinders as we steadily march to improving the returns and margin of the business. Thank you.
Your next question will come from Kun Peng Ma with China Securities.
Good day. it is from Boeing China Securities. Thank you for taking my for taking my question. I have a follow-up on the services business.
For the very strong TTS rep not net interest income growth. I believe besides the deposit volume growth, there must be some tailwind from the higher for longer rate environment. Right?
So you see it looks forward, if the if there is not if it is not higher for longer for the rate, you know, how can they forecast the mix of the of the TTS revenue growth in the future. And also, can we have more detailed breakdowns geographically of the performance of the services business you know, be beyond The US, ex US scope. Because, you know, I am based in China.
I can I can feel the very strong demand directly and personally for years? But, you know, this market state are also very competitive. Lot of competitors here.
So it will be, you know, super helpful. If we can Yeah. We can have some color on how city keep growing your market share here.
Yeah.
Thank you. Yep. Look.
We are we are not gonna give a breakdown geographically for the business, but I it is very fair to say that this is clearly with the growth you are seeing, a business that is firing not only on all cylinders, but also in all geographies. What we If you look at the institutional market share gain, we are up 120 basis points year over year, I would also point to client wins. Client wins are up 36% year over year, We have been focusing on increasing share with asset managers That is up 250% and we have been increasing our share with fintechs.
We have had growth of 20% there. And a lot of the growth beyond the movements in rates has come from the innovation that we have been making in the product suite. Our clients choose Citi because we lead with innovation.
And as we lean into disruption, they are all opportunities for us to lead. They are not threats to us. And so AI is opening up many new vectors of growth and also competitive edge.
So in terms of as you are thinking about this business going forward, I think you can be feeling a lot of confidence about our continued momentum in fees, our continued momentum in volumes, and then the rates curve will be what the rates curve is.
Our next question will be a follow-up from Mike Mayo with Wells Fargo.
Hi. Let me try again on the investment question. And the real question is, is this accelerated second half investment spend for defense or is it for offense?
Both. And, you know, the bigger context is, look, you spent the entire decade on restructuring. You are almost done except for reg data with modernization and part of Mexico out of the 14 country exit and org simplification is done.
You did all this restructuring and it sounds like, is this like another sort of restructuring? Are you repairing some lost market share? Are you re doing more with legacy systems?
Is it defense or is this offense where you are, you know, spending more for AI and stable coin and you know, trying to gain even more share in payments or something. But if you can give some context, this is the debate of the day.
It is 100% on the offense. You know, I was really clear in our in my opening remarks This is a firm on the front foot. I am we laid out at investor day a very clear path for us to drive our returns further forward in each business we have done so in the first half.
And some, and that we have laid out a clear path of what are the investments and detailed them as to what it is we are going to be investing behind to continue to drive the growth for the near term and the medium term. I will reiterate again those are all organic. I am excited about what lies ahead for this firm, This is a firm that is much easier to manage It is much easier to run.
Mike, I cannot tell you that it is that we will exceed the 11%. We are just not going to box ourselves into that, given that we see opportunity, to take actions on the offence which are accretive to shareholders and support our path to our media term targets. That is an easy decision for us, and this is a firm that is growing nicely, as you can see.
We are proud of what we are doing, and we are just going to keep going. Momentum is behind us, but we are going to take advantage of opportunities to bring investments forward and not just manage to a short term numbers We are playing the long game here.
For our final question, we will return to Gerard Cassidy with RBC.
Thank you. Gonzalo, just a real technical question. On the second half incremental investment expense, can you ballpark what might be tied to severance expenses in that number?
Is it a half, a third, a quarter? Thanks, Gerard.
Gonzalo Luchetti
Head of US Personal Banking
No. We are not giving guidance on the severance for the second half. What I can tell you is I am just going back to the first principles, right?
Sharp focus on returns, right, as you heard from Jane, not only in the waypoint, but also in the near term and medium term. Secondly, as I mentioned last quarter, very tight discipline on expenses on a tactical basis. So you can expect us to be continue to be very disciplined on expense management.
And the third piece is leaning into the structural efficiencies. Right? And so as I as I mentioned a little bit earlier, only if we see opportunities for that acceleration when we look at those 100 plus processes that we are looking to further automate on an end to end basis.
If we see opportunities for that, we may lean into that. But at this point, we are not providing guidance on that. Thank you.
There are no further questions. I will turn call over to Jennifer Landis for closing remarks.
Thank you. And before we conclude, I would like to thank Jane, Mark, Gonzalo, Ed, and the entire investor relations team, especially Tim Rogers, for their trust partnership, and support during my time leading investor relations. It has been a truly a privilege to represent Citi and work with such dedicated teams across the firm.
And I thoroughly enjoyed the insightful conversations with our investors and analysts over the past 5 years. I am delighted to welcome Margot, as she takes on her new role and I know the team will benefit greatly from her leadership and perspective. Thank you again for your partnership and support, and I am sure you will have lots of questions.
So we look forward to talking to you this afternoon. Thank you.
This concludes the Citi second quarter 2026 earnings call. You may now disconnect.
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