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