Citigroup Inc.

Citigroup Inc.

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Banks - Diversified

Citigroup Inc. (C) Q1 2017 Earnings Call Transcript

Published at 2017-04-13 15:14:08
Executives
Susan Kendall - Head of Investor Relations Mike Corbat - Chief Executive Officer John Gerspach - Chief Financial Officer
Analysts
Glenn Schorr - Evercore ISI John McDonald - Bernstein Jim Mitchell - Buckingham Research Matt O'Connor - Deutsche Bank Matt Burnell - Wells Fargo Securities Steven Chubak - Nomura Instinet Ken Usdin - Jefferies Betsy Graseck - Morgan Stanley Erika Najarian - Bank of America Gerard Cassidy - RBC Eric Wasserstrom - Guggenheim Saul Martinez - UBS Brian Kleinhanzl - KBW
Operator
Hello, and welcome to Citi's First Quarter 2017 Earnings Review with Chief Executive Officer, Mike Corbat and Chief Financial Officer, John Gerspach. Today's call will be hosted by Susan Kendall, Head of Citi Investor Relations. We ask that you please hold all questions until the completion of the formal remarks, at which time you'll be given instructions for the question-and-answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Ms. Kendall, you may begin.
Susan Kendall
Thank you, Brad. Good morning and thank you all for joining us. On our call today, our CEO, Mike Corbat will speak first. Then John Gerspach, our CFO, will take you through the earnings presentation, which is available for download on our Web site, citigroup.com. Afterwards, we'll be happy to take questions. Before we get started, I would like to remind you that today's presentation may contain forward-looking statements, which are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results and capital and other financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our SEC filings, including without limitation, the Risk Factors section of our 2016 Form 10-K. With that said, let me turn it over to Mike.
Mike Corbat
Thank you, Susan. Good morning everyone. Earlier today, we reported earnings of $4.1 billion for the first quarter of 2017 for $1.35 per share. We clearly carried momentum in many of our businesses from the end of last year into the quarter, leading to significantly better performance from one year ago. While our results were impacted by one-time gains, we increased revenues in both our consumer and institutional lines of business, while maintaining our expense discipline. We grew loans and deposits, and achieved an efficiency ratio of just under 58%, a return on assets of 91 basis points and a return on tangible common equity, ex-DTA, of over 10%, in line with our near term targets which were committed to meeting. Global consumer banking, our U.S. credit card business continued to benefit from the Costco portfolio, although we did see lower mortgage revenues. Internationally, we again posted revenue growth and positive operating leverage in Asia and Mexico, and we continued our investment plan in Mexico to drive improved efficiency and returns. The Institutional Clients Group had a strong quarter all around, as we keep gaining share among our target clients. Our Markets business performed very well with revenue up 17% year-over-year, comprised of 19% increase in fixed income and 10% increase in equities, another area we’ve been investing in. Banking results were also strong; notably, in Investment Banking, which was up almost 40% and Treasury and Trade Solutions and the Private Bank were each up 9%, as well. We also continued to wind down legacy assets recording gains on asset sales including our consumer finance business in Canada and our consumer business in Argentina. This help to offset the one-time impact from exiting our U.S. mortgage servicing operations. We utilized $800 million in deferred tax assets, contributing to the $5.5 billion of total regulatory capital generation before returning $2.2 billion to our shareholders. During the past year, we reduced our outstanding common shares by 6% and returned 80% of earnings to our common shareholders. Our tangible book value per share increased to $65.94, that’s 5% higher than a year ago and 14% higher than two years ago. Even still, our Common Equity Tier 1 Capital ratio has increased to 12.8%, well above the 11.5% upper range of what we believe we need to operate the firm prudently. So we clearly have excess capital and couldn’t be more committed to returning that capital to our shareholders. Last week, we made our CCAR submission for the current cycle and feel good about the progress we’ve made to strengthen our firm. We also continue to be positive about growth in general and the U.S. economy. While the details of potential policy changes in area such as tax code and infrastructure spending have yet to be worked out and will take a little longer than originally projected, we continue to believe that it’s a matter of when and not if these changes will occur. As that process unfolds and outcomes become clear, I expect business will react accordingly as sentiment shifts from optimism to confidence. In the meantime, we continue to do our part to support growth and communities across the U.S. We were recently named the top Affordable Housing Finance here for the seventh year in a row, and we announced a small business lending increased to $11 billion last year, almost double what it was five years earlier. We remained confident in our model and our unique global network, which processes 4 trillion in payments a day and helps U.S. companies compete overseas. We’ve built a franchise that’s balanced across product and geography, and we're making targeted investments where we see the best opportunities to grow revenue and improve returns. With that, John will go through our presentation. Then we'll be happy to answer your questions. John?
John Gerspach
Thank you, Mike, and good morning everyone. Starting on slide three, we show total Citigroup results. Net income grew 17% to $4.1 billion in the first quarter, driven by higher revenues and lower cost of credit. And earnings per share grew 23%, including the benefit of share buybacks, which drove the 6% decline in our average diluted shares outstanding. Revenues of $18.1 billion grew 3% from the prior year, reflecting growth in both our consumer and institutional businesses, offset by lower revenues and Corporate/Other, as we continued wind down legacy assets. Expenses were roughly flat as the impact of higher performance related compensation and higher business volumes, was offset by lower repositioning cost. Ongoing investments were largely funded through efficiency savings. And cost of credit decline significantly, driven by a $230 million reserve release this quarter in ICG, as compared to a build in the prior year related to the energy sector. Consumer cost and credit increased year-over-year, reflecting the addition of the Costco portfolio and other volume growth, as well as the continued impact of changes in collection processes in U.S. cards. As previously announced, our result this quarter included a charge of nearly $400 million related to the exit of our U.S. mortgage servicing operations. This charge was recorded in Corporate/Other, with roughly $300 million reflected as a reduction in revenues and the remainder in expenses. However, we were able to more than offset this impact with nearly $750 million of gains on other asset sales, including gains of roughly $400 million on the sales of two businesses, Citi Financial Canada and Argentina Consumer, which closed on the last day in the quarter. On a net basis, these episodic items benefited our results by roughly $0.08 per share. In constant dollars, Citigroup end of period loans grew 2% year-over-year to $629 billion as 5% growth in our core businesses was partially offset by the continued wind down of legacy assets in Corp/Other. And deposits grew 3% to $950 billion. Turning now to each business, slide four shows the results for North America Consumer Banking. Total revenues grew 2% year-over-year in the first quarter. Retail banking revenues of $1.3 billion declined 3% from last year, driven by lower mortgage revenues. Mortgage revenues declined by roughly $80 million year-over-year, reflecting lower origination activity and higher cost of funds, as well as the impact of the previously announced sale of a portion of our mortgage servicing rights. Excluding mortgage, Retail Banking revenues were up 5%, driven by continued growth in average loans deposits and assets under management. We're seeing positive early results from the launch of our enhance Citigold wealth management offering in the U.S. with year-to-date growth in households and balances tracking in line with our expectations. At the same time, we continued to transform our network this quarter by reducing our branch count to roughly 700, while continuing to roll out smart branch formats, including Citigold centers, expanding our Citigold sales force and adding new digital capabilities as transaction activity continues to shift to self service digital and mobile channels. Turning to branded cards, revenues of $2.1 billion grew 13%, mostly reflecting the impact of the Costco portfolio acquisition and modest organic growth, offset by the impact of day count. We saw good engagement across the franchise again this quarter, with 4% year-over-year growth in average loans, excluding Costco. Looking at the total portfolio, despite the normal pay down you would expect in the first quarter, our full rate revolving balances remained stable sequentially. And we continued to expect growth in these full rate revolving loans in the second half of the year as our investments mature. The interest yield on the portfolio was also relatively flat sequentially at roughly 9.6% this quarter, as the recent rate increase was offset by growth in promotional rate balances as well as the impact of portfolio mix. From here, we expect yields to improve, driven by rate increases as well as the growth in full rate revolving balances in the second half of the year. Finally, Retail Services revenues of $1.6 billion were down 5%, driven mostly by the absence of gains on the sale of two small portfolios in the first quarter of last year. Excluding the impact of divestiture activity, revenues were up 1% year-over-year. Total expenses for North America Consumer were $2.6 billion, up 3% from last year, mostly reflecting the Costco portfolio acquisition, volume growth, and continued investments, partially offset by efficiency savings and lower repositioning cost. And finally, credit costs of $1.4 billion increased roughly $330 million from last year. Net credit losses increased to $1.2 billion, mostly driven by Costco organic volume growth and seasoning, as well as the impact of changes in collection processes and cards. And we build roughly $160 million of loan loss reserves during the quarter to support volume growth. Looking at our card portfolios in more detail, in branded cards, our NCL rates of 3.1% was inflated this quarter by the flow through of delinquencies to credit losses related to the Costco conversion. Excluding this impact, which is now behind us, the branded card NCL rate was closer to 2.9%, up from the prior quarter due mostly to seasonality and the previously mentioned impact on collections. We believe this collection’s impact is now stabilizing and so the NCL rate should improve in the second half of the year, driven by normal seasonality. This is consistent with the improvement we saw this quarter in both 90-day, 90 plus day and early bucket delinquencies on a dollar basis. Therefore, we remain comfortable with our full year outlook for an NCL rate in branded cards of around 280 basis points. The drivers are similar for retail services where the loss rate increased from the prior quarter. But given normal seasonal improvement in delinquencies, we continue to expect the full year NCL rate to be around 435 basis points. On slide five we show results for International Consumer Banking in constant dollars. Net income grew 12% from last year on higher revenue and slightly lower operating expenses partially offset by higher cost on credit. In total, revenues grew 3% and expenses were down 1% versus last year. In Latin America, total consumer revenue grew 4%, driven by an 8% growth in retail banking, reflecting continued growth in average loans and deposits, as well as improved deposit spread. However, card revenue declined from last year, reflecting lower revolving loans, as well as a higher cost to fund non-revolving balances. Total average card loans grew 5% year-over-year. However, revolving balances have generally lagged as we have grown in high quality consumer segments with lower revolvers. The year-over-year trends are improving, however, and we expect to return to growth in revolving card loans sometime in the second half of the year. Expenses were roughly flat year-over-year in Latin America as ongoing investment spending was offset by efficiency savings and lower repositioning cost. We continue to execute our investment plans in Mexico, which we believe will drive improved operating efficiency and returns, over-time. And we still expect to maintain positive operating leverage each year throughout the investment period. Turning to Asia, consumer revenues grew 3% year-over-year, driven by improvement in cards and Wealth Management, partially offset by lower retail lending revenues. Card revenues grew 6%, driven by higher volumes and improved revolve rates versus last year. Average card loans were up 3% and purchase sales were up 4% year-over-year, reflecting slight organic improvement, as well as the recent acquisition of a $700 million co-brand portfolio with Coles Supermarkets in Australia. Retail revenues were up slightly year-over-year as higher Wealth Management revenues were largely offset by the continued repositioning of our retail loan portfolio. Average retail loans were stable sequentially, but down 5% year-over-year with modestly improved spreads. Expenses in Asia declined 2% as volume growth and ongoing investment spending was more than offset by lower repositioning cost. Slide six shows our global consumer credit trends in more detail, across both cards and Retail Banking. The NCL rate in North America increased from last quarter, as I described earlier, but should trend lower for the remainder of the year as the Costco conversion related losses are now behind us and we should benefit from normal seasonality. Credit trends in Asia consumer remained stable this quarter and the NCL rate in Latin America was 4.4%, up somewhat from the prior quarter, mostly driven by lower loan growth but still in line with our near term outlook. Turning now to the Institutional Clients Group on slide seven. Net income of $3 billion grew substantially from last year on higher revenues and lower cost of credit, partially offset by higher operating expenses. Revenues of $9.1 billion grew 16% from last year, reflecting solid progress across the franchise. Total banking revenues of $4.5 billion were up 14%. Treasury and Trade Solution revenues of $2.1 billion grew 9%, driven by strong fee growth, higher volumes and improved spreads. Investment Banking revenues of $1.2 billion were up 39% from last year, reflecting a rebound in debt and equity underwriting and our continued momentum in M&A. Private Bank revenues of $744 million grew 9% year-over-year, mostly driven by loan and deposit growth and improved spreads. And Corporate Lending revenues of $434 million were down 3% from last year on lower average volumes. Total Markets and Securities Services revenues of $4.8 billion grew 18% from last year. Fixed Income revenues of $3.6 billion were up 19% with both rates and currencies and spread products contributing to revenue growth. Equities revenues grew 10% year-over-year, driven by an improvement in derivatives. And finally, in Securities Services, revenues were down 3%. However, excluding the impact of prior period divestures, the business grew 12% year-over-year. Total operating expenses of $4.9 billion were up 1% year-over-year as higher incentive compensation was partially offset by lower repositioning cost and the benefit from FX translation. On a trailing 12 month basis, excluding the impact of severance, our comp ratio was 26%. And cost of credit was a benefit this quarter, driven by net ratings upgrades and continued stability in commodity prices. Slide eight shows the results for Corporate/Other. Revenues of $1.2 billion declined significantly from last year, driven by legacy asset run-off and divestiture activity, as well as lower revenue from treasury related hedging activity. And expenses were down 11% to $1.1 billion, driven by the wind down of assets, partially offset by episodic expenses this quarter related to the exit of our U.S. mortgage servicing operations. While, Corp/Other was essentially breakeven this quarter on a pretax basis, as I noted earlier, our revenues included roughly $450 million of net episodic gains this quarter and our expenses included about $100 million of related charges, resulting in a net benefit to EBIT of roughly $350 million. Slide nine shows our net interest revenue and margin trends, split by core accrual revenue, trading related revenue and the contribution from our legacy assets in Corporate/Other. As you can see, total net interest revenue declined 3% year-over-year in constant dollars to $10.9 billion, as growth in core accrual revenues was more than offset by the wind down of legacy assets as well as lower trading related net interest revenue. Trading positions are managed on a total revenue basis, with the interest component varying based on a number of factors. So while our total trading revenues were up significantly this quarter, the contribution from net interest revenue was lower than a year ago. But this trade in, as we said in past, the trading component of our net interest revenue is by nature more difficult to forecast. Turning to our Core Accrual businesses, net interest revenues of $9.5 billion were up 3% or $280 million from last year, driven by the addition of the Costco portfolio, other volume growth, and the impact of the December 2016 rate hike, partially offset by lower day count and increase in our FDIC assessment and higher long term debt. On a sequential basis, Core Accrual revenues decline as the benefit of higher interest rates was more than offset by the impact of lower day count, loan mix and rate positioning actions. Adjusting for day count, Core Accrual revenues were up slightly from last quarter. And our core net interest margin declined by 1 basis point, reflecting the impact of higher cash balances. Looking to the reminder of the year, Core Accrual revenues should continue to grow year-over-year. Assuming one additional rate hike mid-year, Core Accrual revenues should grow year-over-year by roughly $1.5 billion in total over the next three quarters, with just under two thirds of that amount coming from higher rates and the reminder mostly reflecting higher loan volumes and mix. On slide 10, we show our key capital metrics. During the quarter, our CET1 capital ratios improved to 12.8%, driven mostly by earnings, partially offset by $2.2 billion of common share repurchases and dividends during the quarter. Our supplementary leverage ratio was 7.3% and our tangible book value per share grew by 5% year-over-year to $65.94, in part driven by 6% reduction in our shares outstanding. To conclude, I'd like to spend some time on our outlook for the second quarter. Starting in consumer, in North America, revenue growth this quarter should continue to be mostly inorganic, driven by a full quarter of revenue contribution from the Costco portfolio which we acquired in June of last year. Excluding mortgage, we expect continued growth in our North America Retail Banking franchise as well. However, this will likely be offset by lower mortgage revenues versus the prior year. And internationally, we continue to expect modest year-over-year revenue growth in constant dollars with positive operating leverage in both Asia and Mexico. On the institutional side, we expect Markets revenues to reflect the normal seasonal decline from the first quarter. Investment Banking revenues should be broadly stable sequentially, assuming that market conditions remain favorable. And we should continue to grow year-over-year in TTS, Securities Service and the Private Bank. In Corporate/Other, revenues and expenses should continue to decline over time as we wind down legacy assets. But the underlying EBITDA contribution we saw this quarter of about negative $350 million is a good run rate for modeling this segment going forward. Cost and credit should be higher quarter-on-quarter, driven by the normalization of credit cost and ICG, partially offset by improvement in North America consumer. And on a full year basis, we continue to expect our efficiency ratio to be around 58%. With that, Mike and I would be happy to take any questions.
Operator
[Operator Instructions] Your first question comes from the line of Glenn Schorr with Evercore. Please go ahead.
Glenn Schorr
First, very quickie, I just wanted to get a clarifier. Did you just say the minus $350 million is a good run rate to use for holdings, going forward? I missed the last comment.
John Gerspach
Corp/Other
Glenn Schorr
Corp/Other, okay…
John Gerspach
We don’t have holdings anymore, Glenn. Holdings that folded into Corp/Other…
Glenn Schorr
The strength in DCM was great in banking in general. But I wonder if you have any thoughts on how much of the up almost 40% versus last year's disruption in the quarter versus maybe pull forward as some people thought rates might go up versus maybe it's just good environment and it's a competitive product to lending. Just curious there.
Mike Corbat
If you go back and look at the first quarter last year, which is a tough start and you look at the areas in particular. So ECM, I don’t think we did as an industry we did an IPO until the middle of April. If you look at what went on, you had referenced maybe inadvertently DCM, but DCM had a tough start last year. I think had almost extraordinary March this year. And I think if you look at the pipeline of banking, banking deals. And I would say all the pieces that we expected with that momentum coming out of last year came to fruition. And I would say that the second quarter continues to feel like it has positive momentum. So I would say, coming off a very little base. But I would say the activity in client engagement was high and I think remains high going into the second quarter.
John Gerspach
I actually think the activity this quarter it's more or less of what you would think about as being a more normal quarter as opposed to something that is a big bounce off of a down quarter; and so you have an outsized a wallet out there in this quarter. I think if you take a look at historical averages, it's kind of in line, so it doesn’t appear to be outsized the activity. We’ve nice bounce back obviously from first quarter of last year. But as Mike said, there was virtually zero equity activity last year in the first quarter. So we got a nice bounce back there.
Glenn Schorr
I appreciate that, maybe last question it's a good lead into zero equity activity. In equity, cash volumes were off a lot, especially in the U.S., but you had a very good quarter. In your prepared remarks, you mentioned that derivatives leading the way. Are you talking about corporate derivatives size, are you -- is that an activity in an environment collection? Or are you doing something specific to drive your derivatives business and equities? Because I would have thought you might have mentioned PB being a bigger driver; just curious for a little more color, because that's an area of work for you guys.
Mike Corbat
Glenn, we've been putting investments in equities for a while. And we like to investment we said that we’ve made in both the people and the platforms in equities; we've got balance sheet to put to work; we think that we've been gaining share with our targeted clients; and I think you’re starting to see some of that activity coming through now, it's one quarter. So let's string it together for a couple of quarters. But we saw good client engagement on both the corporate and investor side this time, and so we’ll see.
Operator
Your next question comes from the line of John McDonald with Bernstein. Please go ahead.
John McDonald
I wanted to ask about branded cards and that outlook for the second half. You still got revenue yield feeling some pressure, but you mentioned that should get better. Can you just remind us of that trajectory of second half profitability inflection that you are looking for in cards and what the drivers are of that as things mature?
Mike Corbat
It's primarily two-fold. One is, as you'll recall, back in the middle of 2015 we began to make some significant investments in growing our proprietary product portfolio in cards. That's when we really tried to roll out the launch and everything from double cash to our various value cards, banking the reward cards, all of that. And as we said there, it takes basically 24 to 30 months for those new card acquisitions in a proprietary book to really begin to generate a positive net income. And so that 24 months coincides with the second half of this year. And in similar fashion, when we bought the Costco portfolio, last June, we said that just do the purchase accounting, Costco would not be accretive to earnings until a full year had elapsed. And that happens to coincide with the second half of this year, as well. So we’ve got both of those tailwinds that we fully expect them to be visible in our second half results. You should be able to see it, both in revenue growth and also improved cost of credit, especially as we lap some of the very high cost of credit numbers that we had in the second half of last year as we were building up loan loss reserves for Costco, in connection with the purchase accounting, so those factors. And as I said we like the way Costco is performing; we like the momentum that we got in our proprietary cards products as well; and it's all progressing as we had expected. And so that gives us the confidence in talking about that year-over-year growth coming in the second half of the year.
John McDonald
Then just separately, could you repeat for us the net interest income, the core net interest income guidance that I think you said if there's one more rate hike. And also just let us know like how much does one 25 basis point rate hike help you? Is there any way you could just mention that for us so we could, if we wanted to add our own assumption of more rate hikes, how should we think about that?
Mike Corbat
Very rough math, John, 25 basis points rate hike should impact revenues positively by about $100 million for each full quarter that it's in effect. That's very rough math. That's all going to be dependent upon where you are with deposit is and everything else. So the initial rate hikes you might get a little bit more than a 100, subsequent rate hikes you might get a little bit less than a 100. But a 100 is a good rule of thumb to use.
John McDonald
And if we take the net interest income that you saw this quarter. How should we think about that, and as it relates to your outlook, going forward, for net interest income?
Mike Corbat
When you take a look, again, let’s just focus on the Core Accrual revenues. What I said during the prepared remarks was that we expect the Core Accrual interest revenue to grow year-over-year by about $1.5 billion during the next three quarters, again assuming one more rate hike somewhere around midyear. We had roughly $300 million year-over-year benefits in the first quarter. I think you will see that if you look at slide nine of the presentation. So that was being -- we would expect full year growth to be about $1.8 billion from a combination of the higher rates and volumes for the full year.
Operator
Your next question comes from the line of Jim Mitchell with Buckingham Research. Please go ahead.
Jim Mitchell
Mike you were -- pretty strong statement around capital return. What's giving you the confidence; is it just the fact that you are feeling that much better about your capital ratios; is that regulatory conversations. Obviously, it's rolled again to speech, which you’re talking about, maybe phasing out the qualitative side of things. Is that your sense that they are going to be a little bit more willing to give you credit for the excess capital you have. Just any color around that thought process on your part.
Mike Corbat
I would start here first Jim on the qualitative side of things. And I think that the work that the team has done from a qualitative perspective in terms of models and scenarios and all of the important pieces that go into your build up and ultimately your assets. I think we’ve made a lot of progress, and I think the regulators have recognized some of that progress that we’ve made. And I think we feel good about the process we put in place. And obviously depending how it goes forward, we’re committed to continue to improve on that. And then the other side of it is the qualitative side. And again as I said in my opening remarks, you’ll look at what we’ve done here in terms of capital return and yet our ratios continue to go up; and so this quarter generating $5.5 billion of regulatory capital. And what we’ve said is we got to get to a position where we’re returning that access capital. That’s an important piece of the math around our pathway to making sure our returns get to where they need to get. And so we’ve been engaged in those conversations. We’ll see when the ASC is responded to, what it looks and feels like. But again, I think we feel good about the process. We feel very good about our numbers and our ability to make big ASC and we’ll continue to work on it.
Jim Mitchell
Just maybe a broader question on regulation or de-regulation, however, you want to think about it. Is there any -- have you felt like however that we’re a couple of months into the new administration, has there been any kind of coalescing around some ideas that maybe go from idea to actually implementation that you feel good about? Or is it still too early to be making any kind of assumptions around some, easing around some of the regulations?
Mike Corbat
In terms of being able to point to specifics, I think it's early. But not just myself, a number of us in the industry have been very engaged with the administration and very engaged with a number of different committee members, our regulators, et cetera. And as I think we talked about before just to toe-in from the top, is an important message and signal. And I think we’ve seen very clearly with the president and the administration is very for growth for jobs. And I think around that I think the presidential order that he put out, which I think is one of the first real signs along the way here in terms of what's going to be focused on and where things go. We’ve obviously been involved and commented in terms of things that could be focused on, should be focused on and we’ll see -- we expect the termination and that comes backward. But at this point, I would call the conversations with the administration very constructive.
Jim Mitchell
And if we -- I think concerning the noise around potentially a new glassed eagle maybe this year sort of somewhere to what they did in U.K. about ring fencing. Would that be something that would be overly onerous for somebody like you or how to think…
Mike Corbat
Probably like all of you. And anytime I hear this term 21th century glassed eagle, I ask what it is and I have yet to have anybody really tell me what's there. And as you can imagine that not just myself but I'm sure others have been involved in those conversations. And I would say that the administration is focused around trying to harmonize regulations, focus around trying to take things away that are either duplicative or don’t really add value. And I have yet to have anybody really explain to me what value there is in terms of either a reinstatement of glassed eagle, which in itself is strange or what 21th glassed eagle is. So we continue to ask about it but not necessarily be that focused on it. We think our business model is the right model.
Operator
Your next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead. Matt O'Connor: I want to come back to the outlook for net interest income. And I was hoping again with same basis is what you talked about in January, I think you said the net impact of growth at that time what was Corp and at that time what was holdings. The net of those two would be a modest positive. I think it was up $200 million year-over-year. So I was wondering if you could just update that with, including obviously the comments you gave earlier, but just bring on the same basis to that would be helpful.
Mike Corbat
So in answering the earlier question from John, I mentioned that the add up of two pieces; the $300 million year-over-year growth that we saw in the first quarter; and the $1.5 billion growth that we anticipate for the balance of the year, you get $1.8 billion. Now the prior guidance that we had given of $1.2 billion had included trading related net revenue. So the two figures are not really comparable. The $1.8 billion that I'm talking about in response to John's question and the $1.5 billion of guidance, we really talked about Core Accrual revenue. Whereas the other $1.2 billion was just kind of all-in, and as I said, it included trading related revenue. So the figures just aren’t comparable, Matt. Matt O'Connor: Right and that was my question, I was trying to get them comparable. Because the constant net interest income, obviously, excludes the one-off book. It holds day count, it holds currencies constant. So I understand there might be some moving pieces, going forward. But just having it on apples-to-apples basis, your best guess and outlook right now would be helpful.
Mike Corbat
I am giving you the best thing that I can do, just to give you the $1.5 billion outlook, which is reflective of the construct that that we have in place today. When we don’t beat the $1.2 billion outlook previously, as I mentioned that it included trading related revenues built into that $1.2 billion. There’s some downward expectations related to trading net interest revenues and the previous guidance. So what I would say is that the change in guidance right now is primarily related to assuming two additional rate increases. We had the one rate increase in March and now we've built in another rate increase in June. And there was probably just some modest reduction in our expectation for loan growth that compared to the earlier guidance, certainly following the first quarter performance. Matt O'Connor: I want to take a stab on the trading part, which is fine we can estimate that. How about to see legacy asset piece here that I think was about $400 million contribution this quarter. And you obviously had some sales at the end of the quarter. How should we think about deducting out that component?
Mike Corbat
Same as the guidance that we gave you back at the beginning of the year. We said our expectation would be that we called it holdings at that point in time because we had a holding segment. And we said that holdings, year-over-year, we would expect $1 billion reduction in net interest revenue. You saw that we’ve had roughly a quarter of that $220 million in the first quarter in the legacy asset component of the bar chart on slide nine. And so it's still is looking about $1 billion year-over-year impact. Matt O'Connor: And then just squeezing in one other one, beside the $100 million exit cost for the sale of the mortgage servicing unit, were there other legal or repositioning costs? I don’t see anything disclosed, but it's been a busy day…
Mike Corbat
Bear in mind, Matt, what you probably noticed is that we just collapsed all our expense disclosure now into one line, just called operating expense. For a while, when we were going through periods of heavy repositioning cost and heavy legal expense, we thought that it was beneficial to break those things out of the separate line item, so that we could talk separately about them. But now, as far as legal and repositioning, pretty much it's just part of our BAU activity. So it's just in the operating expense number. Matt O'Connor: Okay.
Mike Corbat
Matt, if we had anything unusual, we call it out. Matt O'Connor: It was very high a year ago. So as we think about the underlying expense growth of the Company, I think combined, it was in $700 million range a year ago. So just trying to figure out is there a meaningful number to adjust for or not as we think about the operating leverage and underlying trends.
Mike Corbat
The first quarter performance, again, we talked about operating efficiency targets at any year. And as you know when we talk to you about operating efficiencies, everything all-in, we don’t adjust revenues and we don’t adjust expenses. So that 58% target is all-in.
Operator
Your next question comes from the line of Matt Burnell with Wells Fargo Securities. Please go ahead.
Matt Burnell
Just one I guess maybe very detailed question. There was a drop in non-interest bearing deposits in North America of about 5% quarter-over-quarter, drop of 6% year-over-year. Could you provide some more color as to what's going on there? And does it tie-in with anything that’s going on within the loan portfolio?
John Gerspach
As you mentioned, that drop was basically in our TTS business. And what we saw there was just some additional influence going into some of the interest bearing accounts coming out of the as a non-interest bearing.
Matt Burnell
Okay…
John Gerspach
As companies after a while, they build-up excess cash and build up excess cash. And eventually they’ll shift a little bit of it over into an interest bearing account.
Matt Burnell
And then just on the international consumer business, particularly in Latin America, Mexico statistically. Obviously, the trends are pretty positive or more positive now on a year-over-year basis. They were little bit negative. I assume some of that’s seasonal on a quarter-on-quarter basis. Has there been any, in your sense, any effect of the U.S. policy on activity levels within your Mexican business?
John Gerspach
Well, I do think that the Mexico economy, at the beginning part of the year, I’d say that there was somewhat of a decline in consumer confidence that did occur. I was in Mexico three weeks ago. My sense was that that had changed, it was beginning to come back. But there was definitely a drop in consumer confidence at the beginning of the year.
Matt Burnell
And then just finally, the release of the $230 million in ICG, was that entirely due to energy exposures or was the combination of factors there?
John Gerspach
Yes, there were couple of other small things, but the predominant driver was energy.
Operator
Your next question comes from the line of Steven Chubak with Nomura Instinet. Please go ahead.
Steven Chubak
John, I wanted to kick things off with a question on capital. Basel proposed some changes to its calculation methodology for GSIB surcharges. And on balance, it feels like it's going to result in some upward pressure on your GSIB score. I know there're differences between Basel and the Fed calculations, and which one could be a binding constraint for you guys specifically. But it looks like, on balance, the changes that Basel has proposed are bit tougher for you guys. And didn't know if that's going to result in you potentially moving to a higher GSIB bucket, given some of the changes from Basel from what appears to be 3% today to 3.5%.
John Gerspach
So, in trying to piece through your questions from a capital point of view, Steven, our binding constraint, from a capital point of view, is the Fed mandated Method II calculation of GSIB. And even if the Basel committee made changes to what in the U.S. we recall Method I, the Method II score would still be the binding constraint. So if you think about it under the current regime, Method I, we're at 2%, Method II we're at 3%. As we run the numbers based upon the proposal coming out of Basel, the Method I would move to 2.5%. And so we would still stay where we are from a capital point of view with Method II being the driving factor. But then we'd have to see whether or not the Fed made any changes in their score. The Basel will continue with their flawed methodology of converting everything into Euros, which means that as we get changes in the dollar without any change at all in our balance sheet, our capital, our score under Method I can change dramatically. So we would still expect the U.S. to do what it had done and put forward a much more balanced approach, eliminating currency fluctuation from your capital base. So we'll see how that goes. The one change, Steven, and this may be what you're driving at. Obviously, Method I is a determinant of your TLAC requirement. And so to the extent that there was a change in Method I. And then again it depends on whether or not the U.S. just adopts the flawed Method I methodology proposed by Basel, or it does again a sensible change and converts it to something that’s stabilizes the impact of currency fluctuation.
Steven Chubak
And maybe just switching to revenue side of the equation, certainly the results in Private Banking and TTS have been quite strong. You alluded to within Private Banking a lot of the strength really being driven by lending side. And didn’t know if you could just give us some context as to how we should be thinking about the revenue outlook for that particular business. And is this a reasonable jumping off point where off of $750 million, we should expect to see pretty steady growth?
John Gerspach
Well, I don’t think that you should count on 9% year-over-year growth every quarter, Steven. But we do have a very solid Private Banking franchise. And if I give you the indication that the growth was primarily driven by loan, there’s really a much more balanced growth coming out of both loans and deposits. And obviously, it's being impacted by changes in the deposit spread as well.
Steven Chubak
And just one quick question, I may, just on the NII side. I know you’ve given a lot of guidance. Last quarter, you noted that we should expect to see the NIM flat year-on-year. And I am wondering, does that still apply to the core book at least or does that guidance no longer hold?
John Gerspach
No, I would say that for the core book, we would expect NIM to be maybe up slightly year-over-year. And I am hedging at that only because we have seen a lot of growth in the cash balances. You can see our cash is almost 10% of our balance sheet, at this point in time. And obviously, as that cash grows, it does impact the denominator of the NIM calculation and you get very little earnings off of cash, especially cash that we would have over in, say EMEA. So I'll hedge a little bit on NIM, going forward, but it should be up slightly. But I’d ask you to focus a little bit more on net interest revenue growth.
Operator
And your next question comes from the line of Ken Usdin of Jefferies. Please go ahead.
Ken Usdin
It was nice to see the 10.2% ROTCE ex the DTA this quarter. We do know that it typically is the peak quarter for you guys in terms of the progression for the year. But I was just wondering if you can just talk about those guide post that you had given us and your confidence in those out-year ROE targets that you’ve had. And just any changes that you’re thinking underneath it?
Mike Corbat
So as I said, Ken, in my opening remarks and then John reiterate, is we remained committed to numbers that we put out there; efficiency ratio, ROE and ROTCE ex-DTA. And again, I think our story is one where we’ve talked about, you can map out what looks like a, at this point, a fairly typical sequential ICG year; again with good momentum, and as we see things right now; and then, obviously, talking about the back half story in terms of consumer. So we’re hoping that the combination of revenue, control cost to credit, expense discipline carries through the cost of the year and that’s where the franchise is focused on. And then as we go into the outer-years the third or fourth lever in there is obviously capital return. And so, we want to continue to pull out level and continue not just to focus on what the growth of the numerator looks like, but also focus on the denominator and we put those together because its confidence in terms of what we told you we're going to do.
Ken Usdin
And Mike as a follow up to that, we know you have the July, Analyst Day coming up and just wondering. Is that more about just providing color on the current strategy or should we expect anything different in terms of the overall company strategy? It's been a long time since you've done one of those. So just what should we be anticipating in general as we think about that?
Susan Kendall
I think it's another step in terms of what I described is the renormalization of the Company. One thing where I look at this quarter that in some ways, I feel quite good about this by what I told you four, five, six years ago, we're going to have an earnings deck that can responsibly describe this firm in 11 pages and probably would have taken pause at that. And so, I think our ability to go and I think really go granular with you in terms of the businesses and that things that we're doing, and I think a lot of the work that's being done from the client, from a digital prospective and some of things that either over lunch or a meetings around the calls we don’t get to do. And then something depending on the reaction and how you see it that something we would like to get into, whatever it comes to be as normal rhythm of doing with you. So, I wouldn't expect because it's anything very shattering, but we plan on taking a deep into some of these strategies and hopefully showing you a few things along the way.
Operator
Your next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.
Betsy Graseck
Couple of questions just on the non-interest-bearing deposits, so I heard you earlier talked about NIB and how it's not atypical to move from NIB to interest-bearing deposits overtime. But I was just wondering, if there is some seasonality as well in the first quarter that you're thinking happened to you this year?
John Gerspach
No, I don’t -- I wouldn't put it on seasonality. There still is a lot of cash out there and it's always looking to fund the homes. And so, we attempt this, especially on the corporate side, we attempt to accommodate our clients as we best we can and we were saying the cash continue to build up.
Betsy Graseck
Is there anything on the deposit better aside that we should be thinking about? How you're going to your -- your deposit data at this stage in cycle still lowering here, but maybe you can give us a sense of how it's moved up over the last couple of quarters?
John Gerspach
It's actually been fairly -- I mean, we saw a little bit of a change with the December at rate hike, but its minute at this point in time that's it.
John Gerspach
Okay, so basically when we're looking at the cost of funds on the liability side, the uptake has more to do with just a net shift to non-interest-bearing deposit -- I'm sorry, non-deposit funding, is that fair statement?
John Gerspach
It’s a fair statement. It's mostly driven by changes in long-term debt in the most part.
Operator
Your next question comes from the line of Erika Najarian with Bank of America. Please go ahead.
Erika Najarian
Hi good afternoon, my questions have been asked and answered. Thank you.
Susan Kendall
Thank you, Erika.
Operator
Your next question comes from the line of Gerard Cassidy with RBC. Please go ahead.
Gerard Cassidy
Can you remind us, John, your capital ratio, your CET1 ratio obviously is 12.8%. In a new more normalized environment, as we move forward, what's your guys comfort level of where you want that to be?
John Gerspach
When Mike gave his opening comments, he talked about 11.5% being kind of at the upper end of a range, as to what we would think we would need to have to run the institution prudently. And when you think about it, if you just look at our regulatory requirements right now, they are about 10%. You add up the different buckets. We will always want to have at least now we are thinking about having a 100 basis point buffer on top of that, which get you to a 11%. There is still talk about maybe moving into that SCB type of the stress capital buffer. So that can take you to an 11.2, and so somewhere between 11 and 11.5, I think is a good range to think about right now as to what we would need to prudently run the institution.
Gerard Cassidy
Very good, if there's changes coming with the new appointments to the Fed and they decide to do away with the capital charge that you and a few your peers have for operating risk. How much capital is tied up in that area right now?
John Gerspach
When it comes op risk meaning, we still have, on the order of $327 billion worth of risk weighted assets tied up in op capital. But that again, op capital is part of the advanced approach.
Gerard Cassidy
Right.
John Gerspach
So, the next question becomes, do they stay with advanced approach? Do they move to standardize? CCAR is based upon standardized. There is a whole derivation of the stress capital buffer, again was calculated in CCAR, which is based upon standardized RWA. So, I think that there is still some discussion to be had as far as what becomes the real focal point of the denominator. Is that the advanced approach or is that the standardized?
Gerard Cassidy
Sure. I noticed in the ICG this quarter obviously the trading activity was very strong for you and those are for your peers. Your Treasury and Trade Solutions numbers was a nice 9% increased. Can you give us some color aside from an interest rates moving up, helping that business? What are some of the other factors that contribute to the growth of that business considering it's one of the largest in the total banking number?
John Gerspach
Well, it's obviously client volumes I mean we will continue to gain wallet share with our clients. You can see some of the statistics they get published by the Swift and other things that we continue to gain share there, and we've got a very healthy commercial card business in Treasury and Trade Solutions as well. And that's been a real engine for growth during the last two years. It is every indication that should continue. The nice thing about the commercial cards business that gives us fee-based revenue, and so, it rises, it diversifies the business away from just being focused on rates on balances. And with the commercial card business, again, once we win that that mandate with the client, it helps us really work with them, working capital management side of business and so it becomes very, very sticky overtime.
Gerard Cassidy
Great, and then just lastly obviously you guys are global. Can you give us some color given European elections that are coming up and the political tremors we're seeing right now. How are the international markets today for your banking pipelines, trade finance, what are your guys in the front line seeing?
John Gerspach
Well, obviously, everybody's watching and we're watching French elections, we're watching the lead up to German elections. One of the things we're watching closely obviously is with Article 50 hasn't been declared, European engagement around what Brexit looks and feels like. So, I would say in the case of the UK, it's clearly been a dampener in terms of activity in the UK, not a lot of inbound FDI et cetera. But I would say that on the continent, business actually remains fairly robust, and client engagement you can look at from a calendar perspective what was done in Europe this quarter, equity debt and transactions in general. And we've got a little bit of volatility in terms of currencies and some things, and so, I'd say the pipeline right now remains pretty strong. But we'll see as we go through from round one to round two and where polling goes in terms of the French elections. I think people will be watching that transition or that [segway], pretty closely. But as of right now, things feel pretty reasonable.
Operator
Your next question comes from the line of Eric Wasserstrom with Guggenheim. Please go ahead.
Eric Wasserstrom
Just two follow ups on -- inside the global consumer bank. The first is, you talked about, John, in the past the remediation that you had to do for all of the changes in Korea from the regulatory environment and that had largely concluded I think at the end of last year. Are you seeing the reacceleration of revenue growth that you were hoping for in that region?
John Gerspach
Yes, I want to make sure, I didn't say it was over, I said that the regulatory headwinds were abating which they had and that's actually been what you've seen in the numbers now over the last couple of quarters, as we continue to have nice yield, modest year-over-year revenue growth, 3% this quarter. And again, that's a good way of thinking about that business right now, it's certainly given back to the go go years where we had much higher revenue, but you can see the momentum building in that business as we work our way through the year.
Eric Wasserstrom
But in terms of the costs associated with complying with the changes in the regulatory environment there, has that diminished at all?
John Gerspach
Well, when we talked about regulatory costs in the past, it wasn't necessarily focused on Asia, it was more focused globally, but a lot of it here in the U.S. And I'd say that cost is still running high, but it's plateaued, and that's given us now the opportunity to shift some of the investment, more away from just doing regulatory work and put investment dollars towards supporting the businesses which has been great.
Eric Wasserstrom
Great. And then just one follow-up on Mexico, the investment that's going on there, what form is that actually taking? I know that there's been a lot of focus on physical branches and things, but where are those dollars being -- where would they be manifested in the actual operation?
John Gerspach
Well, there's several components to the investment program in Mexico, Eric. Core technology upgrades, branch refurbishment as you mentioned, ATM rollouts, we need to modernize a lot of the ATMs. And so we are proceeding with those planned investments as we work away through the year. I'd say that the pace of new branch construction has been a bit slower than we originally planned, just due to the some start up issues. But we are still on track to incur more than 30% of the total program cash spend this year, 2017. But naturally, due to the fact that some portion of that cash spend is going actually be capitalized. The impact on expenses were lag somewhat and it's going to increase gradually over a full year -- the next couple of years until it's fully reflected in our 2020 results.
Operator
Your next question comes from the line of Saul Martinez with UBS. Please go ahead.
Saul Martinez
So a couple of more detail oriented questions on the -- on branded card, I just want to make sure I understand some of the numbers and some of what you said. First on the yield, I think you mentioned that you kind of hit a floor at 9.6 and you expect that to increase to the promotional balance on Costco go away and when not. Can you give us a sense of what you expect in terms of the glide path of that number? How that can progress over the second half of the year? And ultimately, what kind of yield you can get in your branded card portfolio? And then on the credit quality, in the branded card, I think you mentioned Costco collections changes the collection process, seasoning what not, influencing the numbers this quarter. And you had about $633 million of net credit loss in branded cards, which the big increase versus 1Q and 3Q. I guess it's fair to say that that's sort of abnormally high and we should expect that run rate to normalize at a lower level in the coming quarters, is that fair?
John Gerspach
Yes, let's take the second half first. When you get to credit, the guidance that we've given you that we expect for the full year branded cards and that's branded cards all in to have an NCL rate of about 280 basis points. So, first quarter was 311 basis points, full-year average 280 basis points. So, yes, we expected to decline as we go through the year. And average out of the 280 for the full-year, so first quarter was definitely abnormally high. And again some of that was just that "Costco bubble." We did have some start-up issues with the Costco portfolio. That meant that there was some difficulty people getting set up on payment plans that lead to an increase in delinquencies, we saw the 90 plus day delinquencies grow during the first quarter and then again washed out in first quarter and that's what hit the NCL this quarter. So, absent that whole bubble, the NCL for the branded cards in the first quarter was closing to 290 basis points. So, we feel -- we do feel a little good about that guidance going forward as far as 280 basis points for credit. The question on yield, when it comes to the yield is flattening at 960, and now yes, the expectation certainly is that it does grow. I agree with you that our expectation is that, it does certainly grow, but I'm going to shy away from giving you an absolute number as to what is going to grow to only because there are so many factors that can go into that including the mix of promo balances. And if we end up with some more transactions, those yield figures should -- could possibly come down a bit, but yes, it should grow from here.
Saul Martinez
And that starts to really take place in the second half in a more meaningful way?
John Gerspach
Yes, again, my expectation is that you should see some increase in yield, first quarter into second quarter, and then you should see a larger increase in the yield second quarter to third quarter.
Saul Martinez
And on your Costco portfolio, how is the spend progressing especially the spend outside of Costco?
John Gerspach
Again, the spend is doing well, obviously, it’s a little hard for us to compare history right now, because we never seen Costco spend in the first place. We only have portfolio since last June, but the out of store spend is still above that 70% figure.
Operator
Your final question comes from the line of Brian Kleinhanzl with KBW. Please go ahead.
Brian Kleinhanzl
I have just two quick questions, I guess maybe in a different way to look at the core accrual NIM that was 340 this quarter. What would that be ex rewards and promotions?
John Gerspach
I don’t have that I am sorry.
Brian Kleinhanzl
Okay. And then, I know you said legal repositioning is actually part of just the ongoing business as the usual now, but previously, you gave a guidance that was about 2.25% of assets as an on going run rate. I mean is that still what you'd consider guidance or is that you expect it to be lower in '17, '18?
John Gerspach
No, we had said, I think it was going to be 2% of revenue for 2017, and again that was just a view is to where we thought it was going to be and, but even now we thought was the -- a high figure compared to norm. We said it should reduce then overtime. But I think in terms of it being somewhere in that 2% range in 2017, if you want to think about what’s in that efficiency rate, and if that changes dramatically, we'll say something.
Operator
Thank you. We have no further questions in the queue at this time. I would like to turn the call back over to management for closing remarks.
Susan Kendall
Great, thank you all for joining us today. If you have any questions, please feel free to reach out to Investor Relations. Now, again, thanks, we'll talk you soon.
Operator
Thank you. This concludes today's conference call. You may now disconnect.