Hello and welcome to Citi’s Second Quarter 2016 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 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. Kendall, you may begin.

Thank you, Brent. 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 website, 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 2015 Form 10-K. With that said, let me turn it over to Mike.

Thank you, Susan. Good morning, everyone. Earlier today, we reported earnings of $4 billion for the second quarter of 2016, or $1.24 per share. These results are a significant improvement from the first quarter not just in the overall amount of earnings, but in the proportion generated from our core business in Citicorp relative to the assets were winding down in Citi Holdings. The results also show our institution’s ability to generate solid earnings in a challenging and volatile environment. We grew both our consumer and institutional loan books, reduced our expenses, further reduced Citi Holdings’ assets, and utilized additional deferred tax assets. We meaningfully improved our efficiency ratio, our return on assets, and return on tangible common equity from the first quarter. We generated and returned capital to our shareholders and the plan which was just approved significant increases to the amount of capital we’ll return over the next year. In our institutional franchise, both our markets and investment banking businesses are rebounding client activity from the last quarter. And our treasury and trade solutions business continued to grow revenues as we won new mandates in support of our clients’ needs around the world. These results really show the benefits of our global network and the competitive advantages it provides. In global consumer banking, we had positive operating leverage in our international franchise, highlighted by solid year-over-year growth in Mexico and continued sequential improvement in Asia. And as you know, we’ve been investing in our U.S. branded cards business. On June 17, we acquired the Costco portfolio, gaining over 11 million cardholders in the process. And earlier this week, we announced the renewal of our partnership with American Airlines, and in retail services, we’re renewing our partnership with the Home Depot. We’re excited about the growth prospects of these…

Thank you, Mike, and good morning, everyone. Starting on Slide 3, we show total Citigroup results. Revenues of $17.5 billion declined 8% from last year, but expenses decreased 5%, each driven primarily by the continued wind down of Citi Holdings, as well as the impact of foreign exchange translation. And credit costs improved, reflecting lower net credit losses, partially offset by a smaller net reserve release compared to the prior year. We earned $4 billion in the second quarter, or $1.24 per share, each down 14% versus the prior period. Our preferred dividends were higher this quarter. However, we were able to offset this impact through share buybacks, which drove a 4% decline in our average diluted shares outstanding. In constant dollars, Citigroup end of period loans grew 2% year-over-year to $634 billion, as 6% growth in Citicorp was partially offset by the continued wind down of Citi Holdings, and deposits grew 5% to $938 billion. On Slide 4, we show the split between Citicorp and Citi Holdings. Citicorp is the predominant driver of profitability in the second quarter, contributing 98% of total net income. Citicorp revenues of $16.7 billion were down 3% from last year on a reported basis. In constant dollars, Citicorp revenues were flat to the prior year, as growth in our institutional franchise was offset by lower consumer revenues and the absence of prior period real estate gains in Corp other. Citicorp expenses decreased 1%, reflecting efficiency savings and a benefit from FX translation, partially offset by continued investments in the franchise. And cost of credit grew 13% from the second quarter of last year, driven by a smaller reserve release versus the prior year. Credit quality remained broadly favorable across the franchise and net credit losses declined 5% year-over-year. Pre-tax earnings of $5.7 billion in…

[Operator Instructions] Your first question comes from the line of Jim Mitchell with Buckingham Research. Please go ahead.

Hey, good afternoon guys.

Hey, Jim.

Just a question on the energy credit, you – I think you said in June around $1.2 billion of, I think, energy-related credit costs. I think if I my math is right, you did about $500 million year-to-date, and now you’re seeing $300 million to $500 million in the second-half, is that right? So, 8 – is that kind of way to think about $800 million to $1 billion right now?

Well, the $1.2 billion, Jim, that was our reference to total Citi – total ICG cost of credit, that was not specific to energy…

Okay, fair.

...at that point in time.

So is – it does seem like it’s a little bit of a step-down versus expectations even…

Well, certainly – it certainly, when you take a look at the first-half, which you know is about $500 million cost of credit in ICG. And with the second-half range of $300 million to $500 million, that gives you your comparison of $800 million to $1 billion against the previous $1.2 billion. So, yes, it is a step-down.

And is that just simply the improvement in the capital markets in what you’re seeing in terms of experience with the energy space and then getting capital, is that the big change, or is it oil prices or just the combination of both?

Well, it’s a combination of both. And certainly, we’re benefiting – that outlook benefits from what we’re seeing as a stabilization of energy cost with oil in that $45 barrel range. So I think, it also reflects the overall resiliency in our credit portfolio, which is what we’ve been talking about. Now, we described to you the quality of our energy exposure in the past. First quarter, even in the first quarter, we said 73% of our energy exposure was to investment-grade names that has continued to remain at 73% in the second quarter.

Right.

The funded loan book at the first quarter was 63% investment grade, that’s actually improved now to 65%. And because we’re concentrated in those high-quality names, they do have access to capital markets and therefore are able to strengthen their balance sheets.

Right. An E&P balances were down too. So, okay…

Yes, I mean, when you take a look at what we’ve been able to do, we traded off. We reduced the high risk portfolio and remained more concentrated in the high-quality portfolio.

Right. Maybe just one follow-up on Costco, it seems like it’s off to a pretty good start. You’re obviously going to be building reserves there. Do you expect it to be added to the earnings, neutral to earnings, as we think about the combination of expenses, revenues, and provision build?

Jim, our view going into the acquisition is that, in this first year in 2016, it would likely be neutral to earnings just because of the mechanics behind the reserve build. And so that’s our view right now. We’ll give you more updates as to how it could impact 2017, certainly as we get later in the year. But for now, I’d say 2016 on EBT point of view is basically neutral.

Right. So still sticking to neutral. Okay, thanks a lot.

Okay, Jim.

Your next question comes from the line of Glenn Schorr with Evercore ISI. Please go ahead.

Hi, thanks.

Hey, Glenn.

Hello there.

Hey, Glenn, can you speak up a little bit. We really can’t hear you.

Really? I’m screaming into it, sorry.

Sorry.

No problem, no problem. In cards, when I take a step back and I look at all the either renewal up rates or the acquisition costs, like cards is a super tough business right now, or I should say super competitive business right now. So I heard your comments about the 250 basis point ROA on the retail partner. Could you maybe talk about where the cards overall ROA and RoTCE is now and where it should be going forward, it kind of follows on, on Jim’s question. I just like – just want to make sure we’re growing profitability here and not just volume, important business for you guys?

Well, again, as we’ve said, longer-term we – our view is from a branded cards portfolio, we want to be running that portfolio at about 225 to 235 basis points, which really is consistent with where we were entering into the crisis. So, what you’ve seen through the crisis is a – an impact on ROA first with a severe downturn in ROA, as everybody built reserves and worked their way through the credit issues and then coming out now we’ve all benefited from reserve releases. So today, where we were getting ROA in branded cards something close to 300 basis points, but a lot of that has been fueled by reserve releases. The business that we’re building in branded cards is one that is set to yield in ROA of 225 to 235 basis points, where we were going into the crisis and with a better more higher quality book of business. And it’s the same story with retail services that 250 basis points is what we think is a realistic long-term return with that business.

Got it, I appreciate that. You mentioned the renewal on American, most of the channels, I saw that Barclays had gotten, I think, it was the airports and on the plane, which I’m not sure what that means. But what percentage of the originations in the past came from those channels, like do I care?

Well, I mean, it certainly is a smaller amount of the originations than what we believe that we are going to be able to achieve through the channels that we retain. The on-airline and in-airport the – I’d call it the travel day type of acquisitions, that was not a particular strength of ours anyway.

Okay, I appreciate that. One last one on, which one to choose? Okay, I saw the commentary on the more preferreds coming. With capital and leverage ratios so strong, like really strong and a payout ratio still at 70%, I’m just curious where the incremental preferreds – what’s their purpose, where they are going and why do you need them?

Glenn, maybe I misspoke or – but we’re not signaling that we are issuing more preferreds. We’ve done our preferred issuance for now, given the capital stack that we have right now, our preferreds are where they are. But that did since we now are settled for a couple of quarters you’re going to see the preferred dividend than increase over where they were prior year.

Oh, no problem, I got it.

Okay.

I appreciate it.

So if you take a look at Slide 32, that just sort of, we just want to level set your expectations as to where preferred dividends will be reflected. But all these preferred dividends reflect issuances already done.

Totally appreciate it. Thank you. I appreciate it. Thanks.

Okay, Glenn. Thank you.

Bye, John.

Your next question comes from the line of John McDonald with Bernstein. Please go ahead.

Hi, good morning. As Mike noted, the earnings came in nicely better than the first quarter. Just wondering, John, what are some of the items that got better since the early June guidance that earnings looked kind of flattish with the first quarter?

I’d say several things improved, John. Clearly, the markets – markets revenues were improved. What we found is during the month of June, we were able to engage with our corporate clients. They were seeking advice as to how to handle a volatility, both leading up to the UK referendum and then certainly subsequent to the UK referendum and that that gave us a great opportunity. But at the same point in time, because the capital markets remained open during the month of June, we did benefit from a lot of our energy clients then being able to access the client, so that produced a much lower cost of credit than I think Mike had probably indicated when he spoke at the conference at the early part of June. And finally, we saw improved momentum in Mexico in the retail bank during the month of June. We noted that overall consumer revenues in Mexico grew 4% year-over-year that was higher than what we had thought that was going to be when Mike spoke. So we had momentum building in Mexico. We had good engagement with clients throughout the whole UK referendum. And then we benefited from the lower cost of credit again because of the high-quality of our book.

Okay. And you mentioned the corporate credit getting better and you gave an outlook for the cost of credit for ICG looking ahead. How should we think, John, about the provision trend in cards and overall consumer going forward from here?

Well, again, that’s going to intend to increase for two reasons. One is, as we build additional ANR and we’re definitely in a growth mode when it comes to our card – our branded cards book. We’re going to meet to build reserves just because of the volume. And then with Costco, again, when you get into purchase accounting, you’ve got a heavy front-end build on LLR.

Okay. And then just one final thing on Costco, as you mentioned, that’s starting to grow and you’re getting the accounts. There have been some press stories and anecdotal reports of difficulties in the initial roll out. Were there some operational snafus that occurred? Have they been fixed and is everything running right now? Could you just give us an update on that?

John, it’s Mike. I would say that we experienced extremely high calling volumes in the early implementation of it. We’ve put a lot of resources at it, questions around card activation, questions around statements, questions around where to send payments. And so we’re working through that. We’re gaining on it. We’re very focused on it. We’ve got a lot of resources deployed against it and it’s something we can fix in the short order.

Okay. But you did mention John that the accounts are growing, sign-ups have been good?

It’s definitely are growing. I mean 330,000 new card acquisitions just since we took over the book that far exceeded our expectations by a factor of 2 and 2.5 times. So, again, we’re really excited about. I think it speaks to the quality of the value proposition that that we put forward with that card in partnership with Costco.

Right. So just dealing with the volume operationally is what you’re still working through?

Yes, again, as Mike mentioned, the call wait times are coming down, but it’s, yes, it’s probably it’s not the largest, it’s got to be one of the largest portfolio implementation transfers on a single day that’s ever been attempted. And that’s not to give us excuses, I mean, we should be performing better than we are, but we’re working on that. But again, it’s a massive program.

Okay. Thanks.

Your next question comes from the line of Brennan Hawken with UBS. Please go ahead.

Good morning. Thanks for taking the questions.

Hi, Brennan.

On card another one here, the velocity in North America has been really, really good in both purchase volume and ANR. How long should we think about that sustaining and given some of the deals you’ve just walked down from a modeling perspective how long can that sustain?

Well, that’s a great question. We don’t anticipate the same level now. You’ve got two things, two factors. One is Costco obviously is going to benefit as now for the next year, so we’re going to get a tremendous pickup from Costco. As in Costco though, we will begin on an ex-Costco basis some of that growth and we have 10% growth this quarter in purchase sales year-over-year, excluding Costco. That will begin to moderate sometime around towards the end of this year, the beginning of next year. But, again, we still anticipate getting good volume growth, but you’re not going to get the same bump that you have when you start an investment program.

All right. Okay, thanks. We also recently heard about some of your competitors widening out their credit box in card in recent years. Have you guys done that too? Have we seen a shift down within the Citi portfolio a bit of an expansion as far as credit, or can you maybe give a little color on that?

We’re still focused on the same target client that we had going in. If we moved by a basis point or two in FICO, that’s about it. But when you take a look at where we’re focused right now, it’s still on that same target clients that I described to you in the past. And with the renewals that we’ve done and with the new partnership with Costco, I think that speaks to the type of clients that we’re really looking to build on.

Terrific. Just wanted to make sure. And then last one from me, the card trends in Asia, I appreciate your comments on the lower rewards in Australia. But when we look at the loan balances, it doesn’t look like Australia is really all that big. Can that really move the needle? Can you help us understand how that would actually drive that those metrics?

Well, again, it’s not going to drive in this quarter in ANR, but it is going to drive purchase sale. So we have a lot of usage coming out of Australia. So the drop-down in Australia itself cost us a full percentage point on purchase sale growth year-over-year.

Okay. And then that will probably just sustain for a year that lower volume, because it sounds like that’s probably pretty structural, given the changes in that market?

Well, what I would actually think is that as the other card issuers in Asia also adjust their rewards programs, what you’ll see is less of an impact where people stop using their Citi Card. And as the programs become more consistent and more competitive with each other, we should get a pickup back again. So I don’t think that this is more than a one or two quarter blip down in purchase sale growth in Asia.

Okay. And have you seen competitors move yet or just you’re just anticipating it?

I don’t have anything particular in front of me that that would indicate what we’ve seen yet on behavior. We’ll get back to you.

Sounds good. Thanks a lot.

All right.

Your next question comes from the line of Mike Mayo with CLSA. Please go ahead.

Hi. John, you touched on Mexico earlier, but can you talk about Mexico or more generally where do you see it in its profit cycle in addition to just consumer what you said is improving. And then a question for Mike, under what circumstances would you consider a sale of Mexico? I know that that’s in the past, but your discount tangible book keep getting steeper and steeper especially as your tangible book value continues to cost?

So to handle the first part of that question, Mike, there we were seeing good momentum throughout our Mexico franchise. We’ve actually had great momentum in our ICG business in Mexico throughout the past year, year-and-a-half. It’s consumer where we had a bit of a slowdown in that momentum, which we’re now working our way out of, which is why we find getting 4% year-over-year revenue growth to be a nice start positive operating leverage this quarter, positive operating leverage in the back-half of this year. We anticipate having positive operating leverage coming out of the consumer business in Mexico straight on through 2017. So we’ve got an improving cards picture. We’ve got a vibrant retail banking picture going on in Mexico. So we see that as an engine for growth out into the future.

And, Mike, from the strategic perspective, it really dovetails off of what John just described we like – as we have talked about. We like the demographics of Mexico, the growth prospects, where they are now post reforms. The position of Banamex in terms of its retail and consumer franchise, the scale of that our ability to compete. And so in a world that we see, at least, for the future ahead of us right now growth in the world’s are pretty tough thing to find. We think Mexico offers that. So based on what we see and what we think the opportunities are in the franchise, we think it’s accretive to our shareholders. The return are solid, and we think we’ve got the ability to continue to expand those. So right now, I really don’t see a scenario, where we would contemplate selling.

The spirit behind the question and I know you, you understand this. I mean tangible book is close to 64 and the stock price is $44, and at some point the best investment is buying back your own stock. And but you created asset sale gains to, be allowed to buyback more stock, it’s not something you should consider and you’ve made a lot of strides. You discard many consumer operations outside the U.S. You reduced the size of Citi Holdings. Can’t you reaccelerate some of that restructuring?

Well, if you look we just announced a pretty meaningful capital return. We’re in the market and we’ll be buying back $8.6 billion worth of stock over the next four quarters. As you look at our math and you look at our capital return capacity, we’re going to have a lot of ability to buy stock back. And when you think about the trade-offs between the stock buyback and growth, you’ve got to find the right balance. So, again, if we can execute on the things that we want to execute, create the earnings, continue to liberate the DTA, we’re going to have a lot of firepower against the stock, and I’d like to keep investing and making sure, we’re finding and continuing to build on growth.

All right. Thank you.

Your next question comes from the line of Erika Najarian with Bank of America. Please go ahead.

Hi, good morning.

Hey, good morning.

So because of your capital excess in both CET1 and SLR, your name keeps coming up as someone that can continue to take market share, particularly in ICG. And I’m wondering if there are limitations on growth or balance sheet allocation that we’re not thinking about. And I guess the real question here is, where are you in terms of your scoring range on your GCIB surcharge? And is keeping your surcharge where it is today a bigger priority than potentially growing the balance sheet in a greater way to gain market share, given how volatile that that score can be?

Great question, Erika. And one that we contemplate every day. There’s a series of constraining factors that we constantly try to optimize against, GCIB score is one of them. LCR, CET1 stress test capital call that CCAR capital, there’s just many and all those ratios on both an advanced approach basis as well as a standardized approach basis. So it’s a constant trade-off, but the GCIB is certainly one of those things that we look at when we’re making decisions. And to your point, as was previously disclosed, we got into the 3% bucket last year we work to get there. And we ended the year now, I’d say in the very high end of that score range. And one of our goal is to remain in a 3% GCIB in a 3% bucket at year-end this year. And so, we’re actively managing each of the many elements of the score in order to optimize the returns of the franchise. And you’re right, those indicators can fluctuate quarter-to-quarter, but it’s something that we’re trying to actively manage. When I look at the preliminary results that I have for our 630 GCIB score, we come out right at 630. So we’re right in that range of where we need to be and we’re going to keep on working to make sure that we end the year below that 630 target.

Got it. And just a follow-up question on the margin appreciate the color that you gave in terms of the puts and takes of Costco for the next – for the second-half of the year. If the slope of the curve persists or there’s continued pressure on the long end, how should we think about how the marginal progress from that 290 level?

One more weighted especially short-term to the short end of the curve. What we’ve told you in the past is, if the rates move by a 100 basis points, we’ll generate an additional around the world of $1.9 billion of additional net interest income. And most of that $1.9 billion will be concentrated in the U.S. which is I think about a $1.4 billion. And most of that $1.4 billion is focused on the short end. So the long end of the curve, especially in the near-term the next year, year-and-a-half doesn’t really impact us all that much.

Got it. Thank you.

Okay. No problem.

Your next question comes from the line of Ken Usdin with Jefferies. Please go ahead.

Thanks a lot. John, we saw a progress this quarter in the efficiency ratio as you mentioned. And I was just wondering is the prior comments you had made about 58% in Corp for the year still relevant, given the trends that we’ve seen, or is there anything that kind of coming out of the second quarter with the 57 that makes you feel any better about the second-half, I know there’s some seasonality?

I feel pretty good about the second-half. But what we had said at the end of the first quarter is that our target would be to do 58% efficiency for the full-year, given what we – the given the first quarter results. And I’d say that still is where our target is, is at or around that 58% efficiency ratio in Citicorp for the full-year.

Okay. And I know it’s hard to talk about seasonality and given the flurry that we just had of activity in the markets business in June. But how would you characterize how we should think about quote, unquote seasonality or normal seasonality in the summer for the business. And do you – have you seen any change in activity as things have kind of calm down post the initial reaction of f Brexit?

The – it’s still very, very, very early in the third quarter. So it’s a little hard to comment on activity for an entire quarter after just eight, nine trading days. But the activity levels are fine that I think it’s good. And we’ll have to see how everything holds up into the month of August, but again the beginning part of July looks fine.

Great. One last or one for me just in terms your NIM comments and then just that we know that Costco is going to full quarter in the third, it’s a pretty good line of sight in terms of being able to grow NII from here?

I like the prospects of growing NII, I mean, obviously with Costco coming on, that gives us the big boost. I talked about the momentum that we got in for the consumer businesses in Asia and Latin America with branded cards. So, yes, we – I don’t have a prepared comment on guidance on NII. I don’t like to give guidance on individual line items of the income. But, yes, we feel very good about the NII, and that’s why we feel that the NIM should improve back up to the 290 or maybe a little higher range in the second-half of the year.

Okay, understood. Thank you.

Your next question comes from the line of Eric Wasserstrom with Guggenheim Securities. Please go ahead.

Thanks. John, a couple of questions. The first is on Slide 28, where you have the ICG unfunded corporate energy exposure?

Yes.

The double and single B component looks like, it actually grew by close to $1 billion versus last quarter. And I’m wondering, if that’s from actual additional exposure or is that from the down – the ratings migration of existing exposures?

Well, and some of that is migration. There’s a variety of factors that that go into that. But there’s nothing in there that would indicate that there’s something deteriorating, or anything else it’s just a series of puts and takes.

Okay. And the – I think you previously indicated that 65% of the total of about $35 billion is either investment-grade or has credit support. Has that figure changed at all?

No, I don’t have that in front of me. So I apologize for that. We’ll have to get back, yes. I don’t think that there’s any big deterioration there. I just don’t have that with me.

Okay, great, no problem. And then just following up on sort of several of the questions and your responses, we think about the back-half of this year. It sounds like what you’re pointing us towards is balance sheet expansion driving NII growth with perhaps a little bit of a lift also from NIM, continued positive operating leverage from lower repositioning costs and some improvement in the provision guidance, although still incremental build, but potentially some lesser degree of trading revenue. Is that broadly correct?

Well, I’m not going to comment on what you might pull out of your own model. But in broad strokes I would be cautious about thinking that I’ve guided you to balance sheet expansion. Balance sheet expansion is not really something that we’re targeting. As I said, we still believe that we can optimize our balance sheet. So I wouldn’t factor in undue expansion of the balance sheet.

Okay. Yes, I was sort of speaking of within Citicorp, but rather than broadly. But would Citicorp still be broadly low like, I mean, I think it was up about 1% in the period?

The balance sheet growth?

Yes.

I’m not prepared to give forward guidance on the balance sheet. Let’s just say that, again, from the overall level of about $1.8 trillion for the overall Citigroup, that’s broadly the area that we still believe that we should be operating.

Great. Thanks very much.

Your next question comes from the line of Steven Chubak with Nomura. Please go ahead.

Hi, good morning.

Morning.

So, John, I had a quick question on CCAR, maybe a bit of a follow-up to Erika’s earlier question. The results are priced very positively in the latest round. As you prepare for some of the tougher elements like GCIB surcharge inclusion, how are you thinking about the capital minimums or targets that you need to amass to day to day as part of your allocation process? I’m just trying to get a sense as to whether this has changed significantly just given the favorable results that we saw in the latest stress test round?

Well, first of all, Steven, I wouldn’t know what to do about GCIB surcharge in CCAR, because unless something happen this morning while I’ve been sitting here we haven’t seen any proposed rule yet. So that’s something that we’re obviously aware of the rhetoric that’s out there. But, again, we just don’t know, so that has not impacted our planning as yet at all.

Okay, got it. And I recognize, John, that you don’t want to give explicit guidance on balance sheet growth expectations, but with the price of RWAs come down in the quarter and given the growth in both loans and assets, I’m just trying to get a better handle as to what was driving that. I know that there’s some FX translation impacts that could influence the moves in RWA. But given how much Holdings has shrunk, is it reasonable to assume that RWA growth will wrap Citicorp growth going forward in terms of…?

Well, actually, if you – yes, Steven, if you look Holdings RWA declined by about $8 billion or $9 billion in the quarter. And if you look our RWA overall dropped by about $8 billion in the quarter.

Got it, okay. One more quick modeling question for me on legal and repositioning costs. You’d guided to the 225 basis points for Citicorp for the full-year. It looks like there has been a higher run rate in those expenses in the first-half. What’s a reasonable expectation for what we should be modeling for the second-half for legal and repositioning?

I would still say that for the full-year, the 225 is still a pretty good number.

Perfect. Thank you very much.

Okay.

Your next question comes from the line of Matt O’Connor with Deutsche Bank. Please go ahead. Matt O’Connor: Well…

Hi, Matt. Matt O’Connor: Just stepping back bigger picture, you’ve done a lot of work in the credit card businesses, a lot of upfront investing, obviously renewal of some contracts, gaining some contracts. So there’s still obviously the execution to do, but it seems like the heavy lifting has been done from an investment point of view. If you look at the rest of the franchise across the products and the markets, are there other areas that you want to focus on increasingly so on investment dollars, or do we start to see maybe some moderation in some of the spend?

For the investment perspective, Matt, I think we remained largely consistent with the things that we talked about before. So we talked about equities and we talked about what we’re trying to do there the combination of prime brokerage, the combination of cash derivative Delta One and investments in people balance sheet, et cetera. So those continue. Investments in our network and our cash management business in that investments in digital and our interface on the consumer side. So, again, things that we’ve consistently spoken about those investments continue. Matt O’Connor: And just how you think about?

I would describe it’s outsized. Matt O’Connor: Okay. Is it fair, I mean, it feels like the credit card and some of it shows up in expenses and some of it’s a contra-revenue. But it seems like that was a pretty big effort to get behind you. And are these other things more kind of in a run rate or business as usual?

I would say from a technology perspective, we probably need to think of a lot of those investments ongoing as business as usual. I think of the equities investment is probably being slightly different in terms of – there’s a life to it and there’s a set of expectations that we’ve got to make sure we achieve out of those investments.

I think, Matt, what you’ll see is, we’ll continue to invest where we have the prospects for growth. So you’re likely to see still we’ll have investment spending in Mexico, but that is captured in the guidance that I gave you as far as our belief of generating positive operating leverage in the second-half of this year and positive operating leverage in consumer in 2017, so that’s embedded in that. We’ll continue throughout U.S. to spend money to enhance our digital capabilities. So we do have investment dollars at play. So I don’t want to tell you that, we’re not going to be investing. Just to keep our TTS network in place, we spend hundreds of millions of dollars a year, that is not going to stop. But I think the spirit of Mike and I are trying to answer your questions, we don’t see any large lumpy dollar where we’re going to tell you that this is going to be some negative impact on our financial performance for the next several quarters. Matt O’Connor: Okay. That’s what I was getting at. That’s helpful. Thank you.

Okay.

Your next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Hi, good afternoon.

Hi, Betsy.

So a question just on capital creation, because clearly you are creating capital faster than earnings, thanks to things like Holdings shrinking and the DTA utilization and all that. And I’m wondering, do you get any credit from the regulators for this in your opinion? And is there an opportunity, do you think at some point, maybe it’s once we get through the CCAR buffer for GCIBs that’s coming. But do you think there is a point when you’ll be able to talk to them about the DTA utilization and the incremental capital from that going towards share repurchase as opposed to factoring into the whole CCAR process?

When we think about capital generation and in particular capital returns, we don’t as you reference think of that in terms of earnings, because we’ve got the capacity and I think Slide 33 shows the drivers of capital and DTA that we’ve got this ability through the utilization of DTA and again $10 billion used we since it peaked to generate regulatory capital at a kind of pretty significant rate. So we understand that if we’re not returning all of that excess capital and so if we measure ourselves, we measure ourselves against finding capital constraints, and today that would most likely be CCAR. What do we need to run the institution, what do we need is a buffer, and it’s our intention over time to return all of that excess back to our shareholders that we can’t use. And in this environment that’s probably the bulk of earnings and DTA liberalization. And when you think about the difference between our TCE and our CE Tier 1, it’s largely the $29 billion of disallowed DTA. And so as we liberate that, we’d like to return them. I think it’s part of that conversation that’s not nor will be a prospective conversation. But as we liberate it, we then want the ability to return that in arrears. And we’ve been in conversations with our regulators about that and that will I think continue to show itself over time.

So, I guess, is it – this upcoming rule that we’re waiting for from the Fed regarding the GCIB buffer, GCIB surcharge increase for the folks like you that we’re waiting for you get through that and then maybe the ask can go up? I’m just wondering how you think about timing around that?

We’ve consistently talked about walking the ask up. This year was a tripling of the dividend and meaningful increase in terms of buyback and it’s our intention around the right operating environment and the right results to continue to do that. And again going back to the knowing that unless we do that and we return or use all of this excess capital, we’re going to have a denominator problem. And so we’re committed to doing that.

Okay. Thanks.

Your next question comes from the line of Matt Burnell with Wells Fargo Securities. Please go ahead.

Good afternoon. Thanks for taking my question, just a couple one. First of all, John, in terms of the DTA utilization, you’ve mentioned a couple of times on the call freeing up that asset. I guess, I’m just curious why the pace of the DTA utilization was so much slower in the second quarter than the first quarter, given it looks like North American consumer profitability, pre-tax profitability was roughly similar quarter-over-quarter? And just looking through some of the ICG numbers, that it appears North American profitability there was also relatively similar quarter-over-quarter?

Yes, Matt, if it was very simple to give you the formula as far as how you drive down the DTA, I’d love to lay it out. But it just doesn’t work that way. It has to do with certainly where the earnings are generated, importantly, how much of that is coming out of current taxes that that are due as opposed to how much you can put against your deferral. So it’s difficult to give you well if earnings are bit and the DTA will be back. There’s just a lot of other things that go into it. But in general, again, we’re focused on driving it down. And I think as Mike said, we’re obviously been able to do that in billion dollars of utilization over the last couple of years. And we should be able to continue to utilize it somewhere in the range of $1.5 billion to $2 billion a year that’s going to be the pace.

Okay. And then just moving on to page 24 of the supplement, I realize we’re looking at end of period balances, so there may be something skewing this a little bit. But the corporate loans in EMEA grew in the second quarter at a much faster rate than you’ve seen them grow year-over-year. I’m curious if that’s sort of a one-quarter blip possibly driven by Brexit, or are you really driving market share gains on the lending side, partly because of some of the challenges of the European banks?

Yes, I don’t have a great answer for you on that, Matt, I’m sorry.

Okay. And then just finally, John, maybe following up on Betsy’s question. Looking really at this CCAR cycle, you’ve obviously had some good news in terms of living will, your CCAR proposal was accepted without any change. I guess, I’m curious how you’re thinking about potentially requesting a de minimis or a further increase in the buyback in this CCAR cycle using the de minimis exception?

Yes, Matt, in that, I would say that it’s still relatively early in the year, let’s see how the year progresses and where we are and we’ll make that judgment or that call later in the year.

Okay, thanks very much.

Your next question comes from the line of Brian Klainhanzl with KBW. Please go ahead.

Thanks.

Hey, Brian.

I had two questions. First on the Costco, you mentioned that the reserving would start in the back-half of this year, but do you get from the fair value marks, does that last you to third quarter? So you’re not really going to see the reserving start until the fourth quarter, or does that start as early as the third quarter?

No, it actually started in the second quarter. But, again, we only had the portfolio for 13 days. But if you remember we kind of went through a similar set of discussions about LLR build when we acquired Best Buy back in 2013. And so as you correctly stated when we’d purchase a loan portfolio, we acquired the receivables and they’re recorded at fair value, so there’s no corresponding loan loss reserve. Therefore, as new loans are originated, the LLR build. If you think about the difference between an acquired portfolio and a matured portfolio, in a matured portfolio that build would be offset by LLR releases for loans that actually paid off. However, if the acquired loans don’t have an LLR, there’s no offsetting releases as they pay down. So that means that your rate of build to a, let’s call it normalized LLR for an acquired portfolio is actually depended on how fast the new loans are created, as well as how fast the old loans pay down. So if the pay down rate really has the predominant driver of the pace of the LLR build, as the portfolio gets replenished with new spend on existing cards. So since Costco has a high pay down rate, the LLR build on the Costco portfolio is going to be more front-loaded than with the case with Best Buy. So I actually think that what you’re going to see in the third quarter could very well be the highest quarterly LLR build that we will see as a result of acquiring the portfolio.

Okay, thanks. That was very helpful. And then also related to Costco on the purchase, obviously the intangibles went up. What’s the life of those for the amortization schedule? Is it amortized over one year, two years?

I believe tangibles would tie back to the contract.

Okay. And then just lastly, I guess going back to 2013, I mean, Mike you provided a nice update as to back in March of 2013 as to your long-term strategy of where you’re going to be investing. Is there any plans to provide another one of those updates of the kind of benchmark what you’ve done over the last three years, because there’s a lot that’s been done, but kind of what you are going to do to kind of drive the company forward?

Yes, we plan on doing that. We haven’t set a date in terms of coming out. But probably sometime over this summer or as we get to the end of the third quarter, we’ll probably come out with some talk about when we’re going to go up more broadly.

Great. Thanks so much.

Your next question comes from the line of Gerard Cassidy with RBC. Please go ahead.

Thank you. Good afternoon, guys.

Hi, Gerard.

John, you talked about how you had better than expected growth in the number of new cards from the Costco – new accounts from the Costco acquisition in these early days. Were the purchase sales as better than expected as the acquisition of the new accounts?

Purchase sales, I can say are running roughly in line with what we had anticipated, maybe a little bit higher, but roughly in line.

Okay. And the two-thirds outside of the store, is that in line with your expectations as well on the purchase sales?

That’s in line.

Yes. Is there anyway of taking this bigger with your global reach outside the U.S. than what maybe American Express could have done with Costco?

I’m not prepared just to talk about. Let’s absorb what we’ve got right now first. Obviously, we’re still working through the $11 billion portfolio that we have a 11 million new card members, let’s give them a delightful experience first and then we’ll think about international.

Okay. Clearly, you guys have made a commitment to cards with this acquisition and your other acquisitions. Are there any other portfolios that you are aware of that might come up for bidding in the next 12 or 18 months of meaningful size?

Of meaningful size. There is a couple intermediate size bites over the next few years, but there’s nothing of any real significance. Obviously, like we have in the past, we’ll continue to look at those, and if the numbers and returns work, we’ll obviously compete for them, and if not we won’t.

Okay. There’s a lot of moving parts to this question. Obviously you guys are very well capitalized. The regulators control what you can give back in excess capital similar to your peers. Is there ever a thought of if you’re limited and we won’t know for a couple years that you can only give back what you earn every year and nothing above it. Is there a thought with your investments in the digital consumer capabilities that you are doing, that mobile channel to pursue a more aggressive consumer business in the United States, obviously you don’t have a retail branch network and you probably don’t need it in the future like some of your bigger peers. But is there any thought that you guys have, as your mobile channel is very robust, very strong, can you take that even bigger to grow that faster nationwide?

Well, I think we have that opportunity whether or not, we have the issue that you talked about. Again, I don’t think we’re going to end up with. But even if we are able to return all the capital that we think we have, I think we still have the opportunity to grow our consumer business in the U.S. as a result between digital and mobile. Those are things that we’re definitely focused on.

Okay. Shifting gears on you, I know you talked about the ICG business and obviously what went on post Brexit with the trading. Was there any significant change in the pipeline in investment banking activity post Brexit? I know it’s not that long ago. But anything there to talk about?

Well, I think the pipeline remains pretty strong. And actually on the heels of Brexit, we saw actually quite good deal flow. You saw debt capital markets, you saw equity capital markets, you saw M&A getting executed getting announced. So I would say the pipeline for the third quarter remains pretty strong and provided we get reasonable markets. We’ve got an environment in which we can continue to get these things done. So it feels pretty good.

And then just finally, your – obviously your credit quality has improved dramatically and it’s still very strong. But there’s always moving parts, and so one of the questions on the moving parts is, I think it was on the supplement package on page 33, you give us the breakout of your non-accrual loans in corporate and consumer. I notice you had some real good improvement in Latin America, they dropped quite a bit. But EMEA jumped up quite a bit in the quarter on non-accrual. Was that in energy-related credit or Brexit related credit or credits?

Two energy-related names in EMEA caused that.

Okay, great. And look forward to see those, Mike, those new guidelines that you guys are going to hopefully announce later on. And just I would also throw an Investor Day now that you guys are moving forward, you might want to consider that for 2017, even though Susan is probably not happy about that. Thank you.

Thank you.

And we have no further questions in the queue at this time.

All right. Thank you all for joining us for the call. If you have any follow-up questions, please feel free to reach out to Investor Relations. Thank you.

Thank you. This concludes today’s conference call. You may now disconnect.