Hello and welcome to Citi's Second Quarter 2020 Earnings Review with the Chief Executive Officer, Mike Corbat and Chief Financial Officer, Mark Mason. Today’s call will be hosted by Elizabeth Lynn, Head of Citi Investor Relations. [Operator Instructions] Also as a reminder, this conference is being recorded today. If you have objections please disconnect at the time. Ms. Lynn, you may begin.

Thank you, operator. Good morning and thank you all for joining us. On our call today are CEO, Mike Corbat will speak first. Then Mark Mason, our CFO will take you through the earnings presentation which is available for download on our website, citigroup.com. Afterwards, we will be happy to take questions. Before we get started, I’d like to remind you that today’s presentation may contain forward-looking statements, which are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results, capital and other financial conditions may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our SEC filings, including, without limitation, the Risk Factors section of our 2019 Form 10-K. With that said, let me turn it over to Mike.

Thank you, Liz and good morning, everyone. Today, we reported earnings for the second quarter of 2020, with net income of $1.3 billion and earnings per share of $0.50. As in the first quarter, credit cost weighed down our net income. However, the overall business performance was strong which shows that we've been able to navigate the COVID-19 pandemic reasonably well so far. The solid revenue growth at 5% and strong expense management down 1% both on the year-on-year basis, our margin was up 13%. We grew loans and our deposits were up significantly. Our regulatory capital increased and we continue to add to our substantial liquidity and our balance sheet has more than ample capacity to continue to serve our clients. The Institutional Clients Group had an exceptional quarter. Fixed income was at 68%. We had our best investment banking quarter in recent history and private bank revenues approached $1 billion. And while Treasury and Trade Solutions continued to be impacted by the lower rate environment, we did see good client engagement and strong deposit growth in that business. Global Consumer Banking revenues were down and spending slowed significantly due to the pandemic. In North America, despite the decline in purchase sale activity, Branded Cards revenues were up slightly due to a mix shift towards earnings balances. At the same time, Retail Services saw a significant decline in consumer spending with our partners. Retail Banking saw higher mortgage revenue from refinancing activity due to the low rate environment. In Asia, the slowdown in travel and consumer activity again reduced revenues. And in Mexico, revenues declined as the country is struggling from the effects of the health pandemic. Our capital position strengthened during the quarter with our common equity Tier 1 ratio increasing to 11.5% on an advanced basis. I…

Thank you, Mike, and good morning, everyone. Starting on slide 4. Citigroup reported second quarter net income of $1.3 billion which included a $5.6 billion increase in credit reserve this quarter, primarily reflecting the deterioration in the economic outlook since the end of the first quarter under CECL and downgrades in the corporate loan portfolio. The reserve bill also includes an additional qualitative management adjustment to reflect the potential for a higher level of stress and/or a somewhat slower recovery. Revenues of $19.8 billion grew by 5% from the prior year, primarily reflecting higher fixed income and investment banking records. Expenses were down slightly year-over-year resulting in positive operating leverage and a 13% improvement in operating margin. Credit costs were $7.9 billion this quarter. Our effective tax rate was 9% for the second quarter reflecting a higher relative impact from tax advantage investments and other tax benefit items given the lower level of EBIT. Looking at results for the first half of 2020, we delivered net eight number $3.8 billion even as we increase credit reserves by $10.5 billion under the CECL framework given the current environment. We grew revenues by 8% predominantly reflecting continued strength in our markets and investment banking businesses, while we held expenses flat year-over-year allowing us to deliver positive operating leverage and a 20% increase in operating margin. In constant dollars end-of-period loans were 1% year-over-year to $685 billion reflecting growth in our institutional businesses mostly offset by the impact of lower spending activity in our consumer business. Deposits grew 20% reflecting engagement with clients and flight to quality so to speak across both the institutional and consumer franchises, which serve to strengthen our available liquidity. We maintain a strong capital and liquidity position which has been critical to our ability to support our clients…

[Operator Instructions] Your first question is from the line of Glenn Schorr with Evercore. Your line is open.

Sorry about that. Can you hear me now? Sorry about that. My apologies. Quick question on cards in your comments you mentioned doing less balance transfer and tighter credit box impacting revenues. Could you dimensionalize maybe what portion of the book or remind us what portion of the book is promotional? Where this might take it to and how much pressure we're talking about on the card side? Appreciate it.

Yes. This is Mark. Good morning, Glenn. Look, I'd say a couple of things we're seeing take place. We're obviously managing through a crisis here and what we've seen is we've seen less purchase sale activity, less loan volume take place and frankly less new card acquisitions both on the branded side as well as the retail side. And in light of that, in light of the environment that we're in we've dialed back the marketing spend. we've dialed back bal con and the like and what happens as you know is that as you dial back that level of spending you in the future you don't get the increase in average interest earning balances, loan balances that ultimately drive forward-looking revenues. And so the comment there is simply meant to suggest as we prudently manage through this crisis. We've needed to dial back. We've decided to dial back that's been and I think what's critically important is that we turn that back on as this crisis turns around and that's the way we're kind of planning so that we start to get those promotional balances peaking back up as the economy turns as GDP turns as unemployment falls. And we can start growing those balances again. So that mix as you know is very important. It'll be pressured as we manage through this, but then we want to be very responsive to the economy as it changes which is slightly different from the way it was handled in the past.

That's fair. All prudent, I get it and apologies if I miss it in the prepared remarks. Related to the reserve build I get that there's multiple scenario, a lot of variables but can you talk about where we were at the end of the first quarter versus where at the end of the second quarter in the economic backdrop that you wrote reserves to just so we can do the compare and contrast. Thanks.

Yes. Let me try and dimension that a little bit because I think it's important first to kind of understand how we approach the CECL modeling. And then I'll share with you the variables, the key variables that we used in the in the second quarter here specifically. So remember as we approach CECL we've got to take a view on the forward look of the economic environment. And the way we've approached that is we've established models to in order to forecast those reserve levels. And we use one scenario for that we use a base scenario for the modeling of that. In addition to that base scenario, which drives the quantitative output in the way of the level of reserves, we have a quantitative approach that drives a management adjustment and that management adjustment is designed to account for the economic uncertainty and the prospect of a more severe stress or a slower recovery. And so those two components become important to how we've established the reserve both in the first quarter and in the second quarter. In the first quarter -- sorry the second quarter to more specifically to your question, the basic economic forecast called for U.S unemployment peaking at roughly 15% or so in the second quarter and GDP falling 35% plus quarter-over-quarter. Now what's important is the shape and the pace of the recovery including whether we see a significant second wave of the virus or what impact the crisis has on broader employment et cetera and our base scenario as GDP recovering sequentially in the third quarter and beyond and bring, call it, under 10% by the end of the fourth quarter of 2020 and then trending down from that through the fourth quarter of 2021. And these assumptions kind of assume a potential second wave but one that is controlled, it assumes appropriate fiscal response if needed to maintain that pace of recovery but there's a lot of uncertainty there. And that that kind of drives the quantitative approach and then we consider the probability of an alternative downside scenario. And we build additional reserves as appropriate to that and so if you think about our total reserves, which show up on page 20 I think which stand at about $28.5 billion in terms of the ACL reserves that includes roughly a $2.2 billion or so $2.3 billion or so additional management adjustment to account for the possibility of a more adverse outcome. And so that -- so hopefully that helps. We've got a very specific base scenario then we look at a more stressed scenario, severely more stressed scenario and we put a probability to that in order to establish what our management adjustment should be. And that's what's in the $28.5 billion that's it's today.

Your next question is from the line of Matt O’Connor with Deutsche Bank. MattO’Connor: Good morning. Could you talk a bit about the timing of when you think the charge offs will actually start to go up? And obviously you've alluded to the large reserves and that may or may not hit earnings entirely, but just as we think about the loss recognition, maybe if you can speak to when you think we might start seeing that and what peak levels and when and obviously it might vary by region. So any thoughts on those topics would be helpful. Thank you.

Sure. We are -- if you kind of look at the information that we reported. We aren't yet seeing significant NCLs as of yet. We aren't yet seeing. There are some increases but we aren't yet seeing significant NCLs. We aren't yet seeing meaningful or increases in even the 30 to 89 buckets, in fact, they're declining so if you look at kind of North America the 30 to 89 delinquencies declined sequentially in branded cards, in retail services. They were relatively stable. In Asia, in Mexico they declined as well. All in our supplement and part of that is because as you know there are government payroll protection programs. There are stimulus checks. There are unemployment benefits. They're all of these things that are in place in many ways to kind of prop up the economy and so we aren't yet seeing the stress, if you will kind of play through those early buckets. What I would say is that as we get to through the back half of the year and towards the back after the year we're likely to see NCL start to pick up. And we're likely to see some of that at least on the consumer side start to peak towards the middle of next year. But I think what you've got to keep in mind is that we're building reserves now around lifetime expected losses and so to the extent that the forecast plays out as the scenario would suggest, you'll see those losses pick up and all things being equal as it relates to balances, you'll also see the reserves used to cover those -- to cover those losses. MattO’Connor: And then just on a follow-up I mean this is the first cycle that we've all been through with CECL and I always think about there's all these reserves being built that you're supposed to use as charge-offs hit. But that kind of assumes that charge offs aren't going to go up kind of beyond the level of reserves, right? So like if charge off are going up but the macro environment continues to get worse, you don't really know if you should be using reserves or not. So I guess I'm just wondering like it should be a little bit more coincident in terms of using reserves as charge offs go up than maybe before CECL, but I would assume like the backup this year for example when charge-offs go up like you're not going to be using reserves yet until you're confident that the macro is not going to be worse than you preserved for, right?

Again, I think in every quarter we're going to be taking a view on the forward economic outlook and so a little bit to your point if we get into the third quarter and we're seeing that our outlook is consistent with what it was at the end of the second quarter then we're going to take a view as it balances all, balances in terms of loans all things been equal related to balances. We're going to take a view as to whether we think that economic environment is going to be as we've scenario it out, get better or worse and act with the reserves accordingly. I think the other thing that I point out to your question is that remember when I described how we established the reserves, we've also built this management adjustment, this qualitative approach which is meant to account for some of that uncertainty and the prospect for a yet worse scenario.

Your next question from the line is of Erika Najarian with Bank of America.

Hi. Good morning. I hate to ask yet another question on the reserve, but just wanted to make sure we got the right takeaways from everything that you just said, Mark. As we think about your current outlook for the economy are you done with significant reserve building? And in that case in terms of what you're alluding to should we assume that once the charge off actually starts to manifest that are drawn against your reserves and you have a longer, reasonable and supportable period versus peers. And I'm wondering as investors start evaluating banks on normalized earnings how we should think about the end state reserve to loan ratio relative to that longer RNS period?

Yes. I guess here's the way I think about it which is we obviously, you've heard us say in terms of the uncertainty unprecedented crisis. We've taken a view on our forward look of the economy and how it plays out. And that is in fact the view that drives what we've established in the way of reserves. Now we're sitting at reserve levels of $28.5 billion, 3.9% or so of funded, 7% against the global consumer bank in terms of against balances the ICG at 1.7 even within the ICG non-investment grade is nearly 5%, 4.9% in terms of the reserves against the loan balances. We're sitting with reserves that we feel the level we feel comfortable about the level of reserves that we have, but that is for all the reasons that I described tied to the scenario that I've described for you. A scenario where we see the meaningful drop in GDP this quarter but we also see a recovery sequentially in the third quarter and unemployment start to start to fall by the fourth quarter and so to the extent that those things -- a little bit of room there I would say because I do have a management adjustment then I would expect that the first half would reflect by and large the majority of the reserves that we would need to take. And so -- and losses started to play out that we'd be utilizing that reserves in order to cover them. So hopefully that that helps.

Yes. That helps and I'll follow up offline on normalized reserves. But I wanted to get the second question and your peer earlier today noted that we should essentially cut trading revenues in half for the second half of the year in terms of normalization and should we be doing the same for Citi for the second half of the year. And I suspect probably more applicable to the fixed side than the equity side.

Yes. Look, we have seen very strong performance in our markets business and in -- FICC particular, was up 68% and we adjust for the gain that we had last year is up as much as close to a 90% little bit under 90%. So very strong performance there. We have -- I did mention in my prepared remarks that we would expect to see our markets revenue, our investment banking revenue normalized in the back half of the year and I think that certainly holds in terms of what we're expecting. And I also gave a little bit of guidance in terms of how to think about full year performance and that should hopefully inform how to kind of model our performance. And I talked about total revenues or full year revenues that are flat to down slightly with a decline in net interest revenue that's more or less offset by non-interest revenues on a full year basis. And I think if you can kind of model that out and it will, I think, reflect that normalization that I'm speaking to with regard to markets which will show up in both but you'll see a good part of the normalization in the non year.

Your next question is from the line of Mike Mayo with Wells Fargo Securities.

Hi. I have a few questions, so I'll ask a couple then I'll re-queue at the back end, if that's okay. But Mike the one line that got me was that we will be struggling until we get a vaccine, which might be correct. Nobody really knows how this is going to play out but that's a little bit more pessimistic than some of the guidance given by others and certainly the timeframe for a vaccine is uncertain too. So I'm just trying to reconcile the comment that in the reserves are fine. It sounds like the second quarter reserve a build is a high water mark, so that's reflecting everything. On the other hand, if we have to wait until we get a vaccine and also you did mention Mexico not having the stimulus and we have had some data since the end of the quarter that looks a little bit worse. So I guess my question is, Mike, how confident are you that you've built enough reserves as of the second quarter in light of what you said about Mexico, the vaccine and what's taking place since quarter end.

Sure. Thank you, Mike. So let me just kind of touch on the comment in terms of the vaccine. As we think of as I think of these health pandemic and not necessarily specific dates, but a broad-based timeline effectively I think of this going through four stages, containment, stabilization, normalization and ultimately a return to growth. I would describe that today the economy as we've seen the global economy, the global health pandemic is not all in the same place. We didn't enter it at the same time. We didn't have the same response either from a health or from a fiscal or monetary perspective and therefore we're going to see exit and exit rates different and we're going to actually see the numbers in terms of resurgence of COVID in some areas in different ways. I would describe right now that broadly in the world we are somewhere between containment and stabilization, right. Containment is that we can bend the curve in terms of the transmission of cases. Stabilization is that as we remove or start to take down some of the barriers or actions that were put in place. Working remotely, social distancing kind of all of those things that have been put there and as that start to get lifted that you actually don't see cases come back. And when you get to the third phase around normalization and simply put normalization to me is am I willing to get on the airliner? Am I willing to get in a subway? Am I willing to go into a crowded venue to watch a sporting event or a concert or what it may be. And I think realistically when we get to that third bucket, I just don't see that coming and I would say many don't…

And the last part of my question was since quarter end you see the COVID cases increase in Florida and Texas and see what's happening in California. Any change in assumptions in the last couple weeks?

When you say functions, Mike, what do you --

And your assumption sorry.

Oh assumption, I'm sorry. Sure, yes, well to me right if we want characterize what's happening in this in some cases as resurgence or the second round of this. One is I would say that we've seen both societal and behaviors changing right that I think what we've seen in these states where we've seen resurgences is in some ways a dichotomy of the population I think those that have reverted back to original protocols from the early stages of COVID and what needs to be done. And I think those that are, I think being much more for lack of better term free spirited or kind of moving forward with their lives. And I think you can see that in the spend rates that while these cases have had a resurgence, we've seen spend come back off in some of those places, but we haven't seen it necessarily go back to the lower levels of the darkest days of early COVID. I think the second thing in there and it's in all of the national health reports are that the demographics have changed. We were actually seeing and part of it can be attributed maybe to testing or more mass testing but we're actually seeing the average age of the infected population coming down round one it was in the 50 to 50year plus range on average and the last numbers I saw coming out had the most recent cases in these states actually in the mid-30s as an average. And so we're actually seeing a different demographic in there and again I think that has some impact in terms of the way people respond and what spend and what other things are. And to Mark's earlier point Mike just finishing on this, I think that what we're seeing…

Sorry so a 10 second summary, your $28.5 billion reserves as we stand here at July 14 reflect all that 8% contraction in Mexico, some spending come off; some spike in cases and everything else that's out there now. It's not like the first quarter we had all this new information. The $28.5 billion is your best estimate now for your future losses under CECL.

Yes and the one correction. The one correction I would make to that Mike is it's not -- again, we close and our view is as of the quarter end is as of June 30th but again the models are very sensitive to unemployment. They're insensitive to GDP and as we went through last quarter, as we were doing different flashes those numbers moved around. So again the models are sensitive to those inputs and my guess is as those inputs continue to change, there'll be variation but absolutely as of quarter end we are comfortable with where we set those and the reserving around that.

Your next question is from the line of Gerard Cassidy with RBC.

Good morning, Mark. Good morning, Mike. Mark, you gave us good detail in the slides as you pointed out on the commercial portfolio, the wholesale portfolio and you showed us some of the migration trends from AAA to BBB et cetera. Can you share with us what percentage of the corporate portfolio was reviewed and was downgraded? And second and how often do you now need to review the portfolio for potential future either upgrades or downgrades in that portfolio?

Yes. So, look, we are constantly reviewing the portfolio and we ramp that up that timing up significantly as we've managed through this crisis. They're obviously, I start by saying kind of all companies all sectors have been impacted by this obviously there's some more significantly impacted than others. When I think about sectors that that drove a good portion of the reserve build that we've seen is, I think, about aviation I think about energy; I think about autos, commercial real estate to some extent and retails and retailing and that combination probably drove a third of the build that we saw. We did see significant downgrades through the quarter and you heard me reference the non-investment grade reserves sitting at 4.9% of the loan balances and so we are actively reviewing the portfolio as you would imagine. We're looking at both the 80% investment grade, the 20% non-investment grade of our balances and we're adjusting that accordingly, and we'll continue to do that through the quarter and continue to work through the entire book there, just to put it in perspective there were probably a couple thousand names that were involved in the driving of the downgrades. And so they're meaningful names and meaningful review and assessment that we go through in the quarter.

Very good. Thank you and then as a follow-up shifting over to the consumer side, in the slides once again you gave us the relief efforts that you're making with some of your customers or forbearance. I guess you could call it in credit cards mortgage et cetera. It's a two-part question. Is there any way of you, Citigroup finding out what percentage of those customers are unemployed, but receiving enhanced unemployment benefits so that the delinquencies across in your portfolios, as well as your peers are quite low. And part of the reason possibly is due to the unemployment benefits being so beneficial to the people that are unemployed. Is there any way of carving out the higher risk components of these forbearance areas where they could end up turning into charge-offs later in the year or next year?

Yes. Look, we're constantly again reviewing the portfolio but in terms of specific unemployment information that's something that we have available to us as we work with our customers and review their specific credit statistics. So we don't have that. We do have as you know the early signs of both customers who took advantage of the forbearance globally and them still paying. So we've got if you think about it globally we have 40% to 60% of the customers that were -- that are enrolled in the consumer relief programs continue to make payments and they aren't contractually obligated to do. So almost 50% in branded cards and 40% in retail and again high numbers around the globe. So that is a good sign that people are benefiting from the program and taking those benefits and applying them to their exposures and the other important stat that I think is a good indicator and probably gets a little bit closer to what you're trying to get a sense for is that the first time enrollment volumes have come down significantly, while we're offering reenrollment, the rates are running below expectation. They are kind of in the mid-teens so to speak or but around there and more than half of the total enrollments that it rolled off to date and over 80% of those remain current. And so we're seeing good signs of those rolling off enrollment continuing to remain current, which we think is a positive indicator. That said we've said it a couple of times on the call now there's still some uncertainty, fair amount of uncertainty out there in terms of how this thing continues to evolve. But the good leading indicators between purchase sales, between re-enrollment levels, between continued payment both on and off the programs.

Your next question is from the line of John McDonald with Autonomous Research.

Thank you. Mark, I was hoping you could drill down a little bit on the outlook for consumer revenues. You mentioned the outlook for continued pressure on the top-line there. Just wondering it sound like maybe you're seeing some improvement in Asia, you're down 15% revenues in the quarter but sound like maybe a little bit improvement there. Latin America wasn't sure so maybe just a little bit of dimensioning what you see in the outlook for consumer revenues international and domestic.

Yes. Sure. So, look, I mean I think that we're going to continue to see pressure on the consumer revenue line. And I think that as you know if you think, if we could be just kind of taken in pieces very quickly in the US, our branded cards, our retail services, the unemployment stats are very important indicators for those businesses what those stats are. We've seen -- while we've seen improvement in purchase sales, they're still down in the 20s year-over-year and so we do expect that we will see continued pressure on the loan activity there and so and as a result continued top-line pressure on the consumer business domestically. Similarly when I look at Asia for example, there we have a large card business. We're focused on the wealth segment there again purchase sales are still under pressure there. The nature of that activity and card skews towards travel and I commented on the prospect of travel recovering and what that looks like in the future and so we'd expect to see continued pressure in Asia. Similarly, there's pressure in the insurance business that's there in light of the face-to-face interaction that's involved. And in Mexico as well just given the GDP deceleration. So I think consumer will continue to have some top-line pressure. I think the underlying indicators there are still strong for us in terms of the deposit growth; in terms of the engagement; in terms of the digital access in use of our offering. And so we've got good indicators including investment AUMs in Asia that show positive signs as we come out of this. But as we're managing through it we're going to have top-line pressure there.

In Latin America just to finish it up?

Yes. So in Latin America and in Mexico specifically as Mike suggested we're seeing a continued pressure from a GDP point of view. They are later in the cycle in terms of addressing or managing through this COVID-19 situation. There's likely to be some continued pressure on employment there. And so I think there's going to be top-line pressure in Latin America consumer, Mexico in particular as we go through this as well. That said I feel good about where we're positioned. We kind of started to dial back lending activity a little bit in some of the prior quarters. I think we're well positioned from a reserve point of view and I think we're positioned for when Mexico recovers from this to continue to kind of gain ground there given some of the investments we've made in the prior years.

Your next question is from the line of Brian Kleinhanzl with KBW.

Great. Thanks. Maybe just a quick question for Mike. I know there's been a lot changes in Hong Kong so a big piece of your portfolio and what are the operations over there? Is there any change and how you're thinking about the business there? And how you think about that in a go forward basis to start?

Yes. Brian, I would say one is that I think as we look at the region you can't just look at Hong Kong. I think you've got to take a bit of a broader view and the word I would use is that it's complex right. We've got the combination of a sideline trade deal with China; you've got the interaction between China and Hong Kong. You've got the recent announcement or creation of this new national security law which is I think fairly specific in terms of calling out financial support in terms of China against its sovereignty with significant penalties around that. And so I think we've got to be mindful of all those. From our perspective, we've been in Hong Kong a long time. It's an important place. It's our Asian hub as we operate in a number of countries there. And I would say a couple important things as to that. One is we do obeyed local laws; second is that our goal really is to be there to support our clients. And that we're fairly used to operating in charged or complex environments and as part of that I think we have found both the Hong Kong government and the HKMA and others very supportive of our business and our approach. And at the same time we have I think received the same support from China and haven't in any way kind of received restrictions or other things from them. So obviously it's something we pay close attention to. It's important to us but obviously we're committed to being there and obviously are monitoring things closely.

In a separate question. And Mark mentioned that in the retail services that there was some pressure from partner payments. So are those higher partner payments fully in the run rate now or should we expect those to kind of increase on a go-forward basis and what were those exactly? Thanks.

Sure. So as you know, we've got a number of partners that make up our retail services partner business and many of these arrangements call for the sharing of profitability. So contractual profitability of sharing between us and the partners and we will determine that based on our outlook in any given quarter for the balance of the year. And so we make an estimate for what we think profitability will look like and then we obviously account for the share that goes to the partner in the revenue line. That profitability estimate excludes ACLs so the reserves that we've been building. It does include any NCLs that we realize and so important to note that again when we're calculating that the lifetime reserves that we're building despite the fact that we'll share them when they become losses that's excluded from the profitability estimate. And so essentially what's happened and what's caused part of the drag on retail services is that we've seen the losses that we expect from retail services push out beyond kind of 2020. As I mentioned earlier, we see good signs in some of the early buckets and as such our view as to when those losses will actually come through as NCLs has been pushed out into 2021. As a result, the 2021 view on profitability for some of these partners is going up and therefore the amount of sharing has increased thus putting pressure on the top line. To answer the other part of the question, so we believe at this stage based on our view for the balance of the year that we've accounted for the level of profit sharing that we would expect, but as things evolve we would need to adjust accordingly.

Your next question is from the line of Saul Martinez with UBS.

Good morning and thanks for taking my question. So, Mark, I want to go back to CECL and get your perspective on the stickiness of CECL reserves as its charge off start to happen. And I guess the willingness to release reserves that I think we've all been focused on reserve builds, when we see the peak in reserves and less focus on what happens in the cadence and pace of releasing reserves and declines in reserves as the actual loss start to occur. And I mean as you know CECL kind of works backwards every given quarter you need to -- you estimate when you built your lifetime losses are in portfolio, your charge-offs and kind of back into a plug with loan loss provisions. So I'm curious given all the uncertainty that we are -- we still have and will likely continue to see whether as you start to see charge-off start to materialize and whatever the fourth quarter or the beginning part of next year in the more material way whether there's sort of a bias to maybe maintain reserve levels at fairly high levels and not necessarily release reserves because even if we're not -- even if reserve releases are happening or we're not building reserves as charge-offs happen that could imply that provision credit costs remain pretty high for a while. So I'm curious whether you think there will be sort of hesitancy or a natural inclination to kind of wait it out and have a little bit more stickiness in the reserve levels and until we get more clarity and all of the things going on in the world.

I think it largely depends on our outlook at that point in time in that given quarter. I mean it's just know -- there's no other way for me to kind of explain it when we get into the -- like we're in the third quarter now as we go through the third quarter and the fourth quarter, we will have a view a forward-looking view and if that forward-looking view is still meaningfully uncertain to worse than it was in the second quarter then we will likely continue to have to adjust reserves accordingly. If that forward looking view is better, we can -- or the same for that matter, it will support the release activity that you're alluding to. And that's the way I think about it. I think that's how it's probably going to work.

Okay. Got it. I guess maybe just getting more granular even that I guess if there's -- if your baseline economic you -- I know you only use one scenario your baseline has a change or even not maybe getting a little bit better but you still have a high degree of uncertainty in potential in the range of outcomes. Some of which were far worse. I would assume that your qualitative adjustments will factor that in some way shape or form is that and that's reflected?

That's right. So I mean it the way we think about the qualitative piece now as you know we cover kind of a 15% probability that the recovery is worse or slower right. And that has an impact or an implied higher unemployment et cetera. And so if we view things as getting better we would toggle that probability so to speak to adjust the way we think about the management adjustment that should be there.

Your next question is from the line of Ken Usdin with Jefferies.

Thanks. Good morning. First question just on expenses, Mark, you've done a very nice job this year keeping the level flat and that $10.4 billion, $10.5 billion zone through the first half you've got $3billion more revenue and flat expenses and I heard you point earlier that you expected to keep it flattish from here given that we'll see a likely decline in second half revenues from here though can you talk about just what optionality you do have to adjust the cost base lower given your point about supporting employees, investing in technology and then the pushes and pulls of compensation and staff levels et cetera. Thanks.

Sure. Thank you. So I guess a couple things. One is as I mentioned in my prepared remarks that I do expect that we will maintain our full year expenses roughly flattish. And that's what we're kind of managing to and part of that against revenues that are flat to slightly down and if you think about what we're managing through in the midst of this crisis, we've got a lot of puts and takes. So we've got some headwinds that kind of fall into a bunch of different categories including the things we do to support our employees including building out our collection capabilities, including enhancing our fraud detection capabilities all of which I think are important to ensuring that we're managing through this crisis in a thoughtful and responsible way. Sanitization of buildings, ensuring that people have remote access and the equipment to support that all of those things come with cost. Cost that we were not planning for in the year. There are obviously some tailwind. So we've got marketing expenses that you heard me mentioned we've dialed back. We've got T&E expenses because people are doing more Zoom than they are traveling to meet with clients. And so you've got some tailwind there that offset that but net-net when you think about those expenses they are headwinds for us. We also have investments that we will continue to make. Investments in technology, investments in enhancing our digital capabilities which have proven to be quite valuable as we've managed through this crisis. Investment in infrastructure and controls that ensure that we not only protect the franchise but we're improving our efficiency in operations and improving the quality of our data et cetera, et cetera and then we've got productivity initiatives and the other levers that pull or that we do pull quite naturally with revenues. And so the compensation expenses obviously will adjust accordingly. The transaction expenses will adjust with how we see volumes move and we'll continue to deliver on our productivity savings in the way of right placement and reducing our number of centers and the like and so, yes, they're levers but they're also meaningful headwinds and that's kind of how I get to that outlook of roughly flattish as we manage through this particular year.

Got it. Thank you. My second question just on capital. This year you've been bound a little bit more on CET1 by the advanced approaches with advanced RWAs a little bit higher than standardized. It's only about 20 basis points but as we get into the SCB construct can you do anything to optimize the advanced RWAs vis-à-vis the standardized approach and how much of a focus will that be?

Yes. Look, I mean we're part of a big part of kind of what's driving the advanced -- the down grades that are associated with the prices that we're managing through. And so that is a factor that's likely to persist for a while and we're actively managing and optimizing the balance sheet to identify ways to impact or reduce that persuaded assets and aid in the calculation here of the CET1 and but that is the headwind that we've got to manage. Now what I point out is that the regulatory minimum for CET1 in both on standardized and advances are running at about 10%. And so we sit on an advanced basis at a ratio as Mike and I've said at 11.5%. So we're still 150 basis points above that regulatory minimum, which we think gives us room to manage through this period of uncertainty and a range of different outcomes. It also gives us room if you think about some of the additional stress analysis that's in front of us in the industry. So, yes, advance; yes a byproduct of the prices were in, yes we're constantly looking to manage it effectively where that makes sense and where we can continue to serve our clients in a way that is great for the franchise.

Our next question is from the line of Jim Mitchell with Seaport Global.

Good morning. Mark, maybe just can you help us unpack a little bit the -- how we think about the trajectory of NII? What would -- how do you deposit, flight to safety deposits have been stickier than I would have thought still seeing growth in deposits. What are your assumptions I guess around balance sheet growth and NIM? Where do you see kind of NIM bottoming out? Those kind of things would be I think helpful and just understanding your assumptions and versus ours.

Yes. So, look, we kind of mentioned in my opening remarks that we obviously saw NIM decline some 31 basis points quarter-over-quarter. And that's a combination again of lower rates, loan mix shift that we've seen so lower NIM cards in higher ICG in terms of that mix and the balance sheet expansion which is really a reflection of the strong growth in deposits in the solid liquidity position that we have. And so when I think about that dynamic we are likely to continue to see as I mentioned pressure on our cards lending activity around the globe. We're likely to kind of continue to see rates kind of impact some of our banking businesses, businesses like TTS and the like. And as a result, I think that we'll continue to see some pressure on the NIM line in the outer quarters but again I'd point you back to the total revenue forecast that I've given because obviously there are other components here. And that is getting back to flattish to slightly down.

I mean that's all fair. I just was curious if you're assuming a flattish balance sheet or further growth. Obviously, I've heard your comments on some of the pressures just try to figure out what your base case assumption is for the balance sheet.

Yes and then the balance sheet will see, they'll likely be some growth in the balance sheet but that will be driven by the client demand that we see out there and our ability to meet that. But we will likely see some continued growth in the balance sheet from a GAAP asset point of view.

Okay. Just as a follow up on capital. I mean what is your, Mike, do you think you need to see getting back to your earlier comments need to see a vaccine before banks can sort of confidently return to buybacks or do you think it just -- you just need to have a little more macros, stable macro data. How do you think about returning to buybacks given your capital position? Obviously you can't do it in the third quarter but beyond that.

Yes. I think it's based on as we look and project forward what we see from an economic perspective and obviously what's going on in the economy both consumer and institutional. And how we're projecting loss and loss rates that going forward and do we feel comfortable about the trajectory of the pandemic and using my timeline do we feel like we're somewhere in that stabilization moving to normalization, right. So I think in here there's the fear that as we get into colder weather maybe that's now been debunked with Florida and Texas and others. But in the fall maybe we start to see resurgence and some of these things spike up. I think we'd like to see this roll over and hence have some comfort that we've got the ability to keep it down. And that again we see a better sense. I'm not sure what the new normal is but we see a better sense of normalcy whatever that is returning to the global economy.

Your next question is from the line of Charles Peabody with Portales.

Good morning. A couple of questions regarding your capital, your tax position and how it affects your capital. First in the stress test, I believe the CARES ACT provided some capital relief around your tax position. I was wondering if that was true. And if you could size that and secondly going forward if tax rates are raised as Biden suggests, how much would that enhance your CET1 ratio? And then finally, I think Jamie Dimon this morning implied that he would love to restart buyback sometime in the fourth quarter after the election. I was curious if you saw buybacks as a regulatory issue or a political issue. Thank you.

Okay. In terms of the CARES ACT, there is a benefit associated with that. I don't think that it is significant in our case to the CET1 ratio. But I don't have that specific number in front of me. In terms of the tax rate and the prospect of the rollback of taxes that will come with many puts and takes including the impact to the DTA and other things that we have across the firm. And so I apologize I don't have the exact math on that but we can n certainly kind of been beneficial.

But you would have to write up your NOL by billions of dollars, is that correct? I would add by --

We would have to make a number of adjustments such as that would add to capital.

Go ahead.

I was going to say, Charles, the other piece that you've seen in our tax rate is given the breadth of our business we haven't necessarily enjoyed the benefit that the more you fully US-centric institutions have had. And so again ours would be the blend of the US versus international and in that tax rate going up again I don't think we would go back to a global taxation system. We would say a territorial system which again vis-à-vis some US counterparties could on a relative basis would probably be to our benefit. And I think to your final point, I view when the US industry made the decision to go ahead and to stop buybacks, it was not political; it was done, we thought from a prudence perspective of the right thing not knowing what to expect going into this. I don't view this today as being political. I view it as and as the Fed has said it will ultimately be our choice to come back into reinstate buybacks at the right time. And again as we said in the previous questions, we'll be monitoring that and when the time is right we'll be back in there filing to re-begin or to begin the buybacks.

Your next question is from the line of Betsy Graseck with Morgan Stanley.

Hi. Good morning. Two quick questions. One on Mexico, I know, a couple years back you invested something around $1 billion in the infrastructure there and I'm wondering is that investment finished, completed and is it now in the run rate or does that represent a level of funding that could then come out and pay for other things as an efficiency opportunity is basically the question.

So, yes, we did announce an investment a number of years ago. We are largely through that if we got this somewhere probably 80% or somewhere on through having deployed that investment. What is left it does serve as a lever for us that we reconsider as we take on these decisions. And just keep in mind those investments were made in building out enhancing our technology and branches and digital capabilities and the like and so I think they have certainly been beneficial. But we are largely through that and what's left is available to us to the toggle as we need to do.

Okay and then as I flip to the US could you give us an update on where you are with the efforts to drive deposit growth in the US? I mean I obviously see that deposit growth was up not only in the US but in International in the quarter. But I'm really kind of honing in here on the consumer side and you had had the announcement around some partnerships with American Airlines and with Google and so I just like to understand where you are in that strategy and do you think that there's anything that you can do to drive up the consumer deposit growth in the back half of this year and into next?

Yes. So we've had very good consumer deposit growth, excuse me, through the quarter. I think that we benefited from the investments that we've made in our digital capabilities, as you've seen the digital deposit sales grow meaningfully as high as $12 billion as we ended the quarter. And we continue to see those benefits play out both in our market and outside of our markets, which, as you know, has been part of our strategy to ensure that we are leveraging the breadth of our customer base in cards that has a broader presence in the U.S. than we do in terms of the Retail Banking footprint. And so, we continue to see those benefits of the strategy play out. Some of that is fueled by some of the things that I've mentioned earlier in terms of the stimulus that's out there and the delay in terms of tax payments, but nonetheless we've been able to capture upside from both new and existing clients, and we expect to continue to do that through the balance of the year. I'd also highlight -- I know your question was around consumer, specifically, but I would also highlight that we're also seeing very good continued traction on the institutional side in our TTS franchise. And that growth in many ways is, as we've seen and worked very closely with our corporate clients to shore up their liquidity positions, whether it was early on where they were drawing all in lines or in the quarter where we partnered with those same clients to access the capital markets, we've been kind of that partner of choice, that flight to quality on both the consumer side in the U.S. and internationally as well as the institutional side.

Yes. I know I figured that institution was extremely strong. I'm just wondering out of that -- it does -- is there more room for the consumer to accelerate and kind of move it forward from here?

And on the consumer, you've seen it in both the U.S., you've seen it in Mexico, you've seen it in Asia. We've had strong consumer growth across all of the regions. But we are pleased with the growth that we're seeing here. Mike, do you want to add something?

Yes. Sure. The other piece Betsy is that, I think very consistent with what we've spoken about in the past of that $12 billion that Mark mentioned, two-thirds, which again is a pretty stable number for us, is coming from outside our branch footprint, which we obviously play -- we pay close attention to, given our branch model.

Two-thirds of the growth in consumer is coming from outside of the branch footprint.

Two-thirds of the digital growth is coming from outside the branch footprint.

Your final question is from the line of Mike Mayo with Wells Fargo Securities.

Hi. Thanks for letting me have my follow-up questions. I just say -- so just to be clear, so you are not guiding for positive operating leverage this year, Mark, because earlier you said expenses flat to down, and then you said flat. And it sounds like your guess, and I know there are a lot of COVID costs that make this a difficult year, but -- so no positive operating leverage this year?

Yes. I'd repeat what I said earlier which revenues are kind of slightly down and expenses flattish, right.

Okay. I guess -- and as far as the equities business you guys didn't participate as much as others. And help me with this logic. I mean you had the corporate draw-downs in March that was replaced with the fixed income markets. And now, maybe we have a reequification with more equity activities, and then one of your competitors showed a lot of pickup in equities. You talked about normalization in capital markets. Do you expect equities to improve? You recognized under performance is a timing thing. How do you think about that?

So I would say, one is, let's kind of break the business into a few different buckets. So one, I would say that our cash trading performance was good. It was strong. And I would say that, again, it's early to see, but we did not do as well in either of Prime or Delta One -- Prime Finance, Delta One derivatives. From equification perspective, if you actually look into our capital markets numbers, you see a very strong number in ECM that our ECM business was up 56% on a year-over-year basis. So in terms of the capital raising aspects of it, we were quite active in most of the headline deals that were done. And so again, cash trading okay. We'll see where things come out, but not as good performance in derivatives, Delta One, Prime Finance and a strong performance in terms of ECM.

And then just a summary question. Through the course of this call, your stock price went down. You're underperforming the BKX. It's just one day. I know stocks move. Don't read too much into that. But there is, I think a feeling that I'm getting that either your -- being more maybe realistic pragmatic about the realities of the world out there, and that goes back to -- you mentioned about the vaccine. You're seeing something specific to your franchise that gives you more caution or maybe, me and others are just interpreting your comments too negatively. I just say that because when you talk about the revenues, the NIM was down 31 basis points. It still goes lower. You talked about the consumer being under pressure, less partner payments, Retail Services, ICG normalizes ahead, TTS gets hurt by lower rates, you won't have positive operating leverage and expenses, the loan losses, you have Mexico with COVID, and we are only somewhere between containment and stabilization and no buybacks for some time to come. So those are all -- that's a summary of some of the negatives that you had from this call. So maybe that was unintentional or maybe that was intentional. So this is kind of a last chance to either put some positives on the other side, like with digital banking or deposit growth or things like that or to say you know what, I'm actually in the camp where this is going to be a long road and maybe you differ from the rest of the world.

Well, I would start off Mike and say that it is not our intention to be negative. I think we're all in this together and I would certainly say that the unknowns outweigh the knowns. And if somebody has the crystal ball, I would love to see it. But I think what we are seeing and what we've described coming through four very challenging months, is the first half of 2020 with revenues up 8%, expenses flat, our ability to absorb significant reserve builds under the new format of CECL, broad scale or wide-ranging engagement from our clients. I think you will continue to see in the numbers as they settle that we continue to take market share, we've continued to build capital, we've continued to build liquidity and feel very good about where we are and how we're going into the second half of the year. The unknowns are the unknowns. We don't know. And that in there, we're seeing resurgences in places where cases had been down, and they've come back up. And the U.S. is uneven in the approaches and the rest of the world has been uneven. And so again, I would say we go in feeling very well positioned against this. But we don't want people leaving the call simply thinking that the world is a great place and it is a V-shape recovery. It's our view that we will see V, we will see U, we will see W. And as an institution, we need to be prepared to deal with all of it. And I think you've seen across our businesses while in certain areas, revenues have been under pressure that we've managed through this very well so far. And I'm really proud of the team in terms of what they've done. But again, I don't think anybody should leave any bank earnings call this quarter simply feeling like the worst is absolutely behind us and it's a rosy path ahead. So, feel good about where we are. The environments are unknown. I think the actions we've taken so far have been spot on. And I think we're well positioned for what the future brings.

This concludes today's second quarter 2020 earnings review. Thank you for your participation. You may now disconnect.