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Comfortable with capital ratios, Citigroup's balance sheet is 'open for business'

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Comfortable with capital ratios, Citigroup's balance sheet is 'open for business'

executives saidJuly 21 that the bank is comfortably within the new set of banking regulations,enabling a full range of product offerings to clients. Meanwhile, a Januaryprediction that the bank would drop down to a 3% surcharge appears in doubtbased on a recent disclosure of its systemic risk score expectations.

Speakingduring a call with fixed-income investors, management said the bank's bindingconstraint remained its common equity Tier 1 ratio under the Federal Reserve'sComprehensive Capital Analysis and Review. In a presentation, the companystated its common equity Tier 1 ratio was 12.5% and its liquidity coverageratio was 121%, both figures well within range of compliance. The CCAR exercisestresses bank portfolios, including the capital ratios.

"Weare mindful of the various constraints, whether that be CCAR or LCR or anyother R that's out there. But the most important thing for us is to make surethat we have the capacity and the capability to serve the needs of our clients,and that is what we're focused on. And we have a balance sheet that is open forbusiness," said CFO John Gerspach.

Regulatorycompliance dominated much of the conference call. Another key regulatoryrequirement for bank holding companies comes from Total Loss Absorbing Capacity.The rule requires banks to hold long-term debt that would be wiped out beforesenior debt as one of the defenses against another government bailout for atoo-big-to-fail financial institution. An investor asked Citigroup managementif there was any consideration of changing the covenants on TLAC-eligible debt.

"Frankly,until we see a final rule, we're sort of reactive at this point," saidJames von Moltke, treasurer for the bank.

Andmanagement confirmed that the bank's surcharge for systemic risk footprintwould be close. In January, Citigroup executives said the bank's systemic riskscore was low enough to drop down to the 3% surcharge bucket from 3.5%; thesurcharge is added to select capital ratio requirements. However, managementlater disclosed that they expect a score of 630 basis points, which is right onthe edge of the 3.5% bucket. The bank would need a score of 629 basis points toreach the 3% bucket, but the Federal Reserve's final calculations will be theultimate measure.

Also,an investor asked where the bank saw returns under a normalized environment.Executives said they would expect a return on tangible common equity of 14% ina "more normal" environment, defined as interest rates 200 basispoints higher than current levels and U.S. gross domestic product growth atroughly 2.5% to 3% per year.