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Citigroup talks recession fears, exposure to Sears, PG&E

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Citigroup talks recession fears, exposure to Sears, PG&E

Speaking on the overall direction of the global economy during a Jan. 14 earnings call, Citigroup Inc. CEO Michael Corbat said fundamentals appeared strong considering tight labor markets, wage growth and strong consumption. However, he said markets appear concerned about Federal Reserve rate hikes and balance sheet management as well as ongoing trade disputes.

"Right now, we see the biggest risk in the global economy is one of talking ourselves into the next recession as opposed to the underlying fundamentals taking us there," Corbat said.

Executives on the call also addressed exposures to specific risks identified by analysts, such as bankruptcies from Sears and Pacific Gas & Electric. The bank would expect an impact of approximately $200 million from a possible liquidation of retailer Sears, said Mark Mason, the bank's incoming CFO. That figure is down from $300 million — provided in the prior-quarter earnings call due to "an additional quarter of intangible amortization as well as the refinement to our regional estimate," Mason said.

Mason said the bank recorded a small reserve related to Sears in the 2018 fourth quarter. He also noted that much of the impact from a liquidation would have been recorded as ongoing amortization expense by year-end, so the incremental impact of liquidation would be closer to $100 million.

Later in the call, an analyst asked about the bank's exposure to PG&E, a utility company that plans to file for bankruptcy due to costs from recent California fires. John Gerspach, the bank's outgoing CFO, said the company would not comment on any specific client while suggesting that the bankruptcy would also have a small impact on operations considering more than 80% of the bank's book is investment-grade.

"Any exposure that we would have to any type of company that you're reading about is certainly going to be manageable," Gerspach said.

Management also addressed the bank's exposure to consolidated loan obligations, or CLOs, financial instruments that have attracted concerns from regulators in recent quarters. Mason said the bank has exposure to CLOs in both its markets business and as part of its investment portfolio.

In the markets business, the bank's warehouse lending for CLOs is subject to both a volume cap and structural limitations implemented after the 2008 financial crisis. Further, Mason said the bank's primary syndicate no longer retains residual exposure after issuing the CLO. On the investment portfolio, he said the bank has exposure to about 75 unique CLOs, limited to senior tranche investments that are AAA-rated.

"Net-net, we feel pretty good about our exposure. We are not heavy into leveraged lending," Mason said.