Citigroup: pressure builds for strategic shift
The bank’s shares trail its two biggest rivals, prompting calls for a change in direction. But can CEO Mike Corbat deliver?
Mike Corbat took over as chief executive of Citigroup just as the dust from the financial crisis was settling. Even then, in 2012, it was clear that the post-crisis landscape in the US would be dominated by three huge, diversified banks, each with big investment banking, commercial and retail operations.
Jpmorgan Chase, Bank of America and Citi had all put the bulk of their crisis-era mergers and restructurings behind them. Markets and the economy were robust. At the beginning of that year, Jpmorgan had a market value of $133bn and Bank of America $59bn. Citi sat between the two, at $83bn.
Since then, the first two banks have seen an increase in value of roughly $225bn each. Citi’s increase? Under $80bn.
Despite a recovery in its share price this year from a brutal 2018, and better performance in key businesses, that yawning gap in long-term share performance is a stark reminder of how much remains to be done at Citigroup.
A dissident group of large investors, analysts and even some inside the bank say that slowand-steady improvement is not enough, and that Mr Corbat and Citi’s board need to be bolder in changing the bank’s strategic direction.
That sentiment has become more urgent since the arrival of Valueact — the activist investor behind shake-ups at large companies including Microsoft — which began building up its stake of more than $2bn in Citi shares last year.
“Is it [the] business model, execution or both? It can’t be the market not understanding all these years,” says one former senior Citi executive of the valuation gap. “Either they are not getting the job done, or the model is broken. It’s one or the other.”
Mr Corbat, 59, a Citi lifer, re
ceives good marks from investors and executives for leading the bank through a period of recovery and stabilisation, despite some missed targets along the way. He has taken out costs, made peace with regulators and returned capital to shareholders.
Citi, unlike its rivals, was still exiting businesses as late as 2016, which the bank’s defenders say helps explains the performance gap. Yet even after epic rounds of post-crisis divestments, Citi remains an unusual collection of businesses, some dominant, others subscale and in need of investment, and many with little strategic connection to one another. It begs the question of whether it is time to sell some, and double down on others.
“There is always a good reason to stay in business X, Y or Z,” says a senior figure at a top 10 Citi investor. But the argument for keeping the current collection “relies on the notion that those businesses can all be run optimally. Citi hasn’t shown that yet.”
Among the businesses seen, by investors, as ripe for restructuring or offloading are the equity sales and trading business, and the Mexican and Asian retail operations.
“There’s a disappointment the company hasn’t got higher ambitions,” says one person involved in the bank’s strategic planning, citing the company’s tendency to prioritise incremental targets over investing in, for example, technology to fuel future growth. Mr Corbat is “not trying to be a hero, he’s just trying not to screw it up”.
The pressure on Mr Corbat to act is intensifying. Even if the bank hits its 2020 target for return on tangible common equity of 13.5 per cent — and investors and analysts increasingly believe it can — that is still far short of Jpmorgan’s 20 per cent and Bofa’s 16 per cent.
Just hitting the 2020 targets is unlikely to satisfy Valueact. Though the fund’s $2.2bn stake is only just over 1 per cent of the bank’s total, it has a reputation for rallying big, institutional shareholders behind its ideas for companies from Adobe to 21st Century Fox. At Microsoft, where Valueact owned less than 1 per cent of the shares, it is credited by many for precipitating the resignation of chief executive Steve Ballmer.
Valueact cannot take a seat on Citi’s board as long as it has a representative on the board of Alliance Data Systems, a Citi competitor but the fund has an “information sharing agreement” with the bank giving it access to its books and board members.
A 2018 Valueact letter to investors praised Citi’s core institutional banking operations and management, but said that in the future “the winners and losers [in banking] will be decided by strategic focus, customer centric innovation and capital allocation, as opposed to product breadth”.
The enthusiasm for a “tight focus on core franchises” is not an obvious fit with Citi today. The question is whether Valueact will eventually demand that Citi more closely follow this model. ValueAct declined to comment.
Citi’s asset mix makes it a “freak of nature”, says Tom Brown, an investor and analyst. This is largely a function of its history.
Founded in New York 200 years ago, state regulations limited the bank’s ability to open branches elsewhere until the 1980s. It focused instead on its big corporate customers and international operations. This helps explain both the bank’s global character and its small US retail footprint, with $180bn in domestic deposits, just over a quarter of the amount at Jpmorgan and Bofa.
The bank’s structure changed radically when it merged with Sandy Weill’s financial conglomerate Travellers in 1998. This brought together investment banking (Salomon Brothers, which Travellers had bought a year earlier and where Mr Corbat had his start), wealth management (Smith Barney) and insurance (Travellers). It also brought an attitude one Citi alumnus describes not at all admiringly: “They were cowboy entrepreneurs.”