Class of 2019: Citi

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The global bank has refreshed its senior management but needs to start demonstrating its platform can deliver best-in-class returns.

Suffering by comparison
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Citigroup is doing quite well. Its last report, for the first nine months of 2019, showed it to have grown overall revenues by a fraction of a percentage point compared with the first three quarters of 2018 and cut expenses by about 1%, with substantial share buybacks allowing it to show earnings per share growth of 17%. 

It has yet to report for the full year 2019, but in the run up to Christmas looked to be on track to hit its target of a 12% return on tangible common equity, albeit on a common equity tier-1 ratio that has edged down to 11.6%.

The problem for Citi is that its competitors are doing better. 

JPMorgan reported a ROTCE of 18% at the end of the third quarter of 2019 on a CET1 ratio of 12.3%. Bank of America showed a return on tangible common equity of 15.6% on a CET1 ratio similar to that of Citi.

Chief executive Mike Corbat acknowledges analysts concerns: “I think we’ve got to continue to show progress and we’ve got to continue to narrow that gap.” 

But Citi no longer sounds so confident of meeting its previous 13.5% ROTCE target for this year, given that the outlook is darkening for it and all banks. 

It can no longer expect to boost interest margins from rising rates at home, while the global economic outlook is not promising. Credit costs were already edging up last year, by 9% during the first nine months of 2019, from $5.6 billion in the first nine months of 2018 to $6.2 billion last year. And cost of credit is likely to keep rising.

Citi has managed to keep growing revenues faster than costs, but those jaws seem to be closing. Meanwhile it must continue to invest in the technology supporting its leading franchises, such as transaction and treasury services, as well as consumer banking.

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Mike Corbat

Tough questions are crowding in. Citi announced the end of its post-crisis restructuring, begun by Vikram Pandit and ably completed by Corbat, two years ago. If it continues to show uncompetitive returns, investors are entitled to ask if it has narrowed its focus down to the wrong business model and now requires new management to take the bank forward from a sturdier foundation.

When Euromoney met Corbat in the middle of 2019, he had already spent the previous nine months coping with a string of departures among his direct reports, most, although not all, due to retirement. 

Then in October, Stephen Bird, the highly regarded chief executive of global consumer banking, told Corbat that he had decided to leave Citi to pursue an opportunity outside the firm. This was one of his first important appointments to jump ship. 

Corbat acknowledges that: “In 2015, he [Bird] began setting a new path for global consumer banking. He established a digital-heavy, footprint-light strategy in the US, our largest consumer market, while protecting and enhancing our competitive positions in Mexico and Asia.”

Corbat neatly took advantage of the news by promoting former McKinsey partner Jane Fraser to head global consumer banking and take on the role of president of Citi, making her a clear candidate to be the first female chief executive of one of the US’s biggest banks.

Corbat made clear to Euromoney how big a task managing the careers of senior staff is.

“I spend much of the spring each year looking at our human talent,” he said. “Where are we moving our people; who are we designating our high potentials; who are our ready-nows and our likely-to-be-readies in two or three years for senior roles? And we also ask: ‘Who are the blockers in the organization who may have a strong bench beneath them ready to step up and that might leave if we don’t promote them?’” 

As to the business model, it remains to be seen whether or not the liberal application of trade tariffs by president Donald Trump and persistent trade tensions will be a drag on earnings at the most international of the leading US banks, or an opportunity to show its worth.

Corbat tells analysts that tariffs and trade tensions have certainly already had an effect. 

“It’s impacted in two ways,” he says. “One, from a volume perspective, I think we see less trade and movement today. And I think the second way is that that we’ve also seen the rerouting of trade. And the example we give is: today China is not necessarily consuming less soy, it’s just getting its soy from different places in the world. And so as to our ability as a global bank to move with our clients on both sides, in terms of the importer and the exporter, and to help them rethink what those trade routes and what the supply chains look like, I think we’ve been very effective.”