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 $133 billion and Bank of America $59b. Citi sat between the two, at $83b.
Since then, the first two banks have seen an increase in value of roughly $225b each. Citi's increase? Under $80b.
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 slow-and-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 $2b 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, receives 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 $180b 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."
The resulting bank was big but not unified. "They set up silos by product, they set them up by region" says Mr Brown. "They set up this global franchise with no synergies. In fact, the silos couldn't talk to each other."
"We had $600b in deposits and a $3 trillion balance sheet. That was a bull market strategy," says another former senior executive. There was an "enormous concentration" in real estate, he adds.
The result was decimation during the crisis, followed by mass spin-offs of everything from subprime lenders to retail operations in the emerging world. Much of the Salomon investment bank remains, as do retail operations in Asia and the US; Banamex, the third-biggest Mexican retail bank; a global credit card business; and the international commercial bank.
Mr Corbat, pressed on the performance gap with peers, points to a widening premium for US assets, which helps the bank's rivals; pressed on the group's low returns, he talks about excess capital and the need to increase efficiency.
He is not alone in this assessment.
"The return on equity problem is in the denominator rather than the numerator," says Eric Hagemann of Pzena Investment Management, which holds a large Citi stake. He argues that profits are strong and the bank can still return between 15 and 20 per cent of its total capital to shareholders. Once it does, its returns will look much more competitive. Several other major shareholders echo the sentiment.
A Citi spokesperson says that "we regularly review our strategy and mix of businesses with an eye towards improving returns", noting that the bank's return on tangible common equity had risen from under 8 per cent to nearly 12 per cent since 2012.
Citigroup's greatest strength is its industry-leading treasury and trade solutions business, which helps global companies manage their cash. It benefits from low earnings volatility and almost no client turnover, high margins, and growth faster than global output.
Cross-border payments, working capital management, rate-hedging and the like do not attract bankers in master-of-the-universe mode. But the value of such steady, low-capital business in the post-crisis banking landscape is underlined by both ValueAct's enthusiasm for the businessand the fact that Goldman Sachs — which once revelled in high-voltage markets and advisory businesses — has made building a cash management operation a priority.
The deep relationships with global corporate customers in the treasury and trade solutions business are the foundation for much of Citi's institutional banking business: rate-hedging, foreign exchange trading, commercial banking and fixed income.
The biggest threat to this business is technological: witness the revolution in retail payments that fintechs have triggered. Good reason, observers say, to choose a strategy that ensures that treasury and trade solutions receive as much investment as it needs to stay ahead.
So, should Citi stay in the businesses where its core strengths provide no market advantage? Can it ever earn a good return, for example, in equity sales and trading — a scale business where it is persistently just outside the top tier group of four firms? Do such operations take focus away from the core businesses — and might they be more valuable to another owner?
Citi's strongest consumer business is credit cards: it is the largest card issuer globally, measured by loans, and second-biggest in the US market. Yet the business has underperformed expectations, as the US card industry fell into a rewards war, but it is again building momentum: profit grew 8 per cent to $1.7bn in the first half of this year.
Elsewhere, there are questions over all three of Citi's other consumer businesses in Asia, Mexico, and the US.
In fast-growing Asia — where the bank's key markets include Singapore, Hong Kong, India and parts of south-east Asia — revenue has been broadly flat for five years. Many suggest that Citi, with its recent focus on costs and efficiency, has neglected the region. "There is no reason for that lack of growth but pure under-investment," say one former executive.
Another, who worked in the region, describes Citi as "reluctant to invest ahead of the curve" in Asia. Should Citi decide to sell, there would likely be buyers willing to pay a premium for its Asia business, as a whole or in parts, he adds.
Mexico is similar. Other big banks in the country trade at about two times their net asset value, twice what Citi as a whole does. Selling or spinning off the business could create value for shareholders.
The US business is the hardest puzzle of all. The current focus is on converting card customers into account holders — a strategy that makes sense for Citi in that it does not rely on having a large branch network. Perhaps in time retail banking will become more digital, but for now, Citi is being outpaced by JPMorgan and BofA, with their bigger branch networks.
Some investors think Citi either needs to ramp up its ambitions for the US retail business — via an acquisition — or embrace a flinty realism about it, ripping costs out more aggressively and running the retail network for cash rather than growth. Or perhaps even selling it altogether.
The support for such a bold strategy on Citi's board may be limited. John Dugan, the new chairman, is a career lawyer and bank regulator — the profile of a man focused on avoiding risk rather than taking big strategic decisions. Mr Corbat is paid almost $25m a year, two-thirds of it deferred over three to four years, not long enough to see the fruit of any big changes. He owns $42m in Citi shares, less than two years' pay, according to the company's proxy statement.
"The CEO makes a million and a half dollars a month, and will continue to make a million and a half by maintaining the status quo," says Wells Fargo analyst Mike Mayo, a longtime critic of the bank. "In the case of Citigroup, better is not good enough, when you are worst in class and it's not a close call."
A more optimistic view is that next year will be a watershed. If the bank misses the goals it set for 2020, it will have to accept that change is needed and if it meets them, it might gain the confidence to take the next step in its evolution. In either case, the gap between Citi and its rivals will remain — and those rivals will not be standing still.
Written by: Robert Armstrong and Laura Noonan
© Financial Times
