JPMorgan Chase – 3 Ways Jane Fraser Can Fix Citigroup—and Why the Stock Is a Buy
is broken—but the U.S. banking giant finally might have found the woman to fix it.
When Jane Fraser becomes CEO of Citigroup on March 1, she will find herself simultaneously in the most and least enviable position in finance. Fraser, 53, will be the first woman to lead a U.S.-based big bank, shattering Wall Street’s glass ceiling. But she’ll also be taking over a bank that accidentally wired $900 million to hedge funds, among other missteps, and now needs to win over regulators and convince investors that it isn’t beyond repair.
Citigroup stock (ticker: C), at a recent $65.88, is up 28% since September, when Fraser was named as the successor to CEO Michael Corbat. But don’t take that as a vote of confidence. While the bank’s shares have outpaced the S&P 500 index’s 12% rise during the same period, Citi has lagged behind the 48% surge in the
KBW Bank Index.
Still, that makes Citi a bank with room to run.
It’s obviously a tech and infrastructure overhaul.
Fraser has a big job ahead. Since the financial crisis of 2008, Citigroup has been dogged by regulators for weaknesses in its internal compliance and control infrastructure. In 2012 and 2013, it was slapped with consent orders by the Office of the Comptroller of the Currency and the Federal Reserve for violations of the Bank Secrecy Act and weaknesses in anti-money-laundering compliance. Other regulatory actions followed, culminating in another consent order and a $400 million fine in October 2020 for “deficiencies in enterprise-wide risk management, compliance risk management, data governance, and internal controls”—deficiencies that may have cost Corbat his job.
The bank’s most recent setback occurred in February, when a federal judge ruled that Revlon creditors who hadn’t returned their piece of the $900 million that Citigroup accidentally wired them could keep the money.
Still, it’s not a bad time to be taking the helm of America’s fourth-largest bank by assets. The U.S. economy continues to recover from last year’s coronavirus-induced recession. Longer-term bond yields are rising, even as the Federal Reserve promises to keep its benchmark interest rates pinned near 0%. This is a boon for banks, which borrow short and lend long. And with Citigroup stock trading at just 0.9 times tangible book value—lower, even, than Wells Fargo’s (WFC) 1.2 times—the market doesn’t expect much from the company. Fraser now has a chance to prove investors wrong.
“I’d like to see her come out of the gates strong,” says Mike Mayo, a analyst at Wells Fargo Securities.
Analysts generally want to see Citigroup follow the path of other large banks, such as
(JPM) and Bank of America ((BA)C), both of which have integrated their consumer and commercial businesses profitably. JPMorgan, with a return on equity of 10.7% and a “fortress-like” balance sheet, has continued lending to clients throughout economic downturns. Bank of America, which has an ROE of 6.7%, has spent the years since the financial crisis gaining a larger share of its customers’ wallets. As a result, JPMorgan trades at 2.3 times tangible book, and (BofA), at 1.7 times tangible book.
Citigroup’s ROE is just 5.9%. “Usually in these situations, you get bad news before you get good news,” says Matt O’Connor, an analyst at Deutsche Bank. “If it was an easy fix, they would have fixed it by now.”
But there are steps that Fraser, a 17-year veteran of Citigroup, can take. Corbat, while generally respected on Wall Street, was criticized for not acting swiftly enough to fix the bank’s internal controls, and Fraser’s first job will be to convince investors that she’s doing what he couldn’t. But improvements will be expensive.
Citigroup already highlighted more than $1 billion of spending in 2020 tied to improving its infrastructure. In recent presentations, management said it expects expenses across the franchise to increase by 2% to 3% in 2021. Analysts see higher expenses next year, as well, and that means profits may be lower than Wall Street anticipates. “It’s a tech and infrastructure overhaul,” says David Konrad, managing director at D.A. Davidson.
Those expenses should ultimately pay for themselves, according to Citigroup Chief Financial Officer Mark Mason, who spoke at a conference this past Thursday. “There are also efficiencies that are tied to [expenses],” he said. “And those efficiencies mean that there’s less reconciliation work to do, for example, and you require less manual touch points and people doing that type of work. And so there are less errors and the like that have to be worked through.”
Fraser, though, can’t take her focus off improving what Citigroup already does well. One area that Citigroup could dominate is payments. Together, its card business and treasury and trade solutions group, which provides cash-management services for businesses, brought in $28 billion in 2020, or 37% of the bank’s revenue. As businesses and households continue to demand things like instant payments, Citigroup is positioned to see these segments become an even bigger contributor. “You have the building blocks for a dominant payment-processing company,” Mayo says.
“Citi has made significant and consistent progress over the last several years,” the company said in an email to Barron’s. “We completed a successful restructuring that returned Citi’s focus to the basics of banking. We improved the quality and consistency of earnings and went from returning hardly any capital in 2012 to returning nearly $80 billion in capital to our shareholders over the last six years, which reduced our share count by 30%. A number of factors make this the right time for Citi to refresh our strategy and drive sustainable earnings growth that closes the returns gap with our peers.”
Citigroup declined to make Fraser available for an interview.
Citigroup still has too many businesses that can’t compete efficiently. For too long, the company has tried to be everything to all people, and that needs to stop. That means trimming the number of retail branches it operates globally, now around 2,300. Recent reports suggest Citi has been exploring the sale of some businesses in Asia. “Limited scale in several of C’s consumer markets has inspired lower returns,” writes BMO Capital Markets analyst James Fotheringham. “If confirmed, we would applaud such a strategic initiative.”
The good news for investors is that getting smaller could unlock a lot of value. Wells Fargo’s Mayo argues that Citi’s parts are worth more than the whole. Its U.S. consumer bank, for instance, could trade at 1.6 times tangible book value if it were valued like a stand-alone regional bank, while its Latin American and Asian consumer units could be worth 1.4 and 1.3 times, respectively, based on regional peers. Its investment bank would trade at 1.7 times book if it were valued similarly
Group (GS), while its transaction-services unit could trade at 1.7 times. All told, the company would be worth 1.5 times tangible book—or $111 a share—“reflecting significant hidden value and trapped capital,” Mayo explains.
No one expects Citi to trade that high soon. Mayo’s price target, based on six different valuation methodologies, is $74, up 12% from Friday’s close.
We’d call that a good start.
Write to Carleton English at [email protected]