Citigroup is not the strongest of americas big banks. it is the most interesting. the job for jane fraser, its next chief executive, is to make it a bit more dull.
What makes citi so fascinating and ms frasers task so hard, is the banks history. for much of the 20th century, citi was the international banking arm of corporate america a sort of private sector us state department. it is a still great global corporate and investment bank, the industry leader in global cash management and foreign exchange. domestically, it was an innovator in credit cards in the 1960s and 70s, and it is a major card issuer today.
Those two areas remain citis strengths. much of the rest of the bank can be traced back to sandy weill, the chief executive at the turn of the century, who merged citi with the financial conglomerate travellers and then bought more businesses at home and abroad. the 2008 crisis revealed that this financial supermarket structure, far from offering stabilisation, provided conduits along which financial panic could pass.
Repairing the balance sheet required a multiyear yard sale, managed admirably by ms frasers predecessor mike corbat. the remains of mr weills empire are: a global investment bank, the former salomon brothers; a cut-down us consumer bank; and solid retail operations in mexico and asia.
Minotaur banks, with an investment bank as the head and a retail bank the body, can work well. jpmorgan chase and bank of america are the prime us examples. but those banks retail operations are all domestic, providing efficiencies of scale. citi, by contrast, is an ungainly chimera: its three retail units add little to one another or to the global institutional operation. the foreign retail operations are perceived as risky, too, particularly mexico. the domestic retail unit is undersized, with $173bn in consumer deposits, next to (for example) bofas more than $800bn pile, which helps provide it with a much lower cost of funding than citi.
The net result of this structure? a return on tangible common equity of 12 per cent in 2019, well behind jpmorgan and bofa at 17 and 15 per cent, respectively.
Citi executives defend the global retail operation by talking about sharing best practices and the power of the citi brand. this talk is comprehensively debunked by citis own failure, over decades, to wring strong profits from global consumer banking.
What is ms fraser to do?her first option and one not to be scoffed at is to keep the current set-up, odd as it is, and run it leaner. the capital base could be tighter. the chief financial officer recently said citi had high-quality equity capital that was $19bn in excess of its regulatory minimums, almost a quarter of its market capitalisation. bringing that down, cautiously, will boost return on equity meaningfully.
The bank could press its advantages on the institutional side, investing more in its cash management business, where rivals such as jpmorgan and goldman sachs are coming for citis crown. and it could cut areas where it underperforms, such as equity sales and trading. ms fraser could seek changes in the credit card operation, too, doubling down on growth or running it for cash.
Ms fraser could also change the managerial and financial reporting structures of the bank, making them easier to understand and highlighting citis strengths. it is not easy for investors to see how much of citis institutional business is fee-driven and non-cyclical, and therefore worthy of a high valuation.
There is another reason to stay the course. after citi accidentally wired $900mto creditors of the cosmetics group revlon in august, regulators are reportedly close to censuring the bank. some stability might be required to get regulators on the side of the new boss.
All that said, this optimisation approach would be an extension of what mr corbat has done since at least 2017. that has yielded a stock price only a few dollars higher than when he took the job in 2012, underperforming bofa and jpmorgan by big margins.
Should ms fraser have a hard look at mexico and asia? mike mayo, wells fargo analyst and longtime citigroup gadfly, says he has been arguing for this for 10 years. if one or both of those businesses were sold, whole or in parts, some of the proceeds could be poured into bulking up the us retail bank.
But getting this done will take luck as well as skill. while the two businesses are surely worth more to local players than to citi, ready buyers with regulatory leeway cannot be simply magicked up. even if a buyer can be found, ms fraser may have to offer a bargain price.