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10/7/20, 9:19 AMCiti’s new boss Jane Fraser faces hard choices | Financial Times
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Jane Fraser will take on the top job at Citi next year © Bloomberg
Robert Armstrong OCTOBER 5 2020
Citigroup is not the strongest of America’s big banks. It is the most interesting.The job for Jane Fraser, its next chief executive, is to make it a bit more dull.
Opinion Inside Business
Citi’s new boss Jane Fraser faces hard
choices
ROBERT ARMSTRONG
Incoming chief’s dilemma is whether to stay the course with
current bank structure or shake things up
10/7/20, 9:19 AMCiti’s new boss Jane Fraser faces hard choices | Financial Times
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What makes Citi so fascinating and Ms Fraser’s task so hard, is the bank’shistory. For much of the 20th century, Citi was the international banking arm ofcorporate America — a sort of private sector US state department. It is a stillgreat global corporate and investment bank, the industry leader in global cashmanagement and foreign exchange. Domestically, it was an innovator in creditcards in the 1960s and ’70s, and it is a major card issuer today.
Those two areas remain Citi’s strengths. Much of the rest of the bank can betraced back to Sandy Weill, the chief executive at the turn of the century, whomerged Citi with the financial conglomerate Travellers and then bought morebusinesses at home and abroad. The 2008 crisis revealed that this “financialsupermarket” structure, far from offering stabilisation, provided conduits alongwhich financial panic could pass.
Repairing the balance sheet required a multiyear yard sale, managed admirablyby Ms Fraser’s predecessor Mike Corbat. The remains of Mr Weill’s empire are:a global investment bank, the former Salomon Brothers; a cut-down USconsumer bank; and solid retail operations in Mexico and Asia.
Minotaur banks, with an investment bank as the head and a retail bank thebody, can work well. JPMorgan Chase and Bank of America are the prime USexamples. But those banks’ retail operations are all domestic, providingefficiencies of scale. Citi, by contrast, is an ungainly chimera: its three retailunits add little to one another or to the global institutional operation. Theforeign retail operations are perceived as risky, too, particularly Mexico. Thedomestic retail unit is undersized, with $173bn in consumer deposits, next to(for example) BofA’s more than $800bn pile, which helps provide it with amuch lower cost of funding than Citi.
The net result of this structure? A return on tangible common equity of 12 percent in 2019, well behind JPMorgan and BofA at 17 and 15 per cent,respectively.
10/7/20, 9:19 AMCiti’s new boss Jane Fraser faces hard choices | Financial Times
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Citi executives defend the global retail operation by talking about sharing bestpractices and the power of the Citi brand. This talk is comprehensivelydebunked by Citi’s own failure, over decades, to wring strong profits from globalconsumer banking.
What is Ms Fraser to do? Her first option — and one not to be scoffed at — is tokeep the current set-up, odd as it is, and run it leaner. The capital base could betighter. The chief financial officer recently said Citi had high-quality equitycapital that was $19bn in excess of its regulatory minimums, almost a quarter ofits market capitalisation. Bringing that down, cautiously, will boost return onequity meaningfully.
The bank could press its advantages on the institutional side, investing more inits cash management business, where rivals such as JPMorgan and GoldmanSachs are coming for Citi’s crown. And it could cut areas where itunderperforms, such as equity sales and trading. Ms Fraser could seek changesin the credit card operation, too, doubling down on growth or running it forcash.
Ms Fraser could also change the managerial and financial reporting structuresof the bank, making them easier to understand and highlighting Citi’s strengths.It is not easy for investors to see how much of Citi’s 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$900m to creditors of the cosmetics group Revlon in August, regulators arereportedly close to censuring the bank. Some stability might be required to getregulators on the side of the new boss.
All that said, this optimisation approach would be an extension of what MrCorbat has done since at least 2017. That has yielded a stock price only a fewdollars higher than when he took the job in 2012, underperforming BofA andJPMorgan by big margins.
10/7/20, 9:19 AMCiti’s new boss Jane Fraser faces hard choices | Financial Times
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Copyright The Financial TimesLimited 2020. All rights reserved.
Should Ms Fraser have a hard look at Mexico and Asia? Mike Mayo, Wells Fargoanalyst and longtime Citigroup gadfly, says he has been arguing for this for 10years. If one or both of those businesses were sold, whole or in parts, some ofthe 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 aresurely worth more to local players than to Citi, ready buyers with regulatoryleeway cannot be simply magicked up. Even if a buyer can be found, Ms Frasermay have to offer a bargain price.
