By Telis Demos
It is time for Michael Corbat to change the narrative at
Citigroup Inc.
Since taking the bank's helm in October 2012, Mr. Corbat's
Citigroup has played defense. It has scaled back businesses, shrunk
the firm's global retail-banking footprint and wound down
crisis-era assets that dragged on returns.
For shareholders, it has been a slog. Citigroup's total return
has underperformed those of its biggest rivals, save for Wells
Fargo & Co., since Mr. Corbat arrived on the scene. The bank
has yet to show it can consistently generate returns that exceed
its cost of capital; in the first quarter the bank's return on
common equity was a tepid 7.4%. And the stock trades at just 85% of
book value, the lowest valuation of the big U.S. banks.
Now, investors, analysts and even top executives within the bank
acknowledge it is time for Mr. Corbat, a former Harvard football
star, to shift to offense. That means boosting growth and
profitability in areas such as credit cards, Wall Street stock
trading and retail banking.
"What investors want now is to understand what's next in the
story," said Conor Muldoon, fundamental portfolio manager at
Causeway Capital Management LLC. "What can you do to make the
valuation better over time?"
Citigroup is among the largest holdings in the firm's Global
Value fund.
The first test comes this week and next with the Federal
Reserve's annual bank stress tests. A key indicator will be the
bank's so-called payout ratio under the tests, a measure of whether
it is given a green light to return more capital to shareholders
than it is expected to earn in coming quarters.
Citigroup shareholders want to see the payout ratio top 100%,
meaning the bank would begin drawing down its capital pile rather
than continue adding to it. If it can't do this, gains in its
business won't accrue to shareholders.
Assuming that won't be the case, investors want Mr. Corbat to
boost returns over the long term by generating more profit on
lagging businesses, notably the bank's consumer-lending and
retail-banking arm.
In anticipation of this, Mr. Corbat has been honing the bank's
focus, a notable change for a firm that was once a sprawling global
behemoth. He and his veteran management team have done things like
exit nearly two dozen retail markets globally and slash the number
of corporate clients to 14,000 from 30,000.
The idea is to emphasize areas with the strongest growth
prospects, particularly ones in which Citigroup has a dominant
share with multinational consumers and corporations. In this vein,
the bank has already said it would invest a further $1 billion to
upgrade its Mexican retail bank.
The biggest recent bet, though, is on credit cards, particularly
for U.S. shoppers. Over the past two years, Citigroup has taken on
more than $10 billion in card loans for Costco Wholesale Corp., and
made other investments, such as in Citigroup's proprietary
reward-card offerings.
As a result, Citigroup has the biggest global card lending
portfolio of any U.S. bank. Card lending now makes up 24% of
Citigroup's total loans, nearly double that of rivals such as Bank
of America Corp. and J.P. Morgan Chase & Co., according to
analysts at Sanford Bernstein.
Underscoring the importance of cards and the Costco business,
which the bank took over from American Express Corp., Mr. Corbat
personally made surprise trips in December to call centers in
Florence, Ky., Jacksonville, Fla., and Tucson, Ariz., according to
people familiar with the trips.
A key point was to emphasize how critical customer service will
be to get new Costco-card customers, who in many cases were offered
introductory rates that would expire, to become loyal users of
their cards.
Those rates and other investment in cards were a drag on the
bank's retail performance of late. While corporate and investment
banking was at or near return targets last year, consumer banking
generated a roughly 13% return against a 20% target, Mr. Corbat
said recently.
Citigroup is counting on the profitability of the card business
to pick up meaningfully in the second half of this year as the
initial investment period winds down.
Mr. Corbat and other executives are expected to provide greater
detail for these plans when the bank in July holds an investor day
-- its first in nearly a decade. At this, he also will have to
fight the view among some investors and analysts that Citigroup
lacks a unifying strategy.
The bank's consumer and corporate businesses are like "two boats
floating in the ocean, not tied to each other," said KBW analyst
Brian Kleinhanzl. In the past, he has called for the bank's
breakup, though Mr. Kleinhanzl says he is now waiting to see how
Citigroup fares amid rising interest rates.
The investor day will give Mr. Corbat "the chance to lay out the
new strategy," he added.
Write to Telis Demos at telis.demos@wsj.com
(END) Dow Jones Newswires
June 19, 2017 16:06 ET (20:06 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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