March1,2021 BARRON’S 13
the S&P 500 index’s 12% rise during
the same period, Citi has lagged be-
hind the 48% surge in the KBW Bank
Index. Still, that makes Citi a bank
with room to run.
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 Comptrol-
ler 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, culminat-
ing in another consent order and a
$400 million fine in October 2020 for
“deficiencies in enterprise-wide risk
management, compliance risk man-
agement, data governance, and inter-
nal 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 $
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 trad-
ing at just 0.9 times tangible book
value—lower, even, thanWells
Fargo’s (WFC) 1.2 times—the market
doesn’t expect much from the com-
pany. 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 ana-
lyst at Wells Fargo Securities.
Analysts generally want to see
Citigroup follow the path of other
large banks, such asJPMorgan
Chase(JPM) andBank of America
(BAC), both of which have integrated
their consumer and commercial busi-
nesses profitably. JPMorgan, with a
return on equity of 10.7% and a “for-
tress-like” balance sheet, has contin-
ued lending to clients throughout eco-
nomic 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%. “Usu-
ally 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 act-
ing 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 improve-
ments will be expensive.
Citigroup already highlighted more
than $1 billion of spending in 2020 tied
to improving its infrastructure. In re-
cent presentations, management said it
expects expenses across the franchise
to increase by 2% to 3% in 2021. Ana-
lysts 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.
T
hose expenses should ulti-
mately pay for themselves, ac-
cording to Citigroup Chief Fi-
nancial 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 busi-
nesses, brought in $28 billion in 2020,
or 37% of the bank’s revenue. As busi-
nesses and households continue to
demand things like instant payments,
Citigroup is positioned to seethese
segments become an even bigger con-
tributor. “You have the building blocks
for a dominant payment-processing
company,” Mayo says.
“Citi has made significant and con-
sistent progress over the last several
years,” the company said in an email
toBarron’s. “We completed a success-
ful restructuring that returned Citi’s
focus to the basics of banking. We
improved the quality and consistency
of earnings and went from returning
Memo to Jane Fraser:
Here’s How to Fix Citi
If the incoming CEO gets it right, Citigroup’s stock eventually could climb
much higher, earning a valuation similar to its stronger big-bank peers.
“It’s obviously
atechand
infrastruc-
ture
overhaul,”
says David
Konrad,
managing
director
at D.A.
Davidson,
of Citi’s
planned
improve-
ments.
C
itigroupis broken—but
the U.S. banking giant
finally might have found
the woman to fix it.
When Jane Fraser be-
comes CEO of Citigroup on
March 1, she will find her-
self simultaneously in the most and
least enviable position in finance. Fra-
ser, 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 re-
cent $65.88, is up 28% since Septem-
ber, 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
By CARLETON ENGLISH
BankingonaTurnaround
Citigroup stock has lagged behind its
larger peers. A new CEO has a
chance to make up lost ground.
Source: FactSet
March
2020
0
20%
2021
Citigroup
JPMorgan Chase
BankofAmerica
Illustration by Mike Ellis