Will Citigroup finally wakeup from its long sleep?

Banking, like life, is experienced forward but only understood backwards. 25 years ago, Sandy Weill was the king of Wall Street when he engineered the mergers of the insurer Travelers, the 200 year old global commercial bank Citicorp, the bond trader Solomon Brothers and the brokerage firm Smith Barney to create the world's biggest financial supermarket. The bank's tagline used to be "Citi never sleeps". Sadly, neither did its depositors or shareholders for the next two decades as this global bank almost failed in 2008 and only survived because the Bush White House sanctioned an Uncle Sam bailout. Citi's shareholders lost more than 95% of their capital and the bank only avoided Chapter 11 after $65 billion in losses because the Federal Reserve deemed it too big to fail and its top managers too big to jail. Not that the next decade was much better for Citi. The bank's risk control system was so awful that it once wired $500 million by mistake to the near bankrupt Revlon.

The series of boardroom palace coups led to the firing of CEO's Vikram Pandit and Mike Corbat amid the sales of dozens of businesses, the loss of 500,000 jobs and $500 billion in assets so that the Citigroup was no longer America's preeminent money center bank. Citi even failed the Federal Reserve stress test for systemic banks, was publicly rebuked for its risk control deficiencies and complex management structure. Like HSBC, the world's ex-local bank, Citi was too big to manage and could not even manage to create value for shareholders by earning its cost of capital. It is no wonder that Citi trades at $50 as I write, well below its tangible book value of at least $65 a share. Apart from Credit Suisse and Deutsche Bank, banking zombies, this is the Cinderella of money center banking.

Citi's latest CEO, Jane Fraser promises a strategic turnaround, as did her two predecessors. The song remains the same but who is listening? Well, Warren Buffet for one as Berkshire has amassed a $3 billion stake in the bank even though he was burnt badly as the chairman of Solly in the 1990's. The oracle of Omaha is the maestro of deep value and this defines Citi if Ms. Fraser gets strategy and execution right.

Fraser has ditched the very idea of Sandy Weill’s global financial supermarket. Citi has exited 14 consumer banking markets in Asia and wants to sell its Mexican subsidiary Banamex. Citi has exited 14 high risk retail banking markets including India, Pakistan and China. Fraser intends to invest the $11 billion in capital freed up by the exit from Asian consumer banking to invest in its highly profitable treasury and trade solutions and wealth management businesses. Banamex should free up another 6 to $8 billion dollars. Unlike her disgraced predecessor Chuck Prince, Fraser no longer wants to become Wall Street’s top investment bank and high risk trading house.

Despite the higher dollar interest rates, Citi’s fourth quarter profits fell by 22% as its investment banking profits plunged. Even though its corporate FX and interest rate derivatives business was a consistent money maker. Fraser calls Citi’s institutional services group (ISG) the “crown jewel” of the bank. I agree since ISG has relationships with the world’s top multinationals in 90 countries and provides a vast spectrum of syndicated lending, trade finance, capital markets, treasury and custody services.

It is too early for investors to get their pulse racing on Citi’s turnaround. After all, return on tangible equity was only 5.8% despite a huge increase in net interest margin as the Fed funds rate rose from 0.25% in March 2022 to 4.75% now. The full year ROE is much better at 8.9% well below Fraser’s 11 to 12% ROTE target. Citi’s Basel Tier One capital ratio is 13% and will rise even more as Banamex is sold and Fraser ends the bank’s 100 year old love affair with emerging markets. The grapevine argues that Citi will exit Poland and it has exited Russia after the Kremlin’s Ukraine invasion but still has a $7.5 billion exposure to Putinistan.

It will take a long time for Citi to remotely trade at a premium to tangible book value like its peers J.P. Morgan and Bank of America. Yet hopefully Jase Fraser gets it right and a Citi investor can finally sleep!