Citigroup is in trouble.
After the company's collapse during the 2008
recession, Citi stock has continuously struggled.
Shares of the company saw more than a 30% drop over
the last five years.
The firm has faced many ups and downs over the
course of my career here, and it's clear we have
challenges that we need to urgently address right
now.
Citigroup has had worst in class efficiency, returns
and stock market valuation, and that's led
to underperformance over almost any timeframe.
They haven't been profitable enough.
It's a chronic laggard in profitability.
It's not that it's teetering on the edge.
Once the largest bank in America, Citigroup is now
the third biggest in the U.S., with over $1.7
trillion in consolidated assets.
Globally, it is the 11th largest, with just over
$2.4 trillion in total assets.
Citigroup, I believe, is finally turning a page.
The first step to improve is to recognize that you
have a problem in the first place.
We know there is a clear cut case for change at
Citi. I hope you've seen we're acting on it,
positioning our firm's long term future and
tackling the issues that have held us back head on.
The challenge now will be executing and changing
that culture to what she wants to be more real time
and more aware and more intense and more about
winning.
So what kind of changes is Citi making, and can it
return to its former glory?
In April 2021, Jane Fraser, the CEO of
Citigroup, announced a bold shift in the
company's strategy, exiting 13 retail markets
outside of the United States.
Asia and the EMEA region accounted for more than a
third of Citi's net revenue in the year prior.
This global vision that Citi retail banking was an
aspirational bank, that it was kind of like the
Nike swoosh or the Mercedes star, that it was
a branded global good.
And every CEO had that vision.
And maybe in the '60s it was true.
Under Jane Fraser, Citi is finally unwinding the
failed 50-year experiment of serving consumers all
around the world. The old banking adage has played
out. Wholesale banking is global, retail banking is
local.
In 2022 alone, Citigroup completed sales of its
business in five countries and added Mexico
to the list of countries it's departing.
What's been obvious to analysts for a long time
is that Citi had become too unwieldy, too big to
manage, and that ultimately a lot of the
disparate parts overseas, they didn't really have
very many synergies between them.
Four executives I spoke to actually referred to these
businesses as melting ice cubes.
In other words, that over time with disinvestment,
with perhaps not the greatest management focus
from HQ, that ultimately their value was decreasing
versus some of the sharper, more motivated,
locally owned competitors in many of these overseas
markets.
Citi instead announced its plans to divert its
resources and focus to double down on wealth
management. It's a tactical move that several
other major banks have adopted in recent years.
I always like to say banking is all about
money. And guess who's got money?
Rich people got money.
Everybody wants to bank affluent people.
You have a financial adviser usually getting
paid on an annual basis of 1% to 2% of the assets
under management. And to that very basic model, you
could add fees for margin loans or jumbo mortgages
and things like that. But the reason why Wall Street
and investors tend to love this business is that
it gives off an annuity-like stream of
earnings, no matter what's going on in the
merger markets, what's going on in trading.
It offers high returns.
It creates growth opportunities in areas
that are in the early stages of wealth
generation like Asia and the Middle East, and it
comes with less risk of big mishaps.
So the regulatory treatment is better.
But at its core, Citi's new strategy is all about
simplifying down their business.
Part of the idea is that if you shrink down the
footprint, and you're not doing so many things in so
many different jurisdictions, that not
only will you have better critical mass in the
markets that you do choose to serve, you'll
also get less capital requirements because
you're less complex.
You're simpler.
When Citi's finally done in creating a more simpler
firm, interestingly, they're going to look more
like Citigroup before the merger from 25 years ago.
Citigroup's history begins in 1812 with the creation
of the first National City Bank.
The bank grew rapidly after a series of mergers
and acquisitions until it was renamed Citibank in
1976.
The next 10 or 15 years, it becomes the biggest
credit card issuer in the country.
They expand to 90 different markets around
the world and, all along, innovating.
They were the first checking account.
They were the first bank to offer compound interest
on savings.
But it was the merger between Citicorp, the
holding company for Citibank, and a financial
services company, Travelers Group, that
created the Citigroup we know today.
Their idea was to take the biggest bank in the United
States and the biggest insurance company and
wealth management force in the United States, and
to merge them into a financial supermarket.
So all of your financial needs under one roof.
Citibank was once the biggest bank domestically
with assets worth over $2.1 trillion in 2007.
By comparison, J.P.
Morgan had assets worth over $1.5 trillion, and
Bank of America's was just over $1.7 trillion.
But the company's dominance came to a
devastating end in 2008.
Shares of the company collapsed from the height
of over $500 in 2006 to at one point just under a
dollar in 2009.
Citigroup was the poster child for what could go
wrong in a financial crisis.
Leading up to the financial crisis,
Citigroup was fairly aggressive in loading up
on subprime mortgages and other risky assets that
soon became toxic.
Citi eventually joined the list of institutions
deemed too big to fail, receiving $476.2 billion
in bailout from the federal government.
But despite surviving the 2008 financial crisis,
Citi hasn't been able to make a full recovery in
the market. Citi declined to put forward someone for
an interview for this video.
If you look at a chart of the Citigroup stock, it's
basically gone nowhere for the last ten years.
They have bounced back in the sense that their
credit quality has been stable, They've been
consistently profitable.
Their problem has been that they haven't been
profitable enough.
Really, one of the key metrics in banking is its
price to tangible book value, price to TBV.
And in that category, it's really far below all
of its peers. It trades at approximately 0.5 times
book value, which is below 1, and 1 is really
considered the point where below one you're
really kind of destroying value for shareholders.
If you look at J.P. Morgan, it's at close to 2
at 1.8. Morgan Stanley even better at 2.
And so, the old saying among bank analysts is
that you're supposed to buy banks when they're
about 1 or below and sell them at they're about 2.
Well, Citi has been below 1 for the past decade and
really the entirety of the post-financial crisis
period.
Today, Citigroup mainly makes its revenue from two
sources. The first is Institutional Clients
Group, which accounted for 54.7% of total revenue
in 2022.
Contains their Wall Street businesses, their trading,
their merger advisory business, and also
something called Treasury Services that investors
actually really love.
It's essentially a bank to global corporations,
and they're one of the biggest Treasury services
providers in the world, second only to J.P.
Morgan.
Their second biggest division, personal banking
and wealth management, accounts for 32.1% of
total revenue. Despite their shift in strategy,
Citi's investment in wealth management hasn't
paid off yet.
In 2022, Citi expected their global wealth
management to generate a compound annual revenue
growth, in the high single digits to low
teens. But Citi's wealth management revenue fell 5%
year over year in the second quarter of 2023.
The absolute revenues are hard to look at in
isolation right now for a couple of reasons.
One is investment banking just fell off a cliff and
everybody is experiencing weakness there.
And then secondly, you had this steady drumbeat
of divestitures.
Citi's wealth division oversaw $746 billion
globally in client assets during 2022.
In comparison, Bank of America's Merrill Lynch
had an asset size totaling $2.8 trillion in
the same year.
The unfortunate thing for Citi is that they had a
very good wealth management business in the
form of Smith Barney, but during the financial
crisis, they had to sell that off and they sold it
off to Morgan Stanley, which is now one of the
premier wealth management franchises.
So they need to kind of reestablish and rebuild
that.
So if you look at the history of Citigroup,
they're trying to get back into something that
they have essentially ceded to their
competitors, giving their competitors the juice and
the ability to really make way in this business
model that is highly favored right now by
analysts.
It just wastes to be seen whether Citi will be
successful. I'm skeptical for as much more positive
about Citi strategy when it comes to their global
payments or banking or markets business.
I think it's to be determined how this wealth
management strategy plays out.
Citi might be on the right path for success, but the
key will lie in whether the company will be able
to show sustainable growth.
The first step to improve is to recognize that
there's a problem in the first place.
And so Citi has been divesting about a dozen of
their consumer operations outside of the United
States. They're investing in their winners, just
investing in their losers. They're
transforming.
My view is always that it's not necessarily a
high return on equity that makes a stock price
go. It's a rising return on equity.
And Citi certainly has the potential for that,
even though it's taken way, way longer than one
could have reasonably expected.