The U.S. Federal Reserve said on March 26 that it had rejected
Citigroup's request to boost its dividend and buy back more shares.
The news was a stinging blow to Corbat, who was charged with
improving the bank's relationship with regulators in October 2012,
when he was named the new CEO.
The Fed still had not explained as of earlier this week why
Citigroup failed to win approval, a bank executive told Reuters.
Corbat, he said, has little information as to what went wrong and
why. Corbat, through a spokesman, declined to comment.
The regulator's rejection has wrecked what was left of Citigroup's
chances of meeting a key profitability target that Corbat personally
announced a year ago: 2015 profits equal to at least 10 percent of a
measure of the bank's common equity. That ratio, known as "return on
tangible common equity," is a measure of how effectively the bank
uses shareholders' money to generate income.
Corbat is getting ready to talk to investors after the bank posts
first quarter earnings on Monday. Even putting aside the bank's
capital plan rejection, Citigroup's first-quarter results are not
expected to be strong.
Net income is likely to be down 6 percent from a year earlier,
according to the average analyst estimate. The reasons expected
include a sharp drop in revenue from fixed-income markets and
continued high legal and restructuring expenses. The bank has likely
had to spend more money on legal and compliance matters after
announcing it had found a $400 million loan fraud in Mexico.
Add it all up, and the bank's CEO has a lot of explaining to do,
"All eyes are on Mike Corbat," said analyst Mike Mayo of CLSA.
Banks across Wall Street are expected to post lower first quarter
results, hurt by weaker trading revenue.
But Corbat and his executives have extra difficulties to contend
with, and have been debating what they should do about the target
for return on tangible common equity, according to the bank
executive. With regulators rejecting the bank's plan for lowering
its equity levels by buying back more shares and paying higher
dividends, Citigroup's income is almost certain to fall short of the
levels required to meet the return on equity target, analysts say.
The CEO has few palatable options now, analysts said. If he
postpones resetting the target, he risks leaving investors
frustrated by the lack of direction. If he reduces the target, the
shares, which are already trading at lower valuations than
competitors, could be hit.
Announcing a big new set of cost-cuts and layoffs to improve
profitability, as the company did in December 2012, would contradict
Corbat's pledge to make trimming expenses a steady, "business as
usual" practice under his administration.
And reducing staff could also risk further alienating the Federal
Reserve, which has said publicly that it had repeatedly found
Citigroup deficient in projecting revenue and losses for its
operations around the globe under a stressful scenario.
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"Analysts are going to want to know how deep are these issues," said
Fred Cannon of Keefe, Bruyette & Woods. "How delayed is the capital
return story going to be at Citi?"
To be sure, Corbat's chances of meeting the 10 percent return on
tangible common equity target looked slim before the Federal Reserve
ruled, according to analyst estimates. But the denial by the
regulators has made missing it a virtual certainty, Cannon said.
It seems too soon for the company to replace executives, said
Cannon. "They only put this management team in place a little over a
year ago," he said. Corbat became the CEO in 2012 at the urging of
the current board chairman, Michael O'Neill, and he named his
executive team in January 2013.
Corbat announced a series of profitability targets in March 2013 as
a way for Wall Street to track his results. After having been named
CEO when directors pushed Vikram Pandit out of the post, Corbat saw
Citigroup shares rise steadily for about six months, largely on
confidence that he and O'Neill would make the company more efficient
and return capital to shareholders.
That momentum has gone, adding pressure on Corbat to handle the
questions deftly on Monday. Citigroup shares trade for an
industry-low fraction of their tangible book value, 85 percent,
according to analyst John McDonald of Bernstein Research. That means
stockholders cannot get as much for their shares as Citigroup's
balance sheet shows they are worth.
And eight days after Monday's conference call Corbat is in line for
more of the same kind of questioning by stockholders at the
company's annual meeting in St. Louis. The price of their shares on
Thursday was almost the same as at last year's meeting even though
the KBW bank stock index is 23 percent higher.
CLSA's Mike Mayo, who recommended the stock after Corbat was made
CEO, says he plans to go to the meeting and ask Corbat and O'Neill
what corrective actions they will take.
"That is going to be the front and center question," Mayo said.
"Hopefully, this is a catalyst for more aggressive change when it
comes to restructuring, regulatory relations and responsibility to
(Editing by Dan Wilchins and Eric Walsh)
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