Citi CEO seen asking for
more patience as targets still elusive
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[August 18, 2016]
By David Henry
NEW YORK (Reuters) - Earlier this year,
an analyst asked Citigroup Inc <C.N> Chief Executive Michael Corbat
what he would do if activist investors tried to shake things up
after what seems like eons of underperformance.
Corbat's response? He would take the new shareholders down to the
U.S. Federal Reserve so they could see the limitations he faces.
"He was confident that they would not have any success with getting
the regulators to look kindly on their plans," said Charles Peabody
of Portables Partners, recounting his March meeting with Corbat.
The Fed's tight control over capital distributions, business plans
and interest rates is a challenge for all big U.S. banks today. But
Citigroup may be the best example of how the Fed's efforts to make
the banking system safer are tying management's hands and
frustrating shareholders.
Corbat is planning to set out new targets later this year, and
people close to him say he knows the pressure is on. Yet he has
little choice but to ask for more patience, analysts say. Corbat and
his management team have been meeting with analysts and investors
for months, explaining Citi's situation.
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Citigroup needed more than $45 billion in bailouts during the
2007-2009 financial crisis – more than any other bank - and
regulators have kept it on a tight leash. That left it lagging its
peers in terms of capital returned to shareholders and its share
performance. (Graphic: http://tmsnrt.rs/1mZb4h8)As the 56-year-old
former bond trader approaches his fourth anniversary as CEO, the
bank is slipping further away from financial targets he set out in
March 2013 and analysts' profit forecasts suggest the goals will
remain elusive.
"It is an adjustment that is taking longer than would have been
expected," said Macrae Sykes, an analyst at money manager Gabelli &
Co, which owns Citigroup shares.
Returns on capital "have been underwhelming the last couple of
years," he added. "It just continues to be a challenging
environment."
PATIENCE WEARING THIN
Shortly after taking the helm, Corbat set the goal of reaching a 10
percent return on equity by 2015.
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Last year, the gauge, which measures how well a bank uses
shareholder capital to earn profits, only hit 9.2 percent and
analyst estimates suggest it may slip to 7.5 percent this year.
While low interest rates depress earnings, the Fed's requirement
that Citigroup retain more and more capital make it harder to hit
the earnings-to-capital ratio target.
Analysts say the Fed would need to allow the bank to return as much
as it earns to significantly improve shareholders' returns and the
Fed now lets Citi distribute about 65 percent of its capital. Corbat
reached that level in June when he won approval from the regulator
to triple the bank's dividend and increase spending on its stock
buybacks by more than a third. Previously, Citi had failed Fed tests
of its capital plans twice.
While no activist investors have stepped forward with big stakes in
Citigroup, they have been eyeing big bank stocks for some time.
On Monday, ValueAct Capital Management disclosed a 2 percent stake
in Morgan Stanley <MS.N>, spurring chatter on Wall Street about who
might be targeted next.
Even without activists investors, investor patience is wearing thin.
[to top of second column] |
![](../images/081816pics/busine1.jpg)
Michael L. Corbat, president of the Citigroup, arrives at the
Planalto Palace before a meeting with Brazil's President Dilma
Rousseff in Brasilia April 9, 2013. REUTERS/Ueslei Marcelino
"Citi management owes investors an explanation as to how they are going to get
capital out of the business," said Keefe, Bruyette & Woods analyst Brian
Kleinhanzl.
Corbat declined to be interviewed for this story, as did the bank's chairman,
Mike O'Neill. Other executives who spoke to Reuters did so on the condition of
anonymity.
"The strategy we are executing is generating significant capital," the bank said
in a statement. "We are committed to continuing to increase the amount of
capital we return to our investors to reach the amount they expect and deserve."
HOPES FADING
Corbat took over Citigroup after a tumultuous period.
Chairman Michael O'Neill was only six months into his tenure in October 2012
when he replaced Vikram Pandit with Corbat and made him responsible for carrying
out the board's strategy of unloading bad assets, reducing expenses and
returning capital.
Citigroup shares soared 20 percent in Corbat's first four months on the job. But
the stock has moved little since.
As of Wednesday Citigroup shares had gained 27 percent during Corbat's tenure as
CEO, compared with a 39 percent rise in the KBW bank stock index and gains of
more than 50 percent for big bank rivals JPMorgan Chase & Co <JPM.N> and Bank of
America Corp <BAC.N>.
To improve performance, some analysts and investors have called for Citi's break
up, perhaps by separating its consumer and institutional businesses, or by
selling big chunks, such as its Mexican bank, Banamex.
As part of a broad retrenchment, Corbat has already shed consumer operations in
22 countries of more than 40 where Citigroup operated. He also closed a third of
branch offices and 182 operations sites. Payroll is down by 43,000 jobs during
his tenure.
But some investors and analysts want more. Both Kleinhanzl and Mike Mayo, an
analyst with CLSA, have argued that Citigroup ought to break up or sell larger
assets.
"They have taken a lot of steps, but it is not enough," said Mayo. "Many
investors have said, 'Amen' to what we have proposed."
(Reporting by David Henry in New York; Editing by Lauren Tara LaCapra and Tomasz
Janowski)
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