Citigroup Inc. (C) announced the abrupt resignations of its CEO Vikram Pandit and President John Havens on October 16. The Board of Directors also announced the appointment of Michael Corbat as the new CEO. The abruptness of the decisions was not appreciated by analysts in general, who had to inform their clients that no hidden announcements are expected from the bank and that its strategy remains intact.
However, the Street generally welcomed the decision, leading to a 1.36% price appreciation of the stock since the decision was made public. We believe the change of top management will not have a significant change in the strategy of the bank, and that it will improve the profitability of the bank. Therefore, we reiterate our bullish stance on the stock.
Change of top management
The Board of Directors blamed Pandit of mismanagement of operations, which deteriorated relations with regulators and cost the bank credibility with investors. The regulator's rejection of the bank's plan to boost its shareholder distribution in March this year is said to be one of the major reasons for Pandit's ouster. Moody's credit rating cut and Smith Barney brokerage unit write down worth $2.9 billion also contributed to the Board's decision.
The new CEO, who has spent his entire career at Citigroup, is known for his sound risk management skills, accountability and dedication to enhancing productivity. He is believed to have better relations with regulators. With the new management in place, the CEO is expected to focus on the following tasks ahead:
Focus on improving the operating performance
The bank is not expected to shift its business strategy and focus on expanding the core business, which means the bank will continue to concentrate on increasing its footprint in emerging markets. Michael Corbat, the new CEO, is known for his "relentless focus on process", said O'Neill, the Chairman of the Board of Directors. Corbat is expected to focus on improving the operating efficiency of the bank by cutting costs and disposing of unprofitable businesses.
Focus on the upcoming round of stress test
Given the initial failure of the previous stress test, the new CEO is also expected to prepare a submission for the upcoming round of stress tests to be conducted by the Fed in early 2013. Improvements in the bank's capital ratios since the last stress test have increased pressure for a rise in shareholder distributions. The base 3 Tier 1 common ratio for the bank stands at 8.6% as compared to 8.3% for Bank of America (BAC) and 8.4% for JPMorgan (JPM). Here the replacement of Pandit with a traditional banker would improve the bank's positioning with the regulators.
However, one of the premier American credit rating agencies, Moody's, revised Citigroup's rating from stable to negative. The ratings agency was of the view that the bank's ongoing efforts to improve risk management practices will be adversely affected by the abrupt change of management. We believe this is not the case, as the new CEO is well known for his sound risk management skills that he developed during his tenure at Citiholdings. S&P, however, upheld the bank's rating after the change of management.
The stock of Citigroup trades at a 42% discount to its book value, as compared to a 54% discount for Bank of America and a 14% discount for JPMorgan.
In conclusion, we reiterate our bullish stance on the stock after looking at the bank's cheap valuations, its renewed focus on improving operating efficiency, and its focus on growing business in the emerging markets, which is contributing to most of the growth in the bank's top line.