Citigroup Needs To Regroup

| About: Citigroup Inc. (C)

Summary

Citigroup earned a return on shareholders' equity in the second quarter of 2017 that was less than what it earned a year earlier.

Citigroup's current ROE is barely above its average ROE, earned during the time Michael Corbat has been leading the bank and is below the bank's cost of capital.

Michael Corbat is approaching his fifth anniversary as Citigroup President and CEO, and, unfortunately, has not lived up to earlier expectations about how his leadership might change the bank.

The paper edition Wall Street Journal headline on the second quarter earnings of Citigroup, Inc. (NYSE:C) reads “Citigroup Revenue Beats Estimates.” This is about the only good news that the article presents.

Citigroup these days, is, at best, a mediocre organization.

There was a lot of optimism when the current President and CEO, Michael Corbat, was brought on board to turnaround the massive organization. However, this October, Mr. Corbat will have been at the helm of Citi for five years.

Signs of a successful turnaround should have become apparent by now.

The return on shareholders' equity was just 6.8 percent for the quarter, down from 7.0 percent one year earlier.

The sad thing is that Citigroup’s ROE has averaged only 6.2 percent in the previous four years of Mr. Corbat’s tenure and there has been no real uptrend to the performance over the five years he has held the office.

Investment banking was about the only shining light in the quarterly performance, up 22 percent from a year earlier and with little else to boast about, Mr. Corbat is quoted as saying that this was the best investment banking performance, year over year, in seven years.

But, there is little else to talk about.

In order to provide something positive for shareholders, Citigroup received permission from the Federal Reserve to buy back $19 billion in company stock over the next year. This approval was given once Citigroup passed its latest stress test.

The bank would like to achieve two things in buying back some stock: First, it would like to see Citi's share price increase because earnings per share should go up; and second, returning capital to the shareholders would reduce the amount of shareholders' equity on the bank's books and help to raise the bank's ROE. Financial engineering like this can, at times, prove to be beneficial for shareholders.

It seems, however, that the bank has had a hard time achieving approval to buy back so much of its stock because it has failed earlier efforts to pass the Federal Reserve's stress tests.

I have continually been disappointed in management for earlier failures to pass these tests. It seems to me that an institution that was at one time facing the possibility of government takeover and hence, was subject to very high levels of regulatory oversight, should have tried a little harder to pass the test and get on the right side of its regulators, thereby reducing the presence of the regulators in restricting management's business options.

This was, to me, a major disappointment in terms of management leadership.

Citigroup, in my estimation, still has a long way to go before one can gain confidence in how the bank is currently being run. Management must exhibit its ability to produce a coherent business plan and then show that it can execute that plan. Mr. Corbat has talked about changes in how Citigroup will be organized, what areas the bank needs to get rid of, and what specific areas the bank needs to especially build up.

In doing so, Citigroup would simplify its structure, emphasize the areas it wants to be industry leaders in, and build up its customer base. This would also have a major impact on the bank's expense ratios.

Mr. Corbat's efforts to define what this structure should be have been very "idealistic" in presentation, but his ability to create an organization, produce a culture, that would deliver these results has been lacking.

Mr. Corbat, in my opinion, has neither provided us with a clear vision of what Citigroup should be and as a consequence, it is hard to define what it is that we should be looking for in the bank's performance other than a strong capital position, strong net interest margin, strong investment banking results, if that is what he envisions, and lower costs.

I really don't understand what Citigroup under Mr. Corbat's leadership is supposed to be. In making his statement about the investment banking performance in the second quarter, he almost seemed to be surprised about how well that division had done.

What one sees, looking back, is a failure of focus and a shortfall in performance. Results like this leads one to be concerned about future performance.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Money Center Banks, Earnings
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