Citigroup: The Turnaround Continues

About: Citigroup Inc. (C), Includes: BAC, GS, JPM, MS, WFC
by: John M. Mason

Citigroup reported a return on shareholders' equity of 10.2 percent in the first quarter, bringing its performance within the reaching distance of all the other major banks that have reported.

Mr. Corbat, CEO of Citigroup, through shrinkage and cost cutting and restructuring, has accomplished the first stage of the turnaround he began in 2012.

Now, moving into a growth mode, Mr. Corbat has proceeded to change management and refocus the bank, along with a very aggressive policy to buy back stock from shareholders.

Citigroup, Inc. (NYSE: C) continues to improve its financial performance.

Michael Corbat, Citigroup CEO since October 2012, is still gaining ground on his goals for the bank, although maybe, over the last 15 months or so, not as rapidly as he would like.

In the first quarter of 2019, Citigroup earned a return on shareholders' equity of 10.2 percent, breaking through the magic 10.0 percent cost of capital number assumed for the largest commercial banks in the United States.

Mr. Corbat has aimed at producing equity returns in the teens, and this quarter marks the first time that Citigroup has achieved this goal.

In 2018, Citigroup earned a return on shareholders' equity of 9.4 percent, higher than the 4.1 percent earned by the bank the year Mr. Corbat became CEO, and the first time that Citigroup has earned more than 10.0 percent in well over a decade.

Mr. Corbat has specifically aimed at closing the gap in this performance measure with its large commercial bank competitors and has tenaciously been able to close the gap, although it has not caught up with them yet.

In the first quarter of 2019, JPMorgan Chase (JPM) earned a 16.0 percent return on shareholders' equity, Wells Fargo (WFC) earned 12.7 percent, Bank of America (BAC) earned 11.4 percent, and Goldman Sachs (GS) achieved 11.1 percent.

Citigroup earned a return on assets of 0.98 percent in the first quarter of 2019, up from 0.94 percent in 2018. In 2012, the year Mr. Corbat took over, Citigroup’s return on assets was 0.41 percent.

Since taking over the reins at Citigroup, Mr. Corbat focused on shrinking and restructuring the bank.

We read of the results in the Wall Street Journal.

To offset shortfalls from “revenue pressure and to stay on track to meet its return targets, Citigroup has been cutting expenses. Its expenses were $10.6 billion for the first quarter, down 3% from a year ago. The bank slashed its marketing and advertising budget by 6%.”

The bank will admit, however, “tougher markets and choppy global growth aren’t making that any easier.”

Still, Mr. Corbat has gotten far enough along this path that, recently, Mr. Corbat has changed the bank’s focus, shifting from one of shrinking and restructuring the bank. Now the emphasis is on achieving more growth.

“Ultimately, Citigroup is counting on a major turnaround in its consumer business, particularly U.S. credit cards and retail banking, to boost its overall returns.”

“That effort bore fruit in the latest quarter. U.S. consumer-banking revenue of $5.2 billion was up 4% from a year earlier, after adjusting for the sale of a co-brand credit-card portfolio. The proprietary U.S. credit-card unit was up 5% from a year ago, to $2.2 billion.”

To go along with this change in focus, Mr. Corbat is making changes to the management team. According to Christina Rexrode and Telis Demos “Chief Executive Michael Corbat has been shuffling the bank’s leadership team to put the emphasis on growth, after years of shrinking and restructuring.”

Recently, the bank has named a new chairman and chief financial officer, as well as new heads of technology, investment banking and U.S. retail banking.

In an internal memo written last Thursday, Mr. Corbat stated:

“While we will miss the experience and counsel of those who have moved on, I believe that change is healthy and creates new opportunities for our firm and our people.”

Mr. Corbat has also attempted to improve Citigroup’s stock price through stock buybacks.

“Citigroup has returned tens of billions of dollars in capital to shareholders, pushing up its stock price and improving its return measures.”

Just this past quarter $4.1 billion in stock has been repurchased. Common shares have declined by 66 million shares.

Overall, I have found the Citigroup efforts, along with those of Morgan Stanley (MS), during the current recovery very, very interesting. Both turnarounds seem to be doing well.

Mr. Corbat took over the leadership of Citigroup with his sole focus being the need to build a different business model for the bank. The changes he has brought have produced slow, but relatively steady change. Moving the bank from a 4.1 percent return on shareholders' equity to a return of 10.2 percent is quite a feat.

Now, we are in the next stage, building the business model to incorporate more growth. The concern here is that after expanding for 10 years, the US economy may not be as strong as Mr. Corbat would like to help him achieve the growth rates he is shooting for.

I still am a firm believer that Mr. Corbat is a producer and will do well in the future. He has accomplished what he aimed at in his first six years at the helm of Citigroup. I think he will also do well in the near future.

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.