Citigroup C -3.26% may not yet have investors’ faith in its latest effort at transformation. At least now it should have their attention.
Citigroup set a medium-term target of reaching 11% to 12% return on tangible common equity in the next three to five years. For many investors, that will be table stakes, getting back to where it was pre-pandemic and narrowing the gap to peers. The bank’s shares were up about 1.7% on Wednesday. What is more important is how the bank gets to that goal, and whether it represents a durable foundation rather than just a series of moves to hurtle toward a number. So just as important as the bank’s targets on Wednesday were its additional disclosures about its strengths.
Citigroup’s problems are well-documented, and Chief Executive Jane Fraser wasn’t shy about them on Wednesday in an investor-day presentation. She said that “‘good enough’ was good enough for far too long” and called out the bank’s past lack of investment in its operating model and its inability to simplify. That all informed the decision to finally do the difficult work to exit Mexico consumer banking and several other consumer units around the globe, which many observers had long struggled to see as core strategic pieces for a bank whose strengths are serving global multinational corporations and affluent-to-ultrarich individuals.
These moves will take the bank backward in a key respect, in part because they were profitable units. The impact of these moves and other “legacy” parts of the business could shave off about 0.4 to 0.8 percentage point from the bank’s 2021 return on tangible common equity, or ROTCE, in the medium term, according to the bank’s presentations. So Citigroup’s executives spent time highlighting where the bank can alternatively boost returns by redeploying capital or by achieving expense savings and lower capital requirements via simplification.
Investors should pay close attention to those redeployment opportunities because the bank hasn’t in the past always broken out the contributions of its best businesses in such detail. It disclosed a host of metrics for what it calls its services businesses, which encompass treasury and trade solutions, or TTS, and securities services like custody.
Notably, Citigroup said that TTS returned about 21% on tangible common equity in 2021 and that securities services returned roughly 25%. Commercial banking relationships, or banking and services for midsize and emerging global corporations, generated returns of about 37% in 2021. The bank aims to boost its share of the global spending on TTS and expand its under-penetration among midsize clients. It highlighted recent drivers such as a 19% five-year compound annual growth rate of fees from fintech clients.
Overall, Citigroup envisions boosting ROTCE generated by its institutional clients group—encompassing services, banking and markets—by 1.8 to 2.15 percentage points in the medium term. This builds off the bank’s overall ROTCE base of 8.9% in 2021, which excludes the benefit of the release of loss reserves that were set aside early in the pandemic.
In consumer-facing businesses, global wealth management averaged 20% ROTCE from 2017 to 2021. U.S. personal banking, including cards and retail banking, averaged 12%. Citigroup envisions an additional contribution of 1.1 to 1.3 percentage points from personal banking and wealth management on the path to its medium-term target. Part of that will be driven by a recovery in consumer borrowing balances. Wealth could benefit from more clients fed from retail—it had 50,000 such referrals last year, the bank said—and pushing more into the upper-middle tier of clients in Asia.
Citigroup’s additional detail on its strongest units should give investors a more solid sense of how the bank could have durably higher returns. Investors are unlikely to give the bank credit today for its potential, given its long up-and-down trajectory. Achieving execution milestones, such as successful exits from those consumer markets, will help build credibility. So could continuing to highlight performance in the best core businesses.
Now that investors know what is good, they will want more of it.
Write to Telis Demos at [email protected]
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