- US bank says risks are contained as it pushes for higher returns
Ten years ago this month, at the onset of the financial crisis, Citigroup’s then-chief Chuck Prince declared that the bank was “still dancing” when it came to lending, despite fears of a growing valuation bubble.
This week, at Citi’s first conference for its investors in nine years, the incumbent Michael Corbat danced to a rather different tune. Addressing shareholders at Gotham Hall in midtown Manhattan, Mr Corbat argued that Citi was finally out of post-crisis recovery mode as he laid down new financial goals for profits and payouts to shareholders Even so, he indicated Citi would avoid taking anything like the risks that led to its $45bn government bailout in 2008.
“We are in the risk-taking business — but none of those risks should be outsized,” he said. After years of watching Citi generate industry-trailing returns and missing targets, however, some investors and analysts questioned whether the latest goals were achievable and what the bank would need to do to reach them.
Citi’s headline pledge on Tuesday was to boost profitability, as measured by return on tangible common equity, from less than 8 per cent in the past 12 months to 11 per cent by 2020.
Mr Corbat said the upswing would be driven in part by share buybacks, which reduce the amount of equity outstanding. Citi plans to distribute $60bn to its investors through share buybacks and dividends over the next three years — but that figure is greater than all the profits it is forecast to produce over the period, and equivalent to almost a third of its current $186bn market capitalisation.
The bank would require regulatory approval for the splurge, although US officials now appear to be comfortable that Citi has rebuilt its balance sheet following the crisis. Last month the Federal Reserve gave Citi permission to return $19bn over the next 12 months, 30 per cent more than the income analysts reckon it will generate in the period.
However, the $60bn bonanza would erode Citi’s core equity tier one ratio, a closely watched measure of financial strength, from 13 per cent to 11.5 per cent. John Gerspach, chief financial officer, argued the bank could easily manage a reduction in its balance sheet shock absorber.
Citi’s capital position, he said, was “among the strongest” in its peer group. Its buffer above the minimum CET1 ratio required by regulators, for instance, is greater than rivals including Bank of America and JPMorgan. Executives also projected that higher revenues and cost savings at both of Citi’s two divisions, consumer and institutional banking, would help fuel the hoped-for profitability boost, although executives expect a significantly greater improvement from the former.
In particular, Stephen Bird, who runs Citi’s global consumer banking arm, highlighted potential from recent investments made in Mexico, where it has a sizeable retail presence, and in credit cards. The bank is already the biggest credit card issuer globally by total loans.
“Our scale and our investment position us to gain share” in Mexico, he said of the country. Citi is ploughing $1bn into the country to add 2,500 new ATMs and modernise mobile banking. Still, the Mexican investment could be vulnerable if US President Donald Trump carries through on campaign threats to push through protectionist trade measures.
Credit cards, meanwhile, are a particularly competitive corner of the US retail banking industry as issuers make ever more generous reward offers to entice would-be borrowers. The investor day went down well on Wall Street, sending shares in Citi up almost 3 per cent on Tuesday to close at $68.03, just shy of their highest levels since January 2009.
“What they said was perfectly credible,” said Glenn Schorr, analyst at Evercore ISI, although he added: “Everything for them is not a slam dunk — these are really competitive businesses, and other people are investing in them too”.
Asked at the investor day how he would be held accountable for meeting the new goals, Mr Corbat noted the bank had changed its pay criteria. His incentive pay is now tied to the bank’s cumulative earnings per share.
“My guess is this [latest target, set out on Tuesday] will be incorporated into this year’s” bonus plan, said the chief executive, who took over the bank in 2012. Executives insist, however, they will not resort to taking on too much risk to attain the financial objectives. “We really strive not to be risk-averse, but to find a balance,” said Jamie Forese, the bank’s president.
“At some point, whether we’re still in the management team or not, another crisis is coming our way.” “One thing that we are all signed up to ensure is that it is not anywhere near as damaging” to Citi, he said. “I’d like to think that the next time the crisis comes, we’re going to be in a position to take advantage.”