Thursday, September 29 2022

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NEW YORK – In less than two years at the helm of Citigroup Inc, Jane Fraser has unveiled plans to leave Russia in a bid to cut risky assets and weed out consumer businesses in 13 other countries to focus on multinationals and the rich.

Yet, according to analysts and a key investor, while the company is moving in the right direction, the first female chief executive of a major Wall Street bank is facing a monumental turnaround effort.

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Fraser’s main task is to meet an urgent demand from US regulators to overhaul its risk management systems, a problem amplified by a botched transfer of nearly $900 million to troubled cosmetics company Revlon’s lenders there. two years old.

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It must also simplify Citigroup’s business structure and leverage its competitive advantages with a core of institutional and retail clients to increase medium-term returns.

Analysts warn that these targets risk depressing near-term earnings as the bank ramps up capital spending and is further strained by the deteriorating economic environment.

But some investors are showing patience with Fraser’s strategy to make the bank more nimble by refocusing on key businesses, like its treasury and wealth management units, which benefit from the firm’s global reach. Fraser said she wants to win more business from multinational companies that engage in cross-border transactions, while building the firm’s business with high net worth individuals.

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“We really like Jane. We think she’s an agent of change and has laid out a very logical strategy that we’re confident she can achieve over time,” said Joe Pittman, analyst at activist investor Harris Associates, Citi’s sixth-largest shareholder, according to Refinitiv data.

“The company is significantly undervalued,” he said.

According to a valuation measure, Citigroup shares are trading at 0.5x price to book value on a 12-month forward basis, significantly below the banking industry average of 1.07x, according to data from Refinitiv. JPMorgan is trading at 1.2 and Bank of America is trading at 1.04.

Citi declined to comment on its strategic plans beyond comments made at Investor Day in March and other investor events.

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Fraser inherited a litany of long-standing problems when she took over from Michael Corbat, who led the bank from 2012 to early 2021. Her job was made even harder this year after economic sanctions on the Russia prompted Citi, the largest Wall Street bank with a presence in the country, to wind down its operations there instead of selling.

Wells Fargo banking analyst Mike Mayo called Citi’s exit from Russia “good riddance” but noted the news was negative on margins as a buyer would have been better off.

REVOLVE AROUND

Fraser was a star at Citigroup for a long time before becoming CEO. A former partner at consulting firm McKinsey, she joined Citi in 2004 and helped the company recover from the 2008 financial crisis after securing a $45 billion bailout. Fraser spent years rising through the ranks as an executive, running Citi’s private bank, then its Latin American operations and its consumer division.

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“Now what you need to do is apply that turnaround knowledge to Citi as a whole,” said Barclays analyst Jason Goldberg. “It’s not going to happen overnight.”

Fraser’s goal of building a “simpler, stronger bank” makes sense for bondholders, said Peter Nerby, senior vice president of the financial institutions group at Moody’s Investors Service, which has a stable outlook for the bank.

“Capital ratios are going up, liquidity is like any other bank in the United States right now – they’re flooded with cash. I think bondholders can be patient,” Nerby said.

It may take patience to navigate one of the company’s biggest challenges: orders from US banking regulators to overhaul its risk management systems. In 2020, the Federal Reserve ordered Citi to fix several “long-standing deficiencies” in internal controls, while the Office of the Comptroller of the Currency (OCC) imposed a $400 million fine.

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“There aren’t many banks facing this kind of upheaval,” said a banking expert, who asked not to be identified.

Citi is increasing its spending on technology it can use to assess its risks and prevent future mistakes. Karen Peetz, who joined Citi in 2020, leads the program.

Citigroup submitted its plan to regulators last year outlining how it planned to handle consent orders, the company said in March. It’s about refining and executing the plan urgently, Peetz said at the time.

“There are several things they need to do. These include satisfying consent orders, as these tend to be expensive and time-consuming, improving ROTCE (return on tangible equity), and completing divestitures,” Goldberg said at Barclays.

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“The biggest risk would be a tougher than expected economic backdrop.”

Federal Reserve Chairman Jerome Powell warned last week that Americans were heading for a painful period of slow economic growth and possibly rising unemployment as the Fed hiked interest rates to combat high inflation.

A sluggish economy could pose another challenge for Fraser, who has shown a willingness to tackle problems head-on.

“When I think of Citi, look, we’re ready for a variety of scenarios,” Fraser said on the second-quarter earnings call in July. “And what matters to a bank going into recession? Capital, liquidity, credit quality and reserves. And we feel very good with them four.

(Reporting by Saeed Azhar; Additional reporting by Manya Saini in Bengaluru; Editing by Lananh NGuyen and Edward Tobin)

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