Citigroup (NYSE: C) is a company on the move, as its restructuring continues to take hold. The question now is whether the third-largest U.S. bank can continue its momentum.
Citi’s stock has soared 34.7% so far this year, far above the 8.6% rally for the S&P 500 and the 14.3% gain for the KBW Nasdaq Bank Index.
Citi was the biggest bank in the world going into the Great Financial Crisis of 2007-09, after CEO Sandy Weill put together a colossal conglomerate of financial services. But subprime mortgages and other weak assets nearly drowned the institution during the financial crisis. It and its competitors survived only with the benefit of a government bailout.
The restructuring began in 2008, as the bank split off its bad assets, such as subprime mortgages, into a separate unit and then sold or liquidated them. It axed tens of thousands of workers and strengthened capital ratios.
Citigroup has distinguished itself with a broad international presence over the years, but that global reach provided inadequate profits on the consumer side. So from 2014-16, the bank nuked its consumer banking operations in 11 countries, including Japan and Brazil. It also consolidated technology and back office operations.
Fraser’s moves
But that wasn’t enough. Thus CEO Jane Fraser, who came aboard in 2021, has continued the reform, simplifying the bank’s structure and reducing bureaucracy. Consumer banking has been dumped in another 13 countries, including Mexico and India. Citi has shuttered numerous U.S. branches. It’s eliminating 10% of the workforce, about 20,000 jobs, to cut costs and flatten the management structure.
Citigroup now focuses on commercial banking globally and retail banking domestically. The commercial side has large trading, investment banking and international corporate banking operations. The commercial banking represents Citi’s “most unique business, as its global footprint is hard to replicate,” wrote Morningstar analyst Suryansh Sharma.
“This international presence will help Citigroup remain a bank of choice for cross-border companies.” Yet the global reach is also expensive and complicated, and trading returns aren’t reliable, he notes. So, “returns for the commercial banking business have been mixed.”
Then there are Citi’s U.S. personal banking unit and its wealth unit. The personal bank unit centers on a mainly-U.S. credit card business, with some retail banking. The wealth segment offers services for global clients. These units have had mixed results in the past, Sharma said.
Strong Q1 earnings
Nonetheless, the restructuring has boosted Citi’s results. Revenue rose 8% in the second quarter from a year earlier, and profit climbed 25%. Trading revenue soared 16%, and investment banking fees climbed 13%. The stellar results helped Citi announce a $4 billion share buyback plan for the third quarter.
“Citi is benefiting from an ongoing self-help, restructuring story,” wrote Wells Fargo banking analyst Mike Mayo, as cited by Barron’s.
To be sure, the bank is still working through regulatory penalties – called consent orders – that make it improve controls and data quality. Much of this stems from an erroneous payment of almost $900 million to Revlon lenders in 2020. Last year Citi briefly credited a customer’s account with $81 trillion, when it meant to give just $280.
“Getting consent orders removed would also be a positive catalyst,” Sharma said.
There’s no question that Citigroup is moving in the right direction, it’s just an issue of whether it can get all the way there.
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