Citigroup CEO Mike Corbat Has Promises to Keep

(Bloomberg Gadfly) -- Citigroup Inc.'s Mike Corbat isn't as much of a household name as, say, JPMorgan Chase & Co.'s Jamie Dimon or Goldman Sachs Group Inc.'s Lloyd Blankfein. But in 2018, the CEO arguably should be in a better position than any of his peers to deliver on promises, most of them long overdue.

Corbat has had his challenges since taking over the top job at Citi in 2012 from Vikram Pandit, who steered the bank through the worst of the financial crisis before losing the confidence of the board. Plucked from within the ranks, Corbat, 57, has spent much of his tenure sharpening Citi's focus to make it (in his words) "simpler, smaller, safer and stronger" -- or to put it plainly: less risky.

While shedding bad loans and shoring up the bank's balance sheet , Corbat has also whittled down core businesses, slashed costs and reduced headcount to improve the bank's efficiency ratio, a closely watched industry metric. Citi now boasts an advantage over most major rivals by this measure. It still lags in other areas, but that may soon change.

Citi last year was the only one of the six major U.S. banks whose "living will" was deemed adequate by regulators.  And then this summer, it was given the green light to return some $19 billion to shareholders via buybacks and dividends, an action Corbat hopes to repeat and increase in the next two years. 

His next test is whether Citi can meet the refreshed targets laid out at its investor day earlier this year, a feat Corbat described in an interview with Gadfly this month as "achievable but not easy." Not everyone is convinced, if only because the bank's path to stronger returns is significantly dependent on factors, such as Federal Reserve approval of future capital-return plans, that are outside its control. Wall Street analysts, for one, have an average estimate for the bank's 2020 earnings per share of $7.80, significantly below Citi's $9 target (this doesn't assume the passage of tax legislation, which would likely bump up both analysts' projections and the bank's target).

"The work's not done," Corbat said. "The pieces are there, it's up to us to execute." 

Corbat joined Citi in 1998 in through its $70 billion merger with Travelers Group, one of a string of acquisitions the bank made during the decade to give it diversity and scale. A Harvard graduate and former college football lineman, Corbat started his career at Salomon Brothers, which was later bought by Travelers. 

The bank's dramatic, but necessary, transformation in recent years has made it less recognizable from the behemoth it was when Corbat joined. While the slim-down caused Citi to surrender its mantle as the largest bank by assets (it's now in fourth place), it's still a giant with assets of $1.9 trillion and as such, subject to the post-crisis regulatory regime for  institutions considered "too big to fail."

Keeping Citi in regulators' good books hasn't been easy. One of Corbat's biggest setbacks came in 2014 when the bank unexpectedly flunked the Federal Reserve's stress test measuring how it would perform during a severe recession, partly because of concern that it couldn't appropriately manage risks spawning from its global footprint. The failure, which included a denial of Citi's payout plan and derailed its ability to meet previously stated profitability targets, was a "gut punch," Corbat has said.

Ahead of the 2015 stress test results, Corbat offered his resignation in the event of failure, possibly in response to a call from analysts that "heads should roll" following the disappointment a year earlier. Fortunately for Citi, and Corbat, the bank hasn't had a significant stumble since.

Corbat says he is confident that the bank has appropriately hand-picked the markets, clients and products that will enable it to achieve the best returns, though not everyone agrees with that assertion. For instance, Citi's commitment to its global operations, including Banamex in Mexico, gives a more differentiated revenue mix than rivals -- but it also means the bank will get less of a bump from both U.S. tax  and interest rate hikes. 

Citi will also face consequences that other banks won't: If the corporate rate drops to 21 percent, as expected, the bank will likely be forced to take a one-off charge of just under $20 billion, mostly driven by a write-down to its sizable deferred tax asset created from crisis-related losses, which has itself crimped the bank's profitability. That's not an ideal outcome and perhaps one that could have been minimized if Citi had have more rapidly utilized those deferred tax assets to make accretive acquisitions similar to its purchase of Costco Wholesale Corp.'s co-branded credit card portfolio from American Express Co. Still, that's easier said than done, and such moves would have dented its regulatory capital, which has swelled to a level that means despite the charge, its ability to return $60 billion to shareholders through 2020 is unlikely to be impacted. 

Citi's generous payout plans have squashed calls by some for a breakup, though analysts still label the bank a "show-me" story. Corbat knows there's more to prove but says he feels "really good about the hand we're playing." 

His optimism has rubbed off on shareholders who have a renewed level of trust and belief in Citi and its management team. "I want us to be known for doing the things we say we'll do," Corbat trumpeted at this years' investor day, referring to a suite of goals including seeing the bank crack a top-five position in equities and the achievement of sustainable revenue growth across its core businesses. For now, he has the benefit of the doubt. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

  1. Under his leadership, the lender has successfully wound down the majority of Citi Holdings, its "bad bank" which was home to toxic or non-core businesses such as subprime lender OneMain. That unit which Corbat ran when it was formed immediately after the crisis now has assets of less than billion, or under percent of Citi's total assets, a fraction of its peak of more than billion or percent of the bank's total assets. To be sure, the run-off of that arm was already well underway when he stepped into the CEO role, down to billion or roughly percent of Citi's total assets.

  2. It got a "qualified pass" and while there were no deficiencies, there were shortcomings it had to address. This year, all six banks received passing grades, and Citi was found to have no shortcomings.

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