June 29, 2017 / 5:51 PM / 2 months ago

Having aced stress test Citi now needs a strategy

A Citi sign is seen at the Citigroup stall on the floor of the New York Stock Exchange, October 16, 2012.Brendan McDermid

WASHINGTON (Reuters Breakingviews) - Now that Citigroup has aced the Federal Reserve’s latest stress test, it needs a strategy. The $188 billion U.S. bank doubled its dividend and boosted its share buyback by $15.6 billion after clearing the exam. Chief Executive Mike Corbat has been understandably laser-focused on returning capital and appeasing watchdogs, objectives that eluded his predecessor and lifted him into the job. Spurring growth to match bigger investor payouts is a trickier challenge.

Corbat was brought in as Citi’s chief in 2012, after the bank failed the test for the first time under Vikram Pandit. The bank failed again in 2014, leaving Corbat stunned. With his job at stake, Corbat persuaded an executive to delay retirement and take over the examination process. The bank spent $180 million to improve its systems and streamlined operations.

On Wednesday, for the third straight year, Citi passed. Corbat raised the dividend to 32 cents per share, bringing total payouts to $18.9 billion over the next year. That amounts to 125 percent of projected earnings; analysts expected 110 percent. After sitting on excess capital for several years, Corbat said the results marked a “significant milestone” and the bank can now start delivering on bigger payouts and better returns. 

Citigroup's profitability has lagged peers, with a 7.6 percent return on tangible common equity. JPMorgan is at 13 percent. Citi has also been shrinking, pulling out of 20 consumer markets, about half its geographical footprint. It's not clear whether the remaining businesses can produce the kind of profitability that will support higher returns to shareholders.

The bank is investing in areas of growth. For example, Citi announced in 2016 it was acquiring Costco's credit card portfolio from American Express, which could help boost earnings in 2017. Citi also believes it needs an 11.5 percent common equity Tier 1 capital ratio to meet regulatory standards; it now has 12.8 percent. That gives the bank more room to invest and return capital. 

Shareholders will hear more about Citi’s plans later this month during its first investor day in nine years. Further unleashing trapped capital could help the bank eventually reach its goal of a 14 percent return on tangible common equity. More difficult will be improving operational performance, boosting market share in its U.S. consumer arm, explaining its aspirations for Mexico and generally articulating where Citi sees itself now that it has graduated from stress-test purdah.

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