January 14, 2019 / 4:28 PM / 8 months ago

Breakingviews - Citigroup is in a good place to do better

Michael Corbat, CEO of Citigroup, speaks at the Milken Institute's 21st Global Conference in Beverly Hills, California, U.S. April 30, 2018. REUTERS/Lucy Nicholson

DETROIT (Reuters Breakingviews) - Citigroup boss Mike Corbat is doing well enough at making his $138 billion bank more efficient. He has a year to do better. Last week he let investor ValueAct inside the tent, with an agreement to give the activist fund access to confidential information for a year. That will increase the pressure to catch up with rivals.

Earnings published on Monday chart Citi’s slow but undeniable improvement. Its return on tangible common equity was 10.9 percent, higher than a year ago. Corbat wants to boost that closely watched number to 13.5 percent by the end of 2020 by increasing revenue up to 5 percent a year – it rose just 1 percent in 2018 – and reducing costs to 53 percent of revenue from the current 57 percent. He has already cut at least one-third of the costs he planned to in order to meet that target.

There may be more flab to trim – and granting the number crunchers at ValueAct access to information outsiders don’t see could help identify it. Citi’s results suggest two obvious areas to focus on.

First, the consumer bank. Its costs were a reasonable $55 for each $100 of revenue in 2018. Both Bank of America and JPMorgan, though, run leaner operations despite having a far smaller credit-card unit – usually a higher-margin business. Strip out the plastic and Citi’s retail bank devours $77 of the top line.

Similarly, Citi’s corporate and investment bank relies more on the lower-cost transaction-services business than its two rivals, yet is no more efficient.

Citi could save $4.5 billion a year by bringing its retail-banking efficiency ratio down to, say, 57 percent and lopping 4 percentage points off its investment-banking costs to best Bank of America. That’s double what Citi currently intends to shred. Applied to last year’s results, that would have boosted the bank’s preferred return on equity figure to 13.5 percent.

Of course, banks need to invest, and that could account for some costs. But an extra set of experienced, independent eyes is always useful – and ValueAct has a chance to vet Citi’s decision-making process and strategy as well as the numbers. That makes the fund a bit like a management consultant only without the fee – and with the potential to cause a fuss if, a year from now, Corbat and his team aren’t doing better, faster.


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