By Telis Demos
It is time for Michael Corbat to change the narrative at Citigroup Inc.
Since taking the bank's helm in October 2012, Mr. Corbat's Citigroup has played defense. It has scaled back businesses, shrunk the firm's global retail-banking footprint and wound down crisis-era assets that dragged on returns.
For shareholders, it has been a slog. Citigroup's total return has underperformed those of its biggest rivals, save for Wells Fargo & Co., since Mr. Corbat arrived on the scene. The bank has yet to show it can consistently generate returns that exceed its cost of capital; in the first quarter the bank's return on common equity was a tepid 7.4%. And the stock trades at just 85% of book value, the lowest valuation of the big U.S. banks.
Now, investors, analysts and even top executives within the bank acknowledge it is time for Mr. Corbat, a former Harvard football star, to shift to offense. That means boosting growth and profitability in areas such as credit cards, Wall Street stock trading and retail banking.
"What investors want now is to understand what's next in the story," said Conor Muldoon, fundamental portfolio manager at Causeway Capital Management LLC. "What can you do to make the valuation better over time?"
Citigroup is among the largest holdings in the firm's Global Value fund.
The first test comes this week and next with the Federal Reserve's annual bank stress tests. A key indicator will be the bank's so-called payout ratio under the tests, a measure of whether it is given a green light to return more capital to shareholders than it is expected to earn in coming quarters.
Citigroup shareholders want to see the payout ratio top 100%, meaning the bank would begin drawing down its capital pile rather than continue adding to it. If it can't do this, gains in its business won't accrue to shareholders.
Assuming that won't be the case, investors want Mr. Corbat to boost returns over the long term by generating more profit on lagging businesses, notably the bank's consumer-lending and retail-banking arm.
In anticipation of this, Mr. Corbat has been honing the bank's focus, a notable change for a firm that was once a sprawling global behemoth. He and his veteran management team have done things like exit nearly two dozen retail markets globally and slash the number of corporate clients to 14,000 from 30,000.
The idea is to emphasize areas with the strongest growth prospects, particularly ones in which Citigroup has a dominant share with multinational consumers and corporations. In this vein, the bank has already said it would invest a further $1 billion to upgrade its Mexican retail bank.
The biggest recent bet, though, is on credit cards, particularly for U.S. shoppers. Over the past two years, Citigroup has taken on more than $10 billion in card loans for Costco Wholesale Corp., and made other investments, such as in Citigroup's proprietary reward-card offerings.
As a result, Citigroup has the biggest global card lending portfolio of any U.S. bank. Card lending now makes up 24% of Citigroup's total loans, nearly double that of rivals such as Bank of America Corp. and J.P. Morgan Chase & Co., according to analysts at Sanford Bernstein.
Underscoring the importance of cards and the Costco business, which the bank took over from American Express Corp., Mr. Corbat personally made surprise trips in December to call centers in Florence, Ky., Jacksonville, Fla., and Tucson, Ariz., according to people familiar with the trips.
A key point was to emphasize how critical customer service will be to get new Costco-card customers, who in many cases were offered introductory rates that would expire, to become loyal users of their cards.
Those rates and other investment in cards were a drag on the bank's retail performance of late. While corporate and investment banking was at or near return targets last year, consumer banking generated a roughly 13% return against a 20% target, Mr. Corbat said recently.
Citigroup is counting on the profitability of the card business to pick up meaningfully in the second half of this year as the initial investment period winds down.
Mr. Corbat and other executives are expected to provide greater detail for these plans when the bank in July holds an investor day -- its first in nearly a decade. At this, he also will have to fight the view among some investors and analysts that Citigroup lacks a unifying strategy.
The bank's consumer and corporate businesses are like "two boats floating in the ocean, not tied to each other," said KBW analyst Brian Kleinhanzl. In the past, he has called for the bank's breakup, though Mr. Kleinhanzl says he is now waiting to see how Citigroup fares amid rising interest rates.
The investor day will give Mr. Corbat "the chance to lay out the new strategy," he added.
Write to Telis Demos at [email protected]