Citi execs silent on cost of risk overhaul

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Citigroup executives were hammered Tuesday by analysts seeking clarity about how much the company expects to spend to fix risk management and internal control issues, how long the overhaul will take and whether it will entail sweeping changes in Citi’s business model.

But they provided few of those details during Citi’s third-quarter earnings call, which came seven days after the Federal Reserve and the Office of the Comptroller of the Currency slapped the company with enforcement actions and a $400 million civil money penalty for failing to correct long-standing risk-related problems.

Michael Corbat, CEO of Citigroup
"I did commit to the board that I'd stay throughout the year and close out the three-year plan, which we announced in 2017," Citigroup CEO Michael Corbat said when asked why he wasn't stepping down immediately.

CEO Michael Corbat and Chief Financial Officer Mark Mason tried to allay some of the concerns, saying Citi plans to improve profitability and shareholder returns while repairing its control systems. Corbat at one point defended the $2.2 trillion-asset company’s performance under his leadership when Wells Fargo analyst Mike Mayo asked why he hasn’t already stepped down to make way for incoming CEO Jane Fraser. Citigroup said last month that Corbat would retire in February and Fraser would succeed him.

"I think it is important to the board [and] important to the company that we have a real transition,” Corbat said. “As you recall, my transition was about five minutes. And as part of this process, I did commit to the board that I'd stay throughout the year and close out the three-year plan, which we announced in 2017. … That allows Jane to be very much involved in terms of our financial plan."

Yet neither Corbat nor Mason said how much it will cost or how long it will take, except that the effort will last years.

Pressed by Mayo to provide more guidance around the anticipated total cost of the overhaul, Mason said Citi has been “quite responsible” at managing investments in the past several years and “people should expect that [the company] will continue to be responsible” with such investments. He said Citigroup has spent about $1 billion so far this year to enhance infrastructure, risk and controls.

“It's hard to pinpoint a number, as you’ve said,” Mason said. “I would expect … that we would continue to increase our profitability. We will continue to improve our returns. But I can't [calculate] the number for you next year or the year after, except to say we are still running the firm.”

Citi has grappled with risk management and internal control issues in the past, but those troubles resurfaced with a vengeance in August when the bank accidentally paid $900 million to lenders of the cosmetics company Revlon. Executives have blamed human error for the mistake.

In mid-September, three weeks before the consent orders were issued, Mason told investors during an industry conference that the company is taking steps to clean up risk management. Among the requirements of the enforcement actions, Citi must conduct a “gap analysis” of its risk management framework to determine necessary enhancements, submit a plan to hold senior management accountable for improvements and seek the OCC’s non-objection before making new acquisitions.

Ultimately, it will be Fraser — the first woman to lead a major U.S. bank — who will take the reins of the transformation.

She faces several challenges, including boosting shareholder returns. Citi’s third-quarter return on equity was 6.7%, trailing JPMorgan Chase’s 15%.

Overall, Citi reported net income of $3.2 billion for the quarter, down from $4.9 billion a year earlier but still its biggest quarterly profit so far during the coronavirus pandemic. Like JPMorgan, Citi’s provisions for credit losses declined, falling to $2.3 billion from the $7.9 billion set aside during the second quarter.

Citi is currently working on its budget for 2021, Mason said.

When asked by analyst Matt O’Connor of Deutsche Bank if the investments in infrastructure would be a stand-alone item or part of a structural change in Citi’s business model, Mason said there are a mix of factors that could reposition the company, including the impact of the pandemic and the fact that there will be a new CEO with new ideas about the future.

“With any new CEO, I think you would expect an opportunity for that person to take a step back and take a look at the business that we have, take a look at the environment that we're playing into and to make an assessment as to what the right path forward is in light of where we think the growth trajectory is and where we think the return opportunities are,” Mason said. “And so that is the other leg that with Jane coming in, in February, I'm sure she will want to take that opportunity and see what comes of that.”

Analysts also wanted to know why Citi hadn’t addressed the risk management issues in past years.

While Citi has “done a lot of work” to position itself financially and strategically and “made a number of investments across areas that [executives] felt were critical,” it wasn’t fast enough, Corbat said.

“In hindsight, we should have done them faster and prevented it from coming to this,” he said.

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Enforcement Risk management Internal controls Compliance Earnings Expense management OCC Federal Reserve Michael Corbat Citigroup
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