Citigroup makeover should drive higher returns, CFO says

Citigroup’s efforts to simplify business operations under incoming CEO Jane Fraser will cost a lot of money but will ultimately create a safer, more profitable company, Chief Financial Officer Mark Mason said Thursday.

Fraser has not yet taken the reins from outgoing CEO Michael Corbat — the transition is expected to take place within the next few weeks — but she and other top executives are already mapping out changes to the $2.3 trillion-asset company that could include fewer business lines, expansions of those that remain in the fold and better alignment of departments across the board.

Combined, the moves should pave “a realistic path” to average returns that are at or near the levels of other large banks, Mason said.

“We’re seeing payback of investments we’ve been making over several years … and we will continue to make those types of investments,” Mason said during the virtual Credit Suisse Financial Services Forum. “That’s an important factor, because those investments will be what helps us achieve higher returns [and] we do believe that with the right strategy, we can get to comparable peer-level returns.”

Citi’s returns have lagged those of its competitors. For the fourth quarter, it reported a return on equity of 5.9%, trailing JPMorgan Chase’s 12% and Wells Fargo’s 6.4%. Bank of America reported an ROE of 8.4% for the quarter.

During her first earnings call in January, Fraser was upfront about the challenges the bank faces.

“To be fair, while we have made demonstrable progress" in increasing share valuation over the last 10 years, Citi acknowledges "there is a gap to close with our peers,” she told investors.

Meanwhile, the company is grappling with a pair of consent orders from federal regulators who have identified deficiencies with Citi’s risk management and internal-controls systems. The enforcement — which included a $400 million civil money penalty — came a few weeks after the company accidentally paid $900 million to creditors of the cosmetics company Revlon.

Last week, Citi lost its legal bid to recover $500 million of the $900 million. On Thursday, Mason said the company plans to appeal the decision.

“I do believe we have good grounds for appeal and we’ll pursue that,” he said.

Expenses for the year are now projected to rise 2.5% to 3%, Mason said. Much of the increase is tied to the improvements being made in risk management. The company spent $1 billion last year in that area.

How exactly Citi — which operates in 95 countries — might remake itself is still being figured out. Fraser and her team continue to undertake a “dispassionate review” of the entire operation to determine where it has competitive advantages and could grow, and where it might want to step back, Mason said.

Bloomberg reported last week that Fraser is considering offloading certain retail banking units in the Asia-Pacific region. Last month Citi announced the consolidation of two wealth management units into a single global division, bringing wealth management services for the ultrawealthy under the same umbrella as services for substantially less affluent consumers.

Mason declined to say whether the unit could become a third core business for Citi, joining the institutional clients group and global consumer banking division.