Citigroup investors have had a lot to digest over the last few weeks but while the stock has sold off aggressively, analysts remain hopeful.
Shares of Citigroup (ticker: C) were down nearly 7% Tuesday, following a nearly 6% drop on Monday after The Wall Street Journal reported that the bank could face a consent order from the Federal Reserve and the Office of the Comptroller of the Currency for inadequate risk management controls.
The expected move from regulators comes following a headline-heavy few weeks from the bank. Last month Citigroup erroneously sent a $900 million payment to Revlon’s creditors—the type of mistake that was the result of manual processes, which are being upgraded, Citigroup’s chief financial officer Mark Mason said at a conference Monday. Then, last week, Citigroup announced that chief executive Michael Corbat would be retiring in February and that Jane Fraser, currently the bank’s president, would be taking the top spot.
The timing of the leadership change was initially questioned. It made more sense following the Journal report, as the systems and processes overhaul the bank needs to complete is expected to be a multiyear process, requiring a leader to stay onboard throughout it.
“Citi has several remediation projects underway to strengthen our controls, infrastructure and governance,” a Citigroup spokesperson said Monday. “However, while we have made significant and demonstrable progress in each of these areas, we recognize that we are not yet where we need to be and that has to change.”
While it is understandable that investors may not want to wait for a turnaround, analysts reiterated their bullish ratings on Citigroup, noting that—while a tough pill to swallow—the consent order gives Citigroup the push it needs to improve its controls and streamline operations.
“New control issues related to Revlon and a potential new consent order from regulators (unconfirmed by Citi) should give the incoming CEO a greater sense of urgency to restructure Citi and partly break it up,” Mike Mayo, senior analyst at Wells Fargo Securities, wrote in a note Tuesday. Mayo has repeatedly called for Citigroup to consider selling its non-US consumer businesses in Mexico and Asia.
Analysts were also willing to take the regulatory and other issues weighing on the bank in stride, believing that much of the bad news was already baked into the stock. While some analysts lowered earnings forecasts, they still like the turnaround story.
“The need for Citigroup to improve its risk and control systems is not a new topic, and we believe Citigroup shares trading at 67% of tangible book value prices in an awful lot of potentially bad news,” Jeffery Harte, managing director at Piper Sandler & Co., wrote in a note Tuesday. The bank had already disclosed its $1 billion investment in infrastructure and controls earlier this year and recently created the chief administrative officer role, he noted. Still, Harte cut the bank’s 2020 earnings forecast from $3.75 to $3.36 and trimmed the 2021 forecast by 2% to $6.85.
The possibility of higher expenses weighed on the bank but analysts believe that Citigroup will be able to offset some of those costs elsewhere. It was reported late Monday that the bank would soon start laying off employees, something that is expected to affect fewer than 1% of the firm.
“We will do our best to support each person, including offering the ability to apply for open roles in other parts of the firm and providing severance packages,” a Citigroup spokesperson said.
An additional expected reserve build for potential loan losses, disclosed by Mason on Monday, also weighed on shares, even though he emphasized the build will be “meaningfully lower” than in prior quarters.
But analysts took the reserve build as a sign of the bank being extra cautious about the economic recovery and reserving in accordance with the new Current Expected Credit Losses framework than the bank actually seeing “signs of stress” in U.S. consumers, noting that 80% of customers have rolled off of deferral programs and are paying as agreed.
“Higher reserve build today means more reserve release tomorrow,” Betsy Graseck, analyst at Morgan Stanley, wrote in a note Tuesday.
Given Citigroup’s recent trading, investors aren’t yet ready to buy the hope.
Write to Carleton English at carleton.english@dowjones.com
September 16, 2020 at 03:19AM
https://www.barrons.com/articles/citigroups-new-problems-make-it-hard-to-buy-the-bull-case-51600188268
Citigroup’s ‘New’ Problems Make It Hard to Buy the Bull Case - Barron's
https://news.google.com/search?q=hard&hl=en-US&gl=US&ceid=US:en
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