Like most of the megabanks in 2020, Citigroup (NYSE:C) struggled as it faced high credit costs and the ultra-low-rate environment brought on by the coronavirus pandemic. The bank also dealt with and continues to deal with regulatory issues related to its internal controls over compliance, data, and risk management.
In the back half of 2020, the bank announced that its longtime CEO Michael Corbat would retire, sooner than most expected. Jane Fraser, who has worked at Citigroup for the last 16 years, is the new CEO. With a new leader and lots of challenges to overcome, let's take a look at four things to expect from the bank in 2021.
1. Embarking on a new strategy
Citigroup has long frustrated investors for failing to generate the same returns as its competitors, which might explain part of the reason Corbat retired sooner than most expected. On her first earnings call as CEO last week, Fraser said one of her main priorities is "refreshing our strategy." And from her high-level comments, it seems like Fraser wants to double down on Citigroup's global capabilities. Citigroup is already in 160 countries and jurisdictions, but the direction makes sense for Fraser, who led the bank's Latin American region before becoming CEO.
Fraser said management is currently "assessing which businesses can attain leading market positions in a much more digitized world." This assessment could ultimately turn into a major shake-up at the bank, where business segments are shuffled, some wound down, and others strengthened. Already, this has begun to pan out, with the bank recently announcing that it will merge its consumer wealth management and private bank into one business line. The bank also recently named new heads for Citigroup's U.S. consumer business and treasury and trade solutions division. Management is still working through its strategy, but there should be more news to come this year.
2. Addressing regulatory issues
A unique issue facing Citigroup relates to issues with its internal controls and risk management. Regulators in the back half of the year hit the bank with a $400 million civil penalty order for its failure to address these long-standing issues, some of which date back to 2013 and 2015, the Federal Reserve said in its consent order. The issues were also put on full display after Citigroup accidentally wired $900 million to several lenders of the cosmetics brand Revlon. Management ultimately attributed the mistake to a manual "clerical error" and the bank's "out-of-date" software.
What all of this means is that the bank is going to have to invest heavily in order to fix or add infrastructure that will ultimately improve the bank's internal controls and get back into compliance. Citigroup's CFO Mark Mason said the bank spent $1 billion on the transformation in 2020, which included investing in technology and talent. Mason expects overall expenses at Citigroup to climb another 2% to 3% in 2021, most of which will be added to the transformation spend as well.
Fraser said management has specific work streams in place to address all of the necessary work. She added that Citigroup will present a gap analysis in February and provide an implementation plan in May.
3. Stock buybacks
After recent stress testing showed that large U.S. banks could sustain sufficient capital levels in much worse economic scenarios than are expected to occur, the Fed lifted its ban on buybacks. Citigroup will begin repurchasing shares this quarter and expects to be able to repurchase about $1.8 billion worth of shares in the first quarter. However, the Fed is currently limiting capital distributions to the trailing-four-quarter average net income. If that cap is removed later this year, which is possible, Citigroup could increase the pace of its buybacks. Management didn't necessarily say it would do this, but the bank is currently sitting on plenty of excess capital, so it's certainly possible.
4. Improved profitability, but less efficiency
Like most banks this year, Citigroup should be able to generate better profitability due to lower credit costs, the likely ability to release loan reserves back into profits, and because it can buy back shares. However, despite better profitability, the bank will likely get less efficient in the short term. Citigroup's efficiency ratio, a measure of a bank's total non-interest expenses expressed as a percentage of total revenue (lower is better), increased in 2020 and it could increase again this year.
Mason said revenue is expected to drop in 2021, as the stellar performance from the bank's markets division in 2020 begins to normalize, and as net interest revenue on assets such as loans also continues to decline in the low-rate environment. Couple that with the rise in expenses Mason warned about, and you get a rising efficiency ratio.