It hasn't exactly been an easy year for Citigroup (C -2.07%). It stock price is down close to 20% and trades at a rock-bottom valuation. While the bank's multi-year transformation plan is now firmly in place, the plan ran into several hitches along the way that led to write-downs, it still has regulatory issues to work through, and it faces higher capital requirements going forward.
But Citigroup finally caught a break -- and to the tune of $500 million. Can the stock keep the momentum going and start turning things around? Let's take a look.
Finally getting back the Revlon funds
In 2020, Citigroup accidentally wired $900 million to a number of companies that loaned money to the cosmetics brand Revlon.
Citigroup at the time served as Revlon's loan agent and was supposed to wire an interest payment on the loans to several companies. But in an embarrassing blunder, Citigroup actually transferred the entire loan repayment amount to the loan issuers in what the bank would later attribute to a "clerical" error and out-of-date software. This very public mistake likely contributed to banking regulators fining Citigroup $400 million. At the same time, regulators issued the bank a consent order telling it to clean up its act and correct longstanding issues with its internal controls related to compliance, data, and risk management.
To make matters worse, when Citigroup tried to recoup the funds it wired by mistake, several of the recipients including Brigade Capital Management, HPS Investment Partners, and Symphony Asset Management refused to return the funds, more than $500 million in total. Obviously not happy, Citigroup sued these companies.
The bank's first visit to court didn't go so well. U.S. District Court Judge Jesse Furman ruled that recipients who did not return the funds to Citigroup could keep them because they were actually owed that amount by Revlon, and the funds wired were the precise amount down "to the penny."
Not happy with the decision, Citigroup appealed the district court's ruling. This month, the 2nd U.S. Circuit Court of Appeals in Manhattan ruled that Citigroup can recoup the funds and sent the case back down to the district court to make another ruling based on the appeals court's decision.
Judge Pierre Leval wrote in the court's decision that Revlon's lenders were made aware of the mistaken wire, and should not be given a "huge windfall."
Columbia Law School Professor Eric Talley submitted a friend-of-the-court brief that said "the circumstances were suspicious enough that the lenders should have picked up the phone to check with Citigroup, and had they done so they would have quickly learned that the payment was a mistake."
The ruling is not just a big break for Citigroup, but also for the entire banking industry. While I would hope we don't see another $900 million mistake anytime soon, accidental wires happen all the time in the age of digital banking and this won't be the last of them. If the U.S. District Court's ruling was upheld, it might set a bad precedent for other similar banking mistakes down the road.
Can the stock turn it around?
Even with the good news about the appeal, the whole issue serves as a reminder of some of the issues weighing Citigroup down. Citigroup has a good plan in place to get its ship back on course, and investors should note that the specific issue the ruling addresses has very little to do with the bank's fundamentals, strategic vision, or core returns.
The bank is making big and difficult changes by winding down or selling 14 international consumer banking units, including its very profitable Citibanamex division in Mexico. These sales will make the bank less complex and more capital efficient while allowing Citigroup to focus on its strengths like investment banking, corporate banking, and wealth management.
Another sign that Citigroup is on the right course of action came earlier this year when Warren Buffett's company, Berkshire Hathaway, opened a sizable new position in Citigroup, the first time the conglomerate invested in the bank in more than two decades.
While the transformation will not be easy or come quickly after years of failures to fix things, I ultimately do believe Citigroup is on the right path and its stock could be a good long-term buy.