Citigroup's Quarter? It's Complicated.

In this podcast, Motley Fool contributor Matt Frankel and host Deidre Woollard discuss:

• The challenges facing Citgroup.
• Why big banks have to get serious about high-yield accounts.
• Charles Schwab's opportunity to build an integrated platform.

Mark Dixon, CEO of IWG, talks to Deidre about the changing role of the office in business life.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Oct. 16, 2023

Deidre Woollard: Will a rising tide lift all banks? Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst Matt Frankel. Matt, how are you doing today?

Matthew Frankel: Good. It's been a while and I'm glad to be here.

Deidre Woollard: We are going to talk some banking because it's banking season. Banking earnings are usually the first part of earning season, a little appetizer before we get into the tech earnings that start later this week. Last week on the show, we had Dylan and Jason Moser. They covered some of the banks that reported on Friday. They covered Wells Fargo, JPMorgan Chase. One they didn't talk about too much that I'm fascinated by is Citigroup, also reported on Friday. This one has had a bit of a rougher trajectory than even Wells Fargo, which has had its own challenges. They had better-than-expected revenue, but they are really doing some major changes. Tell us a little bit about that and how we should think about it.

Matthew Frankel: Well, Citigroup reminds me of, back in the day when I was single on dating sites, there was an option you could choose that said it's complicated. That's how I view Citigroup to be right now. Everyone asks, how did Citigroup's quarter go? It's complicated. The numbers look pretty strong, but there's a lot more going on. Just to go through the numbers, revenue and earnings both grew year-over-year. Revenue was up 9% year-over-year. Net interest income looks really strong, surprisingly so. Investment banking was a surprisingly strong point, especially considering how weak it has been at other banks. But on the other hand, investors care about the stock performance and not just the numbers. You can't have one without the other and still have to be a good investment. Citi's track record has not been great. Over the past five years, it's underperformed the market by 105 percentage points when you're talking about total return. But on the other hand, it's a very, very cheap stock. I can't remember thinking back even before the financial crisis, when you could get one of the big four banks with a 5% plus dividend yield, Citi has 5.2 right now. It trades for 48% of its tangible book value. It's rare for a solid bank to have below 100% of its tangible book value. The numbers look great, but it really hasn't shown a lot of performance. On the earnings show today, we actually said it perfectly, Citigroup, one of the biggest banks, a really solid history of not being well managed.

Deidre Woollard: Well, let's talk a little bit about that because you said it's one of the big four banks and you've got CEO, Jane Fraser. I'm rooting for Jane Fraser, first female CEO of a major bank. She's got some aggressive plans here. She wants to strip management. She's cutting through five layers of management. She's breaking down silos. It's going to take them about another 2,000 jobs. I think they've cut around 7,000 so far. What do you think? Is this going to be a turnaround? Is she going to do it? I want her to do it, but I'm a little skeptical.

Matthew Frankel: To be totally fair, Jane Fraser took over in March 2021. Let's give her time. It's been not even two and a half years yet, so let's give her time. A mess the scale of Citigroup takes longer than two and a half years to fix even if things are going well. She's not the first person to try to overhaul Citi, but definitely the most aggressive in my mind so far in terms of the plans. A lot of them are already starting to bear results. One of the big priorities, for example, is just automating processes throughout the bank. They used to have to pay people to do, and that's one thing they've done really well. They've been selling off some of their international banking business. One of the biggest handicaps of Citigroup compared to the other big four banks is how much international exposure it have. It's just completely fragmented, like one department has nothing to do with the other and things like that. It's about to close the sale of its Indonesia bank business in the fourth quarter. It just recently announced a deal for part of its China business. It's streamlined, it's reorganized its business into five different business units. This is the first quarter that was in effect. As you mentioned, they're really honing down on the management structure. You mentioned removing five layers of management, that's going from 13 to 8. I can't even fathom what 13 layers of management looks like. At the Motley Fool, there's not 13 layers of management. That would be a nightmare to deal with. [laughs] If I had 13 layers of bosses to talk to and get approval for projects and things like that, it's definitely not the optimal structure and it's never fun to talk about people losing their jobs. But the reduction in headcount could be, if the business is really that inefficient, which historically the numbers tell us that it is, it could be exactly what's needed.

Deidre Woollard: I think that's right. I think, like you said, consolidating some of the international makes sense and also lessens some of their exposure there, which I know has been a concern. They're doing some other stuff. Here's a part where I'm somewhere stuck between skeptical and hey, that's innovative, and that's the Citi Token Services thing. Uses blockchain technology, they say that this can facilitate around-the-clock cross-border payments. Sounds like a good thing for a fairly internationally focused bank. I want to like this. I hear the word blockchain, I hear the word token, I get a little bit nervous. Should I see this as innovation and does this really contribute to the bottom line?

Matthew Frankel: For me, every time I hear the words blockchain in banking these days, it's like a cross between interest and eye-rolling.

Deidre Woollard: Yes.

Matthew Frankel: It's the way I would describe it. We've been hearing for how many years now how blockchain and cryptocurrencies are going to revolutionize the banking business. A lot of banks have incorporated blockchain technology to one degree or another in their business. A lot of financial services companies, Mastercard and Visa, both have big blockchain divisions, for example. But I'm yet to hear a use case that really trickled down to bottom-line profit for any of these banks. It absolutely makes sense. It's 2023 and it's still a nightmare to quickly send money internationally in a lot of institutional cases. The need is definitely there. They had a successful pilot, which makes it a little more encouraging. There is a big need, as they put it, always on financial services, which don't exist right now in a lot of cases for international companies. Citi claims that the market size for being able to tokenize digital securities like this is going to be a $4-5 trillion opportunity by 2030. I'm not skeptical that this is a problem that needs a solution and that this could be the right solution to it. I'm skeptical as to how it benefits Citi in terms of me as an investor.

Deidre Woollard: I think that's a really important point and also blockchain tends to be a little bit like AI. It's thrown into releases to jazz things up, but it's really important to think about how it's going to play out. I want to talk about one more thing with Citi before we move on, and that's their partnership with Edward Jones Financial Services. I like this a bit more than I like the token thing. It feels like a smart deal, also feels like something again that's going to take a while to bear fruit. I feel like with Citi, there's some stuff that we've talked about here that's promising. But as you said, the stock has performed so badly. Is this one where if I'm getting in at this low price, I want to be there for a long time because I know I'm going to have to be patient?

Matthew Frankel: Yeah. I like the Edward Jones partnership a lot, like you said, a lot more than the other one just because I can see how it could translate to bottom line revenue and bottom line profitability. Just to throw some of the numbers out there, Edward Jones has over eight million clients among about 19,000 financial advisors, with a total of about $1.8 trillion in client assets. That's a lot of money that could potentially come onto Citi's platform. How it's going to work is essentially Edward Jones is going to offer what I would call co-branded financial products with Citigroup to its clients, starting with checking and savings accounts. This won't start until 2024, but they'll be able to offer, say, a high-yield checking account that's backed by Citi to its clients. A lot of people want high yield. This is why, for example, just to name one, Wells Fargo's deposit base has declined by 5% over the past year because their yields don't compare to what you can get through high-yield online players. There is a big subset of the population, specifically like the other 95% of Wells Fargo's depositors, who have no interest in leaving a secure platform that they trust to put all their money with SoFi, or Ally Bank, or one of the online players where you can get 4-5% yield. Now if they are all high-yield products and online checking products and things like that backed by Citi that were comparable to those, it could be a very interesting proposition, especially from a financial advisor's perspective, which a lot of financial advisors won't recommend the high-yield platforms and things like that, especially after the banking drama we saw earlier this year. I mentioned Wells Fargo's deposit base decline, pretty what Citi's did as well, Bank of America, JP, all of their deposit bases are declining as people look for higher yield options. That decline essentially stopped at least temporarily after the high-profile bank failures earlier this year. The reason is because they're perceived as high quality, just rock solid, too big to fail institutions. If Edward Jones partnership could use that to its advantage, this could be a bigger deal than people are expecting.

Deidre Woollard: Yeah, I think that's true. You made a really good point about the high-yield savings and I think the awareness of that is growing. I think a lot of people, especially after bank failures, they just wanted to be somewhere safe and now they're like, wait a second, if I'm missing out on 4.5% on cash that's just sitting there, that is too much to just leave around.

Matthew Frankel: Yeah, a lot of people don't want to leave that money on the sidelines. But the problem is big banks generally don't have great savings products. Wells Fargo savings account doesn't pay much, which is why I don't keep much money in it. I keep my savings account with SoFi, a bank that pays me 4.5%. Not that my savings account at SoFi is enormous, but I'm not giving up hundreds of dollars of free money, and a lot of people would feel the same if they had an option that's backed by a big-name bank. Now, other big-name banks are figuring this out and are doing a better job of creating higher-yield deposit products. Capital One is an example that's doing a really great job in doing it. But a lot aren't and a lot of customers aren't aware that you can get a high yield with a reputable big-name bank. I mentioned Edward Jones' reach and the trust that they have with their clients. You have eight million people who trust their advisor, and when their advisor offers them a Citi-branded product, it could be a big deal.

Deidre Woollard: Yeah, absolutely. Let's keep the financial train going. Let's talk a little bit about Schwab. They reported earnings, not a great quarter for Schwab, revenue down around 16%. But good reasons. This company is dealing with two things. One, greater economic climate as we've discussed, not so favorable for the work that they do and the other thing is they're integrating TD Ameritrade that has dragged on their income as they get all of that sorted out. This stock has been beaten up a bit recently, but I don't feel that's fully deserved. What do you think?

Matthew Frankel: No, a lot of people don't realize that Schwab is not just a brokerage, they're also technically a regional bank. They have a big deposit platform. There was a lot of question about how much of their deposits were FDIC insured at the time of the big crashes. It's essentially in a way being treated like a regional bank stock or at least it was at that point. I don't really think that's fully worked out of it yet. But you mentioned the TD Ameritrade integration, which as a TD Ameritrade customer, I have a total of five accounts between things like for my kids and with TD Ameritrade, and only one of them has been migrated to Schwab so far. I can tell you that the integration is going very seamlessly. I've had absolutely no issues. I think you mentioned a stat to me before we recorded where only 45 people out of one million are reporting problems with this. Schwab expected some client attrition. The most recent numbers I could find were from August where they said the attrition was roughly 4% of TD Ameritrade's revenue before the deal is leaving TD Ameritrade and going elsewhere. As I mentioned, that's somewhat expected. A lot of people are using this as the excuse they need to move their broker to a more an online user-friendly app-based platform. I have a brokerage account at SoFi, too. A lot of people I'm sure have small accounts at some of these more tech-focused brokerages and are using this as an opportunity to jump ship. But for the most part, just to name the latest figures, as of the end of 2022, there was about $1.8 trillion of client assets at TD Ameritrade. 1.5 trillion of that has already been migrated. They did retirement accounts first, which is why some of my accounts are still there because those are my non-retirement accounts. But 1.5 trillion has already been migrated, and there's still two waves of account migration to go, one in November and one in January or early 2024. They're saving the more active trading accounts for last. I think mine are going to be in November, I don't consider myself an active trader. Four of mine have still have to be transferred over and I have no intention of moving them. It's been going well. They've maintained their customer service during the transition, which is something that a lot of people were worried about. They still claim it takes less than one minute to answer the average phone call, which a lot of brokers that's not the case, I can tell you that firsthand. That's very solid and they're doing a good job of integrating the best parts of both businesses. Just today, they announced that thinkorswim, the TD Ameritrade trading platform, when they announced this merger, my biggest question is, am I going to lose access to thinkorswim? That was my biggest number 1 thing that would keep me or lose me as a customer. Now, they just announced today that thinkorswim is available to all Schwab customers. They're calling it Schwab Trading powered by Ameritrade as a more broad name. A lot of this is rolling out and it's adding to their ecosystem. That was the goal. It's not just to acquire TD Ameritrade's customers, it's to combine the best of both platforms, what works, what doesn't work. If they're doing that, it's going to be a more valuable product going forward, even with some attrition in the meantime.

Deidre Woollard: I think that's really interesting. On the call, the CEO called it a bull market for advice right about now. You just mentioned that the thinkorswim platform, that competes with some of the other newer, flashier players that are in the industry. You've got this older brand with Charles Schwab. There's a lot of options out there. What do they have to do to stay relevant with both the retail investor as well as their more traditional client base?

Matthew Frankel: Well, one thing I would point out is Schwab's bread and butter is retirement investing. I mentioned that's pretty much what they've migrated so far and it's been something like 80% of TD Ameritrade's assets. That part I don't think they're going to have much of an issue with losing to a SoFi or things like that. I'm not moving my solo 401(k) to SoFi. The retirement clients are the backbone of Schwab is what I would call it. I feel like Schwab targets a different set of investors than say Robinhood, or Webull, or even SoFi, which is I'd say a little more long-term investor-oriented. Robinhood especially is skewed toward smaller accounts, not a big material impact to the potential asset base that Schwab could bring in. Schwab's bread and butter is big accounts and I don't really see that jumping ship. Even the robo-advisory platform, last I checked, had the highest minimum of any robo-advisor on my radar. I want to say they had a $5,000 minimum to be a robo-advisory customer, which a lot of them, like SoFi's minimum is zero. You could start an account with nothing. I think they're staying relevant by combining the best features of both platforms. I think thinkorswim is still the best trading software I've ever used. I think that customers that are in their target demographic are going to appreciate it and stick with them.

Deidre Woollard: Last question for you, we started talking with a blockchain. I had to bring in the other trend, which is AI. Charles Schwab, there is maybe a little bit of an existential threat here with the impact of AI on the investing space and the advising space. Like you said, Schwab, they already have robo-advisors. They seem to be embracing the future of AI while they still have to support all of those wealth advisors and everything like that. Is that a tricky thing to navigate for them going forward?

Matthew Frankel: It is. The robo-advisory thing isn't new. A lot of people who want to be robo-advisory clients are. Most retirement plans are a bunch of index funds and things like that. I don't see AI as a big existential threat to companies like Schwab, maybe to a Robinhood or something like that. But the robo-advisory business isn't a big enough piece of the puzzle where we're having that outcompeted would be that big of a deal, if that makes sense. I don't think AI is a giant threat to Schwab, and I think they're a big enough company that they can stay ahead of the curve on AI. Every company that is at least a little bit tech-focused is investing in AI right now. I don't see them letting themselves get outcompeted by smaller players in the space.

Deidre Woollard: That makes sense. Thanks for breaking this down with me today, Matt.

Matthew Frankel: Sure. Always glad to chat financials.

Deidre Woollard: [MUSIC] The analysts you here on the show have a whole other day job providing premium coverage and recommendations for the Motley Fool's suite of stock investing services. We're giving our listeners a discount on Motley Fool's flagship service. It's called Stock Advisor. If you're interested in more analysis from our team, two stock recommendations per month, and access to Stock Advisor's full scorecard of companies, visit www.fool.com/mfmdiscount. Before there was WeWork, there was Regus and Mark Dixon. I talked with Dixon, founder of IWG, the parent company of Regus, about hybrid work and the future of offices. We're recording this in mid October, so we're about a month into many of the return-to-work mandates. We're seeing some increase in attendance in the US. What are you seeing so far from your aspect?

Mark Dixon: We'll look from our aspect, we're at the receiving end of a change in the way people are working. So in terms of the whole idea of return to work hasn't really affected us because people are working with us, but working with us in different places. The idea of return to work is confusing the narrative about what companies are actually doing, which is increasingly moving their workers to more convenient workplaces closer to where people live. They're still using cities, but they're just using the larger cities less. There's a huge change going on. The narrative hasn't yet caught up with reality, but we are benefiting from it. We had record results on our half year this year, both in revenue and profitability and growth. All three in fact, growth in the network. That's caused by more and more people wanting to work in a different way, and more and more companies adopting a different way of working.

Deidre Woollard: Well, you have this dramatic tension between what workers want and what companies want. I heard this new trend word recently called coffee badging. I'd never heard of this before. But this is employees swiping their keycard, which of course is used for attendance, get coffee and maybe they don't stay the whole day. What are you seeing in terms of how people are using work spaces? Are they coming in and out? Is there more flexibility there?

Mark Dixon: Well, look, we are entirely flexible anyway.

Deidre Woollard: True.

Mark Dixon: Essentially, we've got three and a half thousand buildings that you can use whenever you want, anywhere you want. The whole mantra of what we do is around flexibility, and that's why companies are coming to us. What the companies want, companies want their people to be productive and well supported. They want them to be efficient and they want to get the maximum from their investment in that employee or group of employees. That's what companies want. What the team members want is not to have to commute every day. The ability to work not at home, but close to where you live, some of the time is a huge benefit and it's one that work has very much value and is what is actually happening. It significantly reduces the cost for the company as well. The trend is gathering momentum, which is a change in the geography of work facilitated by technology, allowing people to work in much more convenient locations. That's what's happening. We are opening up in provincial locations all over the world, all over the United States and these are villages, smaller towns, smaller cities, and these are particularly successful as workplace locations. These people, they just don't want to commute. This commuting really is the elephant in the room that people are trying to avoid. The amount it cost and the amount of time it takes really makes a job more unattractive if they have to do that every day. Okay to go into a central office to collaborate with colleagues once, twice a week, absolutely. But not every day. It's just unnecessary. For some workers, it's almost never necessary and they have worked in a flexible hybrid way for a long, long time. This is not a new thing. It's just more workers are adopting it.

Deidre Woollard: I think this is interesting, too, because what you're talking about is the idea of less of going to the office and maybe going to multiple offices. I know that you've talked in recent interviews about hybrid beating the people want to work, like you said, not necessarily from home, but near home. Maybe they go to an office near their house one or two days a week, and then they go to the office maybe in the city once a week or something like that. So it seems like there's a lot of optionality now in how we consider work.

Mark Dixon: Look, it's what we call platform working. You have a platform of places you can work. As a worker, you decide where you're going to be the most productive on that day. It's about convenience. Basically, technology allows you to work from anywhere. So why would you travel to an inconvenient place to just use technology? You travel to an inconvenient place to collaborate with other people, if that's what you're going to do. But not if you're doing basic background work, which most people are doing most of the time. So it's a fundamental change and it's been gathering momentum. Started pre-COVID, pre the pandemic, and the pandemic accelerated it, and now it's got terrific momentum. All research points to most companies reviewing hybrid as a change to the way some of their workers or maybe all of their workers in some cases will work much cheaper, much better for people, much better for the environment, and basically it would be the most popular thing you ever do for your employees.

Deidre Woollard: Are you saying it's unilaterally happening or you're noticing different trends in different countries because, of course, you have offices all around the world? Is there a difference in attitudes in the US versus elsewhere?

Mark Dixon: That's a really interesting question. Look, it's not linear, that's for sure. But if you look at the most traditional countries like Japan that you would think are very traditional, they are also the countries with the longest commute times. Very good transport system, but commute times are long. So really rapid change in places like Japan that's very traditional. It depends somewhat, if you go into places like China, very good transport system and basically homes are smaller. There may be more families in one home, more generations. It really depends on where people live and how they're living and how good the transport system is as well. Places like Australia, worst in the world is Australia because the commuting is not very good, because there's not that much public transport. Most people commute by car and homes are larger and the technology is very good in the homes. So you get people working more locally in places like Australia because the commute is longer. The ditto, Bay Area, California or Los Angeles, I mean, it's almost impossible to get from one end of Los Angeles to another unless you want to take hours doing it depending on where you are. So it's down to geography somewhat, but it's also down to different traditions in different countries, but it's pretty universal. There's not a single country that's not happening. It's just at what speed is it happening? This is large corporations pretty universally looking at it and, of course, small companies and start-up only do this because best way to control your costs. Last thing you want is investing in long-term property when you don't know where your company is going to be in a year's time, and you don't want to be putting capital into property, you want to be putting it into your business and just you rentalize. No way you would do that. Therefore, lots of companies are hybrid only.

Deidre Woollard: As always, people on the program may have interest in the stocks they talk about and Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard and thanks for listening. We'll see you tomorrow.