Citigroup’s Transformation Efforts Marred by Regulatory Uncertainty
The banking sector has been on a roll lately, with major players like Bank of America and Morgan Stanley posting impressive earnings. However, Citigroup Inc. stands out as a notable exception. Despite beating expectations and reporting revenue growth across all five divisions, the stock fell 5% on the day of its third-quarter earnings announcement.
A Moment of Confusion
The confusion began during an exchange between CEO Jane Fraser and analysts on Citigroup’s earnings call. When asked about potential asset-cap restraints, Fraser didn’t immediately refute the question, sparking speculation about new regulatory handcuffs. It wasn’t until later that she clarified, “Let me be crystal clear, we do not have an asset cap, and there are no additional measures… And not expecting any.” The exchange highlighted the challenges Citigroup faces in convincing investors that it has its compliance problems under control.
Regulatory Scrutiny
The questions from analysts were partly spurred by a letter from Senator Elizabeth Warren (D-Mass) to the Office of the Comptroller of the Currency. Warren urged the bank regulator to impose new growth restrictions on Citigroup and consider forcing a breakup if it doesn’t adequately reform its risk management and internal controls systems. The idea of growth restrictions refers to a so-called asset cap, which sets a ceiling on how big a bank can get until it satisfies regulators that any outstanding concerns have been resolved.
A History of Challenges
Citigroup is no stranger to challenges with regulators. In July, it was hit with $136 million in fines for failing to make sufficient progress on consent orders imposed by the Federal Reserve and the OCC in 2020. Earlier in the summer, regulators found weaknesses in Citigroup’s “living will.” However, there have been signs of progress on old problems, including the Fed ending a decade-old enforcement action against Citigroup in 2020 relating to anti-money laundering policies.
Expenses and Investments
Analysts questioned whether Citigroup can bring down its expenses while investing in regulatory, compliance, and data initiatives needed to escape the 2020 consent orders. Chief Financial Officer Mark Mason pointed out that the bank plans to cut its expenses from $53.8 billion to a range of $51 to $53 billion in 2026. Fraser discussed how Citigroup is focused on simplifying its operational model, modernizing its infrastructure, and reducing risk.
Analysts Weigh In
Despite the regulatory overhang, some analysts remain optimistic about Citigroup’s transformation efforts. Bank of America analyst Ebrahim Poonawala noted the progress management continues to make in boosting franchise profitability. Wells Fargo analysts project Citigroup to achieve a 10% ROTCE target in 2026, and Mayo believes the bank can get there. However, others are more cautious, citing concerns about Citigroup’s profitability metric, ROTCE, which fell to 7% in the third quarter.
The Road Ahead
Citigroup’s transformation efforts are ongoing, but regulatory uncertainty remains a significant challenge. As the bank works to convince investors that it has its compliance problems under control, it will be crucial to watch its progress and the impact of regulatory scrutiny on its stock performance.
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