Citi: The megabank that is always rebuilding

Early this year, Jane Fraser made one of her characteristically frank comments about Citigroup.

The long-beleaguered megabank — which has struggled with poor financial performance, ineffective risk management and internal controls and a stagnant stock price — has made strides in becoming a smaller, simpler firm since Fraser took over as CEO in 2021.

But the enterprisewide transformation that she's trying to execute isn't over.

"We have more work to do," Fraser told analysts in January during Citi's fourth-quarter earnings call. "And I and my management team … are fully accountable for getting this all done."

And then, with the confidence and grit that has defined her tenure, she added: "We will."

Three years after Fraser's promotion to CEO of Citi, the $2.4 trillion-asset global financial giant with operations in 95 countries is deep into its latest — and largest — restructuring effort. Under Fraser, a former partner at McKinsey consulting firm who has cleaned up various businesses within Citi since her arrival in 2004, the company is trying to shed its old "financial services supermarket" skin in favor of a slimmed-down, sharply focused organization that generates higher revenues and fewer expenses, and ultimately revives its lagging share price.

To get there, Citi has made several changes, including crafting a strategy around five lines of business. It has sold consumer franchises in nine countries, and continues to work on finding a buyer for its Poland franchise while winding down consumer operations in Russia, China and Korea and pursuing an initial public offering of Banamex, its consumer franchise in Mexico.

Last fall, it rolled out its most consequential changes to date, a plan to reduce management layers from 13 to eight and revamp its reporting structure so that the heads of all five business lines now report to Fraser. The first round of delayering was expected to result in roughly 5,000 job cuts through the end of March, which should save about $1 billion annually, executives have said. In addition, another 15,000 net positions will be eliminated by the end of 2026, as Citi consolidates certain functions and cuts costs in areas like wealth, Fraser has said.

All the while, Citi has been making investments to improve its risk management infrastructure and processes, in part to address deficiencies identified in a pair of consent orders issued in 2020. Fraser has said that the risk management improvements are the top priority for the firm.

While 2023 was a "foundational" year for Citi, 2024 is an "inflection" year as the company moves into the second phase of the restructuring plan, Fraser said on the January call.

"We know that 2024 is critical as we prepare to enter the next phase of our journey," she said.

Analysts and industry observers agree. This is the year that Citi, whose history is littered with failed restructurings, must start moving closer to the financial goals it set in 2022, they say.

"They've laid out what they want to do, and now they need to do it," said Jason Goldberg, an analyst at Barclays who has followed Citi for his entire 30-year career. "It's all about execution."

Valerie Plesch/Bloomberg

'Elusive promises and manifold pitfalls'

It could be argued by even the most casual of observers that Citi, at least throughout the past several decades, is the epitome of a company that's always rebuilding, but never quite rebuilt.

The company's roots go back to 1812 when it was chartered by New York state as the City Bank of New York. In 1865, it traded its state charter for a national charter and became known as The National City Bank of New York. The conversion allowed Citi to be a depository for the federal government and join the national banking system, which replaced the fragmented banking sector of the pre-Civil War years with a set of uniform rules for banks across the country.

Even in its earliest decades, Citi showed interest in doing business beyond its home base. It launched a foreign exchange department toward the end of the 19th century, and in 1914 it opened its first international office, a branch in Buenos Aires, Argentina. It continued to grow during the 19th century, expanding beyond Europe and Asia by moving into the Middle East and Africa.

Its modern-day chapter began in 1998 when Citibank, which was a leader in credit cards, private banking and foreign exchange, paired up with Travelers Group, a financial services firm that offered insurance, asset management, investment banking and capital markets services.

The union was described as a "merger of equals" that resulted in a new name: Citigroup.

The $70 billion deal created "the world's biggest financial services company," the New York Times reported at the time. Four years later, though, Citi spun off the slow-growing Travelers Property and Casualty insurance underwriting business, in an attempt to lift its stock price.

When the subprime mortgage crisis struck in 2007, Citi found itself in trouble. By late 2008, the company was insolvent, even after receiving a $25 billion taxpayer bailout.

Amid massive job cuts and shares trading at less than $1, the U.S. government agreed to a second bailout with another $20 billion of capital. Work began to restructure the firm, and in 2008 Citi announced the sale of Smith Barney, its retail brokerage arm, to Morgan Stanley.

The deal stripped Citi of a retail brokerage business, which it has not rebuilt.

Since then, under different CEOs, Citi has shrunk its footprint and business operations while dealing with various risk management blunders, regulatory fines and lawsuits. It has grappled with consent orders, including one each from the Federal Reserve and the Office of the Comptroller of the Currency in September 2020, about a month after it mistakenly made a $900 million payment to the creditors of Revlon. In 2022, it was freed from a 10-year-old consent order issued by the OCC related to anti-money-laundering controls and Bank Secrecy Act compliance.

It continues to address the deficiencies outlined in the 2020 consent orders. Between 2021 and 2023, Citi spent a combined $7.4 billion on technology, consultants and compensation related to the risk management overhaul, as well as on other efforts to modernize the company.

Meanwhile, its stock price has been one of the worst-performing on Wall Street. Citi shares, which began an impressive ascent in the late 1990s, were trading above $500 by June 2007. The following June, just before the financial crisis swung into high gear, shares had fallen by 64.5%. By June 2009, shares were at $31 apiece, down 94% in two years, and they have never fully recovered. In mid-March, the stock was trading around $58 — down about 20% since Fraser became CEO.

Over the years, it has also repeatedly missed financial targets. In 2013, with Michael Corbat newly at the helm as CEO, Citi laid out financial goals it expected to meet in 2015 — but by that year, it had hit just one, return on assets, as its performance kept lagging behind peers. More recently, after delivering a return on tangible common equity of 12.1% in 2019, it missed its 2020 target, coming in at 6.9% when it was aiming for 12% to 13%. The miss was at least partly attributable to the economic impacts of the pandemic, the company has said.

Between 2017 and 2021, it averaged an ROTCE of 10.2%, versus about 13% at peer banks.

Another financial metric, return on equity, has also floundered compared to its peers. For 2023, Citi reported an ROE of 4.3%. JPMorgan Chase reported an ROE of 17% for the year, while Bank of America and Wells Fargo reported ROEs of 9.75% and 11%, respectively.

Some critics have taken aim at Citi's historically sprawling operations and multipronged business lines, saying it's too big and doing too many things in too many places to operate well.

"Citigroup has served as the poster child for the elusive promises and manifold pitfalls of universal banking," Arthur Wilmarth Jr. wrote in a 2014 report called "Citigroup: A Case Study in Managerial and Regulatory Failures." Wilmarth, professor emeritus of law at George Washington University Law School, wrote that Citi's "high-risk, high-growth strategy" has been disastrous.

In a recent interview, Wilmarth stuck by that decade-old analysis, adding that "what you tend to find is that Citi has a near-death experience or very serious problems, and the attempt is to restructure it to try to solve problems."

Fraser's early move to ditch consumer franchises overseas, which she announced early in her role as CEO, was "needed and overdue," he said.

Still, he questions Citi's current plan to boost revenues while cutting back on spending. "But I get the sense that investors are saying, 'We're not willing to be patient any longer,'" he said.

'We're not … selling dreams'

All together, Citi's turnaround plan is ambitious.

On the revenue side, the company is targeting a compound annual growth rate of 4% and 5% through 2026. While revenues fell 5% in 2021, they rose by 5% and 4% in 2022 and 2023, respectively, according to Citi's annual reports.

Citi has also set a goal to achieve an efficiency ratio of less than 60%, which would be an improvement from 72% in 2023 and 68% in 2022. A higher efficiency ratio indicates that a company isn't using its resources as well as it could to drive higher income.

The biggest hurdle could be lifting its ROTCE ratio, a key profitability metric, to somewhere between 11% to 12%. That's more than double 2023's full-year ROTCE of 4.9%, or 7.3% excluding one-time items, and higher than the 8.9% reported for 2022.

Extracting the value from each of Citi's five businesses — markets, business and investment banking, wealth, U.S. consumer banking and services, which includes the highly profitable treasury and trade solutions as well securities services — is a crucial step.

Each business has its own set of financial targets, and there are growth opportunities embedded in all of them, according to Anand Selva, Citi's chief operating officer and a 33-year Citi veteran.

"Starting with Jane coming in three years ago, the object was to get to a focused and targeted business strategy, and that led to the five core businesses, which are very interconnected," Selva said in an interview. "These five businesses are equally critical, from our perspective."

So much so that part of Citi's reorganization that began last year was to scrap the company's two main operating divisions, thereby eliminating the need for individual heads of those divisions and moving up the CEOs of the five businesses so that they now report directly to Fraser.

That includes two executives who have been hired away from other big banks and have a lot of work to do to improve their respective divisions. Andy Sieg rejoined Citi in September as head of the wealth division. Sieg, who worked at Citi from 2005 to 2009, was most recently president of Bank of America's Merrill Wealth Management.

And this summer, Viswas Raghavan will join Citi as executive vice chair and the head of banking. Raghavan was most recently in charge of global investment banking at JPMorgan Chase.

"We've definitely been on the front foot there," Fraser said at an industry conference in March, referring to Citi's ability to attract high-ranking executives from rival banks. "I've been pleased with our ability to get the best talent in the individual areas that we're looking at."

Both Sieg and Raghavan face challenges. Citi's wealth business has been impacted by investment fee headwinds and higher deposit costs. Revenues for that line of business fell by 5% in 2023, while expenses rose about 10% for the year. In business and investment banking, 2023 revenues were down about 15% compared to 2022 as expenses rose by 9%.

Shahmir Khaliq, as the head of Citi's services business, reports to Fraser and joined the executive management team last fall. Services is often called Citi's "crown jewel" because of its consistent performance. The unit reported a full-year ROTCE of 20% for 2023, which was a record with $18.1 billion of revenues, an increase of 16% from the prior year. Its continued success will be a big factor in Citi's ability to meet its goals.

"Our plan is to continue to add to that momentum," Khaliq said.

Like Khaliq, Gonzalo Luchetti also now reports to Fraser. As the CEO of Citi's U.S. consumer banking unit, Luchetti oversees three main areas: Citi-branded credit cards, credit cards that are branded by retail partners such as Macy's and American Airlines and a retail banking franchise with 650 branches concentrated in six U.S. markets, such as New York and Miami.

The unit's ROTCE came in at 3.6% for the fourth quarter of 2023 and 8.3% for the entire year. At the same time, it has reported six quarters of double-digit revenue growth, Luchetti pointed out.

Citi has not publicly disclosed a target ROTCE for the division.

Luchetti says there is "more work" to do when it comes to increasing the unit's returns, but he is confident in the group's ability. "The crispness and sharpness and clarity of saying the same formula isn't working and saying we need to change. … We're seeing a lot of change in structure and how we talk about what we want to do," said Luchetti, who joined Citi 18 years ago. "We're not, in my view, selling dreams."

Making the change stick

To put it mildly, enacting deep, lasting change across an organization is a huge undertaking. Companies, no matter the size or industry, are often forced into change as a method of survival, and those that can't or won't adjust become irrelevant, and may eventually go out of business.

To be successful, CEOs and other top executives should consider "the why, how and what" — in that order — of any restructuring, said Anouk De Blieck, an advisor who helps companies navigate change. Then they need to ensure alignment not only among senior management but also the layers below so that others are buying into the new vision of the firm, she said.

"It's a lot easier to just come in with a strategy and say, 'Let's just implement it everywhere and do it fast and everyone will get it and everyone will obey,' but then you start to see paralysis," said De Blieck, who worked at Citi from 1996 to 2010 in various human resources and business roles. "The problem is it takes longer and, of course, the risk is that you don't succeed."

De Blieck said she has vaguely kept up on Citi's journey from afar in the years since she left the company, which she said has never done a "holistic transformation" before. In her view, the key for Fraser and her team is to get "buy-in" from the next layers of the company. And that "buy-in" improves the overall culture, which increases the chances of a successful overhaul, she said.

"It's only a transformation when you can make the change stick," De Blieck said.

It remains to be seen how effective the managerial reorganization in particular will be. Knowing that 10% of the company's workforce, which was about 239,000 at the end of December 2023, is expected to be culled over the next two years could impact performance, Wilmarth said.

"What is morale like?" Wilmarth wondered. "If 10% of us are going to disappear, does it incentivize us to work really hard or does it incentivize us to go out and find something else?"

For the past two years, Titi Cole has been in charge of Citi's "legacy franchises," which are being sold or wound down. It was created by Fraser in 2022 as a separate segment that includes the consumer businesses and workforces in Asia, Europe, the Middle East, Africa and Mexico.

Cole, who previously worked at Wells Fargo, Bank of America, Chicago-based BMO and McKinsey, said that attrition across legacy franchises is lower than the historical average, in part because leaders are being transparent with colleagues about the divestitures and exit plans. Across the enterprise, managers are "stepping up activities around engagement" in order to retain personnel, which is also helpful as the company improves its risk management and controls, she said.

"We continue to be able to attract talent, and that speaks to the power of [Citi] and people seeing that a simpler Citi will be able to compete more effectively in the marketplace," Cole said.

Today's Citi is not the Citi of the past

Increasingly, analysts who have been deeply skeptical of Citi are starting to reconsider its potential and the likelihood of pulling off one of the toughest corporate turnarounds in decades.

Some, including Piper Sandler and CFRA Research, have recently lifted their ratings of Citi's stock as it makes good on its simplification efforts and drives growth in areas where it is a dominant leader, such as services. Mike Mayo, an analyst at Wells Fargo Securities, has harped on Citi for years about its expenses and the complexity of its business operations. He is forecasting that Citi's stock will double by 2026. In fact, he has pegged the stock as his No. 1 pick for 2024.

Even Warren Buffet has gotten on board. Berkshire Hathaway, his holding company, acquired Citi stock in 2022 and, as of March, owned about 55 million shares valued at $2.8 billion.

Mayo says his change of heart emerged last summer when he had a meeting with Fraser and experienced what he calls an "a-ha moment" as Fraser laid out her vision and execution plans.

"That's when she laid out the strategy in about the best terms I've heard, perhaps ever," he said.

To be sure, he isn't convinced that Citi will meet its stated revenue, efficiency and ROTCE targets through 2026. He thinks its "track record doesn't support topline revenue growth" that the company has set and the impact of lower interest rates could also become a burden, he said. In addition, it's "imperative" that the organizational overhaul announced last fall gets finished soon, he said.

But the creation of five lines of business will be a game changer over the long run, he added.

"We continue to be able to attract talent, and that speaks to the power of [Citi] and people seeing that a simpler Citi will be able to compete more effectively in the marketplace," said Titi Cole, head of legacy franchises.

"That is absolutely different from the Citi of olden days, and the chain reaction from that simplicity at the top should be improved efficiency, focus and returns," Mayo said.

Scott Siefers, a Piper Sandler analyst, has also expressed increasing bullishness on the stock and the company as a whole. In a February research note, he changed his rating from "neutral" to "overweight," citing three factors: Fraser at the helm, the progress she and her team have made so far to "move the ball down the field" and her "clearly laid out roadmap for the future."

In an interview, Siefers said that it was a January meeting with Fraser — his first with her since he began covering Citi in late 2022 — that gave him more confidence in the company's ability to change its course.

Completing the consumer franchise sales from certain overseas markets, and moving along with the rest of the exits, is also helping by building credibility, he added.

"We're getting to the point where Citi looks more understandable from the outside," Siefers said.

Still, there are challenges ahead, he noted. Citi needs to start reducing expenses, which rose 10% in 2023 to $56.4 billion. For 2024, it is predicting that expenses will land somewhere between $53.5 billion and $53.8 billion for the year, including $700 million to $1 billion of severance and other costs related to the company's reorganization and reduction in headcount.

It also needs to start pulling in more revenue, including in wealth and investment banking, Siefers said. If Citi can't reach its goal of about 4% revenue growth for the year, he said, it could still produce earnings by taking out even more expenses as he thinks there is some "wiggle room" baked in.

An increasing number of analysts point to one factor that may well be the difference between Citi's current restructuring and those attempted in the past — the picture Fraser and her team have painted of what Citi could be, and then making certain decisions that other CEOs wouldn't.

"Of all the strategies we've witnessed, I do think this one has the highest chance of succeeding," said Goldberg, the Barclays analyst whose firm hosted the industry conference in September where Fraser announced the managerial reorganization. "When you look at what she's done since she got to Citi … she's been an agent of change within that organization and she knows where the bodies are buried.

"But more importantly, she's willing to make some of the tough decisions," he said.

At the conference, just before announcing the reorganization, she met with some investors and talked about the changes ahead, Goldberg said. "And it wasn't lost on her that some people would be unhappy with the decisions announced. But that's not to say they weren't the right decisions."

'Stick to the plan, head down'

Not everyone is convinced, of course.

There are critics, including Wilmarth, who remain wary of Citi's ability to increase revenues while cutting costs. Others, such as Christopher Whalen, chairman of Whalen Global Advisors and publisher of the Institutional Risk Analyst blog, have suggested that Citi would be better off if it merged with a large asset management firm or if it broke itself up and sold off the pieces.

In the near term, Fraser "has to continue her drive to cut costs" and reduce Citi's efficiency ratio, Whalen said in an interview. "That's credibility and says to shareholders, 'Yeah, I get it.'"

CEO Fraser calls 2024 a 'turning point' year for Citi

Others aren't so sure about how realistic it would be to break up Citi or find a merger partner. But some, including Mayo, say this is Citi's last chance at having a CEO from inside the firm.

"Jane Fraser is finally grabbing the bull by the horns and changing Citi's strategy with a nice plan, but can she keep revenues, expenses and controls within the desired parameters?" Mayo said. "If she can't generate returns above cost of capital … then they need to consider somebody from the outside."

And all eyes will be on Citi's ability to address its longstanding risk management challenges.

In February, Reuters reported that regulators are stepping up pressure on Citi to make changes to the way it manages risk, and said that Citi recently failed regulatory exams that were meant to determine if the company is making as much progress on data integrity as it says it is.

The story also noted that Citi's own audit staff have said that some of the work related to risk management isn't sufficient and that the bank hasn't fulfilled certain regulatory requirements.

Selva, the company's COO who is in charge of that work, declined to address the claims in the report. But broadly, it's "a multiyear effort, and like all multiyear efforts, it's not going to be linear," he said.

"We are very deep into the execution and making good progress against the plan," he said.

As for Fraser, with her trademark determination, she appears undaunted by the work ahead.

As she put it at the March industry conference: "We just make sure that we execute and get on with it. … Stick to the plan, head down and just relentlessly execute."