Citigroup is switching things up and it’s moving at lightning speed.
The $2.26 trillion-asset bank, led as of March 1 by Chief Executive Jane Fraser, is cutting loose the business lines that don’t perform, ratcheting up the focus on those that do and pouring billions of dollars into a massive risk management overhaul to make the firm safer, sounder and more secure.
The moves are designed to address two issues: In addition to heightened scrutiny from U.S. banking regulators — which fined Citi last fall for gaps in risk management — shareholders are demanding more value from the bank, whose share price is down more than 50% since the financial meltdown of 2008.
Fraser has vowed to return capital to shareholders and to do so at or near the levels of other large U.S. banks. “We’re a team on a mission to get this done,” Fraser said in January. “And we will get this done.”
While the circumstances driving Citi’s urgent makeover are unique to Citi, the pressure to do more and be more is present at every U.S. megabank. Shareholders demand that banks of all sizes focus on improving their profitability, but the calculus is far more complex at Citi, JPMorgan Chase, Bank of America and Wells Fargo than it is at smaller institutions where whole-bank acquisitions offer a relatively straightforward path to greater scale.
Banks generally like to get bigger in order to spread out their fixed costs. The more services they provide, the more money they can save. Cue an uptick in profitability and competitiveness.
But at banks as large as the Big Four — which hold a combined $10.8 trillion of assets and operate a sprawling array of business lines — finding ways to grow is harder. They generally can’t just buy a rival bank to add cheap deposits to fund more loans.
Their sheer size, scope and market power make growth exceedingly complicated — indeed, they face perhaps the most complicated tangle of politics, regulatory scrutiny, deposit limitations, public image, customer and shareholder satisfaction and competition in international finance.
“The bigger you get, the more scrutiny you receive,” said Piper Sandler analyst Jeffery Harte, who covers Citi, JPMorgan and Bank of America.
So how can the megabanks achieve growth in face of these challenges? While each company is on its own path, and the regulatory constraints they face are different, the largest U.S. banks are seeking to bulk up in ways that do not set off alarm bells inside the government. That can mean geographic expansions of their branch footprints rather than acquisitions. It may also mean a greater focus on wealth management than lending.
“Given capital and liquidity rules that penalize risk taking, it seems that one regulation-friendly business everyone wants to enter into is private wealth management,” said Greg Baer, president and CEO of the Bank Policy Institute, an advocacy group representing the nation’s largest banks.
The big liberalization
The Big Four have not always been this large, and there have not always been four.
The industry has been shrinking for decades, ever since the 1980s savings and loan crisis precipitated an extinction event for small banks. Federal data shows that between 1984 and 1999, the number of commercial banks fell from 14,000 to 9,000 while the average size of the remaining banks grew.
Today there are 5,001 federally insured banks, still far more than most other countries, where there are typically just a handful. Part of the reason is the United States’ vast size and preference for local credit, as well as an abiding distrust of centralized power.
The 1994 passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act played a major role in allowing bigger players to expand by permitting them to open branches across state lines and buy out-of-state rivals for the first time in seven decades. One of the lesser-known features of Riegle-Neal is that it imposed a 10% cap on any single bank’s deposit share, meaning that a bank could not acquire another bank if the merged entity would hold more than 10% of the nation’s deposits.
But it was the Gramm-Leach-Bliley Act of 1999 that set the stage for a new era of bank consolidation. GLB, as it came to be known, pared back the Depression-era Glass-Steagall Act that formally separated commercial banking and investment banking.
Suddenly, banks were able to create financial holding companies that house not only banking subsidiaries, but also securities firms, insurance companies and more.
“Banks were slowly getting into secondary industries from 1987 on, but there was a big liberalization,” said Arthur Wilmarth Jr., a retired law professor and the author of “Taming the Megabanks: Why We Need a New Glass-Steagall Act.” “What had been a slow and steady takeoff morphed into full-on universal banking.”
The 2008 mortgage crisis sped up that trend. As it unfolded, investment firms Bear Stearns and Merrill Lynch teetered at the edge of insolvency, and JPMorgan Chase and Bank of America were able to step in and acquire them. Meanwhile, Wells Fargo snapped up the struggling Wachovia — once the fourth-largest bank holding company in the nation — in a $12.7 billion deal that more than doubled Wells Fargo’s assets and gave it nationwide reach.
The crisis proved to be a turning point, Wilmarth said. “It really solidified these four as the banks that clearly separated themselves from everybody else,” he said.
It also resulted in stricter regulations that transformed the way that banks — and big banks in particular — are supervised. The Dodd-Frank Act of 2010 required banks to maintain more capital and liquidity than they previously held. And the international Basel III accords established a set of global standards across G-20 countries to ensure that banks, especially the so-called global systemically important banks, or G-SIBs, have common rules.
“These last 12 years, we’ve been living in a different world,” said Saule Omarova, a professor at Cornell Law School, who noted that the big banks came out of the 2008 crisis not only much bigger, but also operating with greater scope and scale.
There are eight U.S.-based G-SIBs — the Big Four along with Goldman Sachs, Morgan Stanley, State Street and Bank of New York Mellon — and while many post-crisis rules eased for smaller banks in recent years, nothing has gotten easier for the G-SIBs.
“Our members devote a considerable amount of time and energy to risk management and other management processes to make sure everyone is rowing the boat in the same direction,” said Sean Campbell, chief economist and head of policy research at the Financial Services Forum, an economic policy and advocacy organization that represents G-SIBs.
One underappreciated truth about the U.S. banking industry is that size does not necessarily confer profitability. Only one megabank, JPMorgan, is ranked among the top 10 banks in return on average equity, a key metric that investors use to determine a bank’s profitability, on a list of large and midsize banks compiled by Capital Performance Group. Citi, Wells and Bank of America rank below far smaller banks like Zions Bancorp, Fifth Third Bancorp and Ally Financial, which makes institutional investors less likely to pick up the biggest banks’ shares.
None of this is to say that anyone should feel sorry for the biggest banks — few do. The Big Four have the largest customer bases to go along with diversified business lines, and boast significant political clout and economic power. That’s why so many politicians, academics and ordinary people have zeroed in on the megabanks as a shorthand for the abuse of consolidated power and wealth.
While calls for the biggest banks to be broken up have quieted down in recent years, there is still a widespread skepticism of these companies and the market power that they wield. Wilmarth argues that the biggest regulatory problem with the Big Four is that they’ve become too complex.
With fewer business lines, he said, “you can be really excellent in those business lines, and then you’re not so complex. You can keep better track of what you’re doing and be more successful at it. I just think when you get these enormous, giant universal banks, you get all these problems of risk management and risk controls, and often your best units end up subsidizing your worst.”
Big banks say that the heightened regulatory standards that apply to them should give comfort to the public.
Paul Donofrio, Bank of America’s chief financial officer, said that “big banks have a lot of regulatory oversight and are held to a higher standard with respect to how they operate and conduct themselves because if there was an issue, it would have an effect on more people and more companies and potentially affect people’s lives.”
Growing ‘wallet share’
Today each of the Big Four is looking to grow, but they are not necessarily in search of more assets. Instead, they are interested in capturing new clients, extending their reach into existing markets and fortifying their technology, all with a goal of improving efficiency and profitability.
“I think of it more as expanding wallet share in business lines,” Harte said. “Most of the growth initiatives here are about ways to expand and deepen their presence in existing business lines.”
The challenge is to keep growing organically without taking on additional risk or regulatory scrutiny. And wealth management is perhaps the most obvious way to do that.
Consider the example of JPMorgan Chase. The largest of the Big Four, with $3.7 trillion of assets and a global portfolio of businesses, JPMorgan has been concentrating on building its wealth management unit at the same time it has been on the hunt for acquisitions in that area and across the entire company.
In his annual shareholder letter, JPMorgan Chairman and CEO Jamie Dimon wrote that “acquisitions are in our future and fintech is an area where some of [the bank’s excess] cash could be put to work.”
But he is also looking for other opportunities. “We’re completely open-minded,” Dimon said during the company’s first-quarter earnings call. “It could be payments. It could be asset management. It could be data. It could be anything like that. It cannot be a U.S. bank, so I’m just reminding people, if you got ideas let us know.
Meanwhile, JPMorgan continues to expand its branch network. By the end of July, it will have at least one branch in each of the lower 48 states, Chief Financial Officer Jennifer Piepszak said in April.
The bigger you get, the more scrutiny you receive.
Similarly, Bank of America continues to open branches in new markets while simultaneously investing in technology and digital banking and tapping into wealth management to drum up more business.
In 2020, the Charlotte, North Carolina-based company entered new markets in Ohio and Utah, Chairman and CEO Brian Moynihan told shareholders in his annual letter. Since 2015, the bank has spent about $18 billion on technology, bulked up its sales team by 15% and opened 300 branches while renovating 2,000 others, Moynihan said.
A focus on “responsible growth” drives Bank of America’s strategy, Donofrio said. That means incorporating customer and risk frameworks and a sustainability lens into the business plan, he said. The frameworks define who the bank wants to work with and how much risk to take on, while the sustainability aspect allows the bank to think about long-term objectives and outcomes.
“Within those frameworks, there is plenty of opportunity to grow, to deliver our purpose in a way that’s consistent with our values,” Donofrio said. “We won’t go out there and do things short-term to boost profits or revenue in one quarter or a few quarters if it can’t be repeatable and sustainable and grow as our customers grow.”
Buying other companies isn’t a priority, Donofrio said. While Bank of America might make some acquisitions to fill small gaps in technology, it can generally develop what it needs internally, he said.
At Wells Fargo, executives are also thinking about growth, even as the San Francisco-based lender continues its slow recovery from a phony-accounts scandal that cost the firm billions of dollars in fines and resulted in a limit by the Federal Reserve Board on its asset size.
The $1.9 trillion-asset company is focused on “core, scaled businesses,” CEO Charlie Scharf told shareholders in an annual memo. “Our strategy is about becoming even crisper about serving our target market and taking actions necessary to leverage our strong competitive position,” he wrote.
The $1.95 trillion-asset cap, however, continues to be a burden, keeping Wells from making as many loans as it wants to and growing as fast as its peers. Wells has been closing branches and has sold off or exited several business lines, including student loans, international wealth management and direct equipment finance in Canada.
Scharf has promised that when the asset cap is lifted, Wells will have more latitude to grow its business and increase returns.
‘What we have set out to do, we have to do’
At Citi, Fraser and her team are taking what she has called “a dispassionate view” of all business lines. The point is to cut out what’s not working and lean heavily into already-scaled businesses that, with some more investment and focus, could produce even higher returns and generate more income.
Citi executives say the changes it has unveiled and those yet to come will put the organization on a path to deepen its reach in core existing markets — particularly in the United States and Mexico — straighten out its myriad compliance issues and ultimately achieve something that’s been lacking for a long time: returns to shareholders that are at or near the levels of other large U.S. banks.
So far, Citi has combined two wealth management units into a single global division, put consumer retail franchises in 13 overseas markets up for sale and turned over a handful of key management roles.
Citi has “tremendous opportunity” in the wealth management space, in part because it has so much room to grow in comparison with wealth management units at the other large banks, said Jim O’Donnell, head of global wealth at the New York-based bank. That gives Citi more runway in terms of expansion, perhaps as much as an 8% or 9% rate per year, he said.
“We have the platform and the base to build upon that, and I think by expanding our product mix and growing the investment side … we can significantly grow our wallet and market share,” O’Donnell said.
There’s similar optimism at Citi about the prospects for its consumer businesses in countries where it operates at a large scale, even as the bank exits smaller markets.
In April, Citi said that it would sell consumer franchises in 13 markets, including China, India and Australia, where it is not large enough to compete, and focus instead on building four “wealth centers” in London, Singapore, Hong Kong and the United Arab Emirates.
At the same time, the company plans to stick with its “market-leading scaled franchise” in Mexico, known as Banamex, and “grow and deepen” relationships in the U.S. market, which makes up two-thirds of Citi’s consumer revenue, said Anand Selva, Citi’s CEO of global consumer banking.
Citi plans to use both its digital presence and its existing branch network, which is smaller than those of its main competitors, to capture more business. Specifically, it hopes to dig deeper into urban markets in the U.S. where it has branches, while continuing to tap into its myriad credit card partnerships.
Cit’s deal with American Airlines was expanded last year to allow customers who have the airline’s co-branded credit card to open online Citi savings accounts and earn mileage points. Citi is also partnering with Google to offer its first bundled digital checking and savings account.
Theoretically, Citi could bulk up by buying another bank because, unlike the other three megabanks, it is far from bumping up against the federal deposit cap. But acquisitions aren’t necessarily in Citi’s plan, Selva said.
“At this point, our focus is [on growing] organically through our business within those centers we already have and digitally growing the capabilities we’ve built,” he said. “We firmly believe the partner ecosystem will be a big play for us. What we have set out to do, we have to do. It’s already in motion for us.”
Citi’s revamp, however, coincides with an expensive reconstruction of its risk management and internal-controls systems. Last fall, the company received a pair of consent orders from the Fed and the Office of the Comptroller of the Currency, which identified deficiencies with Citi’s current systems. The OCC imposed a $400 million civil money penalty.
The orders came two months after Citi accidentally paid $900 million to creditors of the cosmetics company Revlon. They were the latest in a series of regulatory slaps against the bank for shortcomings in its management of risk and data programs. The OCC said the penalty was the result of “longstanding failure” to fix those problems.
Chief Financial Officer Mark Mason said that the company expects to submit a full remediation plan to regulators no later than the third quarter.
The consent orders have paved the way for a “transformation” that offers Citi an opportunity to invest in operational capabilities that will not only enable the company to run more efficiently, but also to better serve its clients, “which leads to growth and more business,” Mason said.
“That strategy is going to drive everything, and this refresh that Jane is driving is core to our growth and improved returns,” he said. “The good news is that you’re starting to see signs of that already.”
‘They’re not utilities’
The pursuit of growth is a logical strategy even for banks that are already at the top of the industry heap.
“From the bank level, it gives you a fortress balance sheet you can use to support the kind of lending that other financial institutions can’t hope to match,” said David Zaring, professor of legal studies and business ethics at Wharton School of the University of Pennsylvania. “You can use depositors to support your investment banking efforts and to support … really a variety of other uses for your capital that you can finance through all those depositors to whom you’re paying 0.1% in interest.
“So an enormous balance sheet should offer you opportunities to finance businesses that other banks can’t finance,” he said. “There’s profit that lies in that, potentially, for the big banks.”
Like the other megabanks, Citi’s focus on growth comes down to establishing itself as a profitable organization. Getting bigger, in other words, isn’t just about building assets.
“I don’t think the Big Four need to grow in terms of size,” said Karen Petrou, a bank policy expert and managing partner at Federal Financial Analytics. “The real pressure is always on profitability.”
Investors care most about the return on their investments, Petrou said, and if a public company’s profitability falters, the stock value shrinks and investors are unhappy. That can lead to a bank getting smaller, not staying the same size.
“These are all businesses. They’re not utilities,” Petrou said. “They need to satisfy investors because their compensation depends on it.”
What comes next for the Big Four depends on several factors: whether regulatory burdens will increase under the Biden administration, whether there will be renewed calls by lawmakers to break up the big banks and to what extent fintech and Big Tech companies make inroads into the banking industry.
Five months into the Biden administration, there have been no widespread calls to split up the companies like there were after the mortgage crisis.
“If anything, I hear less about breaking up banks and more about simplifying them,” Zaring said. “The tumult of the last year has shown what a good idea it is to have diversified banking businesses, but I do hear stuff about simplification.”
For their part, the Big Four banks are always thinking about their next move — and the move after that, and the move after that.
“I don’t honestly know … as to whether you’re ever done with strategy,” Fraser said in April. “This world is highly dynamic. It’s a fascinating world.”
