Jane Fraser took over as CEO of Citigroup (NYSE:C) in March, and she’s not wasting any time making her mark on the giant financial institution. In tandem with the release of the bank’s first-quarter earnings report, Citigroup also announced that it plans to exit its consumer banking franchises in 13 global markets, signaling a major shift in the bank’s global strategy.
This is just one piece of the refresh strategy that Citigroup is undertaking after some major regulatory concerns resurfaced in 2020, and after years of underperforming its peers. Let’s take a look at why Citigroup is making this change, and how it might improve the bank’s performance.
Exiting businesses with lower potential
Citigroup plans to wind down or sell its consumer banking franchises in Australia, Bahrain, China, India, Indonesia, Korea, Malaysia, the Philippines, Poland, Russia, Taiwan, Thailand, and Vietnam. However, the bank is not exiting these countries altogether. It will continue to offer its investment banking, corporate lending, and markets and securities services, among others.
Citigroup does business in more than 160 countries and jurisdictions. This has required the bank to deal with an array of different nations’ regulations, central banks, and interest rates, and a host of geopolitical risks as well. The decision to simplify operations in this way dovetails with the regulatory work Citigroup must do to correct long-standing deficiencies with its internal controls related to data, risk management, and governance.
The global consumer banking operations in the 13 countries that Citigroup plans to exit have not had the best performance, and they’re inefficient. Further, those are markets that the bank does not deem to have long-term potential. Overall, the operations to be shuttered or sold in those 13 markets broke even in 2020, which wasn’t a terrible result considering the pandemic. However, they still lagged the performance of Citigroup’s total consumer banking divisions in North America, Latin America, and Asia, all of which managed to make at least some money.
CFO Mark Mason noted that the cost of credit nearly doubled in those 13 markets in 2020. They also took up a good amount of capital; Mason said the bank allocates $7 billion of tangible equity to support the $82 billion in total assets.
“While these are excellent franchises, we don’t have the scale we need to compete and we decided we simply aren’t the best owners of them over the long term,” Fraser said on Citigroup’s April 15 earnings call.
Furthermore, the 13 markets are not making enough revenue to justify their expense base. The efficiency ratio (expenses expressed as a percentage of revenue, so lower is better) of the 13 markets together in 2020 was 77%, compared to an efficiency ratio of 57% for Citigroup’s overall global consumer banking business.
The new plan
With its exit from those laggard markets, Citigroup will refocus its consumer banking presence in Asia, Europe, the Middle East, and Africa around four wealth centers: Singapore, Hong Kong, the United Arab Emirates, and London. As a result, the global consumer bank will consist of two main franchises in the U.S. and Mexico, and the four hubs mentioned above serving 100 million customers.
Fraser also said the bank plans to “double down on wealth” in order to “capture the strong growth and attractive returns the wealth management business offers through these important hubs.”
Since Fraser has taken the reins at Citigroup, she has expressed particular excitement about its wealth management business, especially regarding its growth potential in Asia. A few months ago, Citigroup announced that it will combine its consumer wealth management and its private bank business for institutional clients group into one business unit, which will make it easier to analyze for investors. I am not sure about the specific returns in Citigroup’s wealth business right now, but I imagine they are considerably better than the returns the bank made in its consumer franchise in the 13 markets it plans to exit.
Citigroup’s wealth management business performed well in 2020, growing assets under management to $222 billion as of the end of Q1 2021, up 26% year over year. That’s not nearly as large a wealth management operation as competitors like Bank of America, which has nearly $1.5 trillion assets under management, or JPMorgan Chase, which has $2.8 trillion assets under management. But Citigroup believes it has found its footing in Asia and some other international markets, and expects to make significant progress in them.
Why it can work
While a big move, Fraser’s decision to wind down Citigroup’s underperforming consumer banking franchises could pay off. Essentially, the bank is stripping away some of the clunkier parts of its business that it doesn’t think it can scale up and improve, leaving it more able to focus on those businesses that already are generating more attractive returns.
Investors will want to keep an eye out to see how the bank’s wealth management business progresses. But analysts have previously said that when they do a sum-of-the-parts valuation that looks at what each division of the bank would be worth if the company was broken up, Citigroup is worth more than the valuation the market is giving it. So simplifying its sprawling operations and focusing on the strongest parts of the business with the most potential seems like a good place for Citigroup to start in its refresh strategy.
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