As Michael L. Corbat takes up the reins at Citigroup, analysts and investors have a message for him: Shrink your bank fast, and be a lot more transparent as you do so.
Mr. Corbat takes over from Vikram S. Pandit as chief executive of Citigroup four difficult years after the financial crisis. In that period, Mr. Pandit steadied the banking behemoth and tried to focus Citi on the businesses he felt it could do best in. But, increasingly, many investors felt Citi's overhaul wasn't bold or quick enough.
“Citigroup has acted as if it's too big to care,†said Mike Mayo, an analyst with CLSA, a brokerage firm. “That means that they are too big to be sensitive to shareholder concerns.â€
Dissatisfaction with Citigroup's progress motivated shareholders to vote against a $15 million pay package for Mr. Pandit in April. That vote came soon after the Federal Reserve turned down Citigroup's plans to pay out capital to shareholders, a stinging indication that reg ulators still weren't comfortable with the bank.
Since those expressions of discontent, Citigroup's shares are sharply higher, though they are still down 89 percent since Mr. Pandit took over in December 2007. The stock trades at a pitiful valuation, reflecting two dominant views in the markets: Citigroup's transformation has a long way to go, and its financial statements can be opaque.
Though relatively unknown to shareholders, Mr. Corbat starts with a reputation as an assiduous executive with a deep knowledge of Citigroup, where he has worked for nearly 30 years. He even got good reviews from people who have been skeptical about Citigroup and its management. Sheila C. Bair, the former head of the Federal Deposit Insurance Corporation, who clashed with Mr. Pandit, knew Mr. Corbat from interactions during the financial crisis.
“He was involved in several meetings with us,†said Ms. Bair, adding, “He was prepared and he knew his stuff.â€
Now, so me analysts believe Mr. Corbat could open the door to more radical moves at Citigroup.
“I think this is a real, long-term positive for Citi,†said Gerard Cassidy, a banking analyst with RBC Capital Markets.
Still, Mr. Corbat may have to impress quickly, given the pent-up frustrations among shareholders. His first public conference call as chief executive on Tuesday was not encouraging on that front. He seemed to disappoint analysts who wanted to hear Mr. Corbat express a greater desire to change things. Instead, he said, “Today's changes do not alter the strategic direction of Citi, which we believe is a good one.â€
In a memo to employees on Tuesday, Mr. Corbat sounded more emphatic. He wrote, “We must deliver sustained profitability, improved operating efficiency and shareholder returns.â€
Part of Mr. Corbat's job will be getting more out of Citigroup's best-performing operations. Many of its international lending businesses do consistently well, and he may look for ways to make sure investors give greater recognition to this strength.
One idea may be to sell minority stakes in those operations in foreign stock markets, something that Spanish bank Santander has done recently with its Mexican unit. If those shares perform well, it would highlight the value in those businesses and perhaps lift Citigroup's stock. Asked about this idea Tuesday, Mr. Corbat said, “I'll look at those things and see what the numbers say.â€
The burning question, though, is whether he has the resolve to get out of businesses that the bank doesn't excel in, even if the near-term costs are high. Mr. Cassidy, the analyst, said Mr. Corbat should sell any business line that could not achieve the sort of returns that shareholders expected. Citigroup's chairman, Michael E. O'Neill, aggressively reduced the size of Bank of Hawaii when he led it.
“He shrunk that bank by 30 percent; that's what Citi has to do,†Mr. Cassid y said.
In particular, some investors would like Citigroup to be quicker about selling assets in Citi Holdings, the bad bank that Citigroup set up for its unwanted and loss-making assets. Mr. Corbat ran Citi Holdings until the end of last year. Faster sales might mean Citigroup would not get the best price possible for the $171 billion in assets in Citi Holdings. That could lead to higher losses when sales took place.
But selling assets more quickly could free up the capital the bank holds there. In turn, that could lead to a big improvement in Citigroup's regulatory capital ratios, which investors watch very closely. Banks that can show they have little trouble meeting such ratios often get better valuations on their shares.
Citigroup's investment bank is the other obvious target for shrinkage. Right now, it is enormous. The “securities and banking†division at Citigroup has $903 billion of assets. That's only slightly less than Goldman Sachs's assets. And Citi's investment bank's revenue has been uneven since the financial crisis.
The unit is also seen as a black box, something Mr. Corbat will have to tackle if he wants to regain investors' confidence, analysts say. Citigroup's disclosures aren't as detailed as those of some other banks. For instance, each quarter, Goldman Sachs releases a critical number that shows how much profit it makes on its capital.
But Citigroup doesn't do that for its investment bank; it simply doesn't tell outsiders how much capital it has deployed in that unit. As a result, it could be making unproductive investments in Wall Street operations without shareholders knowing. This could be true in other business lines, as well.
The quandary for Mr. Corbat may be that, if he increases disclosure, investors may balk at any alarming numbers and dump the stock. Even so, he may have to risk that outcome.
“They have to open up the kimono,†Mr. Cassidy said.
Perhaps Mr. Corbat will become Citigroup's quiet revolutionary, a leader who is prepared to make bold moves to win over, and win back, shareholders. He did offer up one button-down remark Tuesday that could provide a tidbit of hope to shareholders who are relying on him to redouble Citigroup's remodeling. “I wouldn't minimize the impact you can have on a place,†he said.
