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Citigroup boss Jane Fraser has a message for investors: looking after the global financial system may not be glamorous, but it is highly profitable.
The US lender, which is trying to shed its image as Wall Street’s weakest bank, dedicated its annual investor day this month to talking about its “services” business. One of five newly formed divisions, it helps companies manage and move their money around the world. It also provides trade finance and securities services such as custody.
Fraser calls the division the “crown jewel” of Citi, and rightly so. While the business accounted for less than a quarter of the group’s $78.5 billion in revenue last year, it generated half of the company’s net income. The unit earned a return on average tangible common equity of 20 percent in 2023. That compares with Citi’s overall RoTCE of just 4.9 percent.
However, the brilliance of that jewel cannot hide the bank’s other defects. Its investment banking and wealth management units continue to lag the sector. Retail banking is under pressure amid rising funding costs and tepid loan growth.
Citi has forecast utility returns to rise to the mid-20s in the medium term. Even then, Citi needs a big boost in the profitability of its other divisions if it hopes to reach a group RoTCE target of 11 to 12 percent by 2026. It has new leadership in the banking and wealth units, plus new products in markets and personal banking, to help lift returns on these four units to around the mid-teens.
Despite rising a third over the past year, Citi shares trade at a low valuation of 0.6 times book value. Wells Fargo and Bank of America trade at twice as much. JPMorgan is priced at nearly 1.9 times its book value.
Since taking the helm in March 2021, Fraser has undertaken a radical restructuring to reduce costs. He has abandoned several overseas retail banking operations, reduced management levels and announced plans to cut tens of thousands of jobs. The objective: to get Citi’s efficiency ratio (costs/income) to go from 67.3% in the first quarter to less than 60% in 2026.
But its ability to cut faces regulatory limitations. Addressing consent orders imposed by regulators in 2020, which require the bank to improve its internal controls, has kept expenses high. Its non-salary expense ratio, at 35 percent last year, was well above the 28 percent reported by Bank of America and JPMorgan.
The FDIC Recent rejection of Citi’s “living will” (crisis resolution plan) and the reprimand of the bank’s data controls could keep Citi’s spending spigot open. This Citi recovery, like all the others, still has a way to go.