(Bloomberg) -- Citigroup Inc. Chief Executive Officer Jane Fraser was blunt about the need for a makeover at the company, telling investors it will take time and money before paying off.
“It's frankly not a surprise that we've been outperformed by our peers and that we've failed to meet the expectations of our investors,” Fraser said at the firm's investor day Wednesday. “What we need to do now, in short, is transform our bank.”
Just one year into her job as CEO, Fraser told investors profitability will fall in the near term as expenses rise to pay for the plan. Return on tangible common equity over the next three to five years will be about 11% to 12%, the company forecast. That's down from 13.4% last year and compares with more profitable rivals such as JPMorgan Chase & Co., which posted ROTCE of 23% last year.
“This isn't a quick fix,” Fraser said. “This is a multiyear journey.”
Fraser and the bank's management team detailed a planned expansion in wealth management, targeted growth in its investment-banking business and investments in technology. The investor day was one of the first chances for investors to meet an almost entirely new executive team atop Citigroup, including Fraser, who took over as CEO in early 2021. Initially planned as an in-person event, the bank reworked its investor day earlier this week when two executives, Chief Financial Officer Mark Mason and Paco Ybarra, who runs the institutional-clients group, tested positive for Covid-19.
“In my 21 years at Citi, there have been a number of memorable moments, and now I'll add our 2022 investor day to that list -- and not just because I caught Covid from Paco,” Mason joked in his presentation.
The company clearly has challenges “that we need to urgently address right now,” Mason said. “You know that and we know that. Today's our opportunity to show you that we're determined to drive that change.”
Shares of the bank, the worst performer in the 67-company S&P Financials Index since the start of 2020, climbed 1.3% to $59.38 at 2:23 p.m. in New York.
“Investors will need to be patient and have a little faith as Citi spends the next two years executing on its transformation and consent order and then get to more tolerable returns in years three through five,” Glenn Schorr, an analyst with Evercore Inc., said Wednesday in a note to clients.
Fraser has begun overhauling many of the businesses Citigroup has been known for over much of this century. She has announced plans to exit retail-banking operations across 14 markets around the world. That includes the franchise in Mexico, home to the bank's largest branch network in the world.
The CEO said the firm's banking division would pursue a “high-returning, capital-light investment-banking business.” It will seek to boost growth by targeting “new-economy companies,” and expansion in the commercial bank. Her presentation emphasized the shift occurring across Citigroup to focus on higher-returning businesses such as wealth management, services and its commercial bank, which caters to midsize companies.
Citigroup has repeatedly missed the targets it set for itself over the years. At its last investor day, in 2017, the firm said it hoped to achieve a 14% ROTCE. That's hurt the bank's credibility with investors, who have in turn punished Citigroup's shares. It's the only major bank in the U.S. that trades below its book value, meaning investors believe it destroys value.
Consent Order
In addition to rising costs related to the new strategy, Citigroup has also warned it will face higher expenses as it seeks to comply with two far-reaching consent orders it was saddled with in 2020. The firm has submitted plans to regulators for resolving their concerns and assigned thousands of employees to the work.
“Any way you cut it, you'll see there's a lot of room for improvement -- and that's exactly what we've been up to over the past year,” Mason said. “We're executing a credible, sustainable plan that will allow us to improve our returns over time.”
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