Back in October when Mike Corbat was dragged from bed in the middle of the night to take over the top job at Citigroup after Vikram Pandit's ouster, he did a hastily assembled damage-control conference call while still wearing his footie pajamas. On this call CLSA analyst Mike Mayo surprised Corbat by asking him a softball interview question, namely: tell me how you want your tenure as CEO to be measured in five years. Corbat's response - and here I'm quoting from memory - was "Wait, I'm the CEO? Crap. Let me get back to you on that."
Corbat may have forgotten that promise, but Mayo did not, and he asked the question again yesterday - on Corbat's first earnings call as Citi CEO - and got in reply maybe the single best sentence a bank CEO has ever said:1
Mike Mayo - CLSA
And then for Mike, I asked this question when you first got the CEO job. If in five years from now you were to look back at your performance, what would you want to see to show that you were successful?
Mike Corbat - CEO
I think probably going back to your first line of questioning, we’ve got to get to a point where we stop destroying our shareholders’ capital. I would say that would certainly be at the top of the list, that we run a smart and efficient business that’s good at its allocation of its resources around its customer and client segments, that it’s continued to have the ability to lead in a company those clients around the world, that it served the social purpose. There’s several things in there.
This seems a little unfair! Citigroup actually generated shareholder capital this year, with positive net income and a return on equity just north of 4%. That is uninspiring but positive. Bloomberg says that that return is "below the bank’s estimated cost of equity of about 10 percent," but that's just sort of a made up number. Oh you bought shares of Citi expecting a ten percent return? Tell me more about your brilliant get-rich-quick scheme. Morgan Stanley's Betsy Graseck asked about Citi's 10% "mid-term goal on ROTCE" and when they might think about achieving it, and Citi CFO John Gerspach said "over the next coming months, we'll get you more specifics on that goal." It's an executive team that knows how to put off questions.
I don't envy them!2 There are lots of obvious ways to stop destroying shareholder value, but many of them are not really open to Citi. Recent years have seen many banks adopt a back-to-basics approach, building on strength in their core strengths - wealth management for Morgan Stanley, mortgages for Wells Fargo, unspecified mojo for Goldman Sachs - while cutting back on their pre-crisis visions of being everything to everyone. Citi has less ability to do that. Its core strength, if it has one, is being everything to everyone, everywhere: as Felix Salmon put it, "the only area where Citibank is clearly superior to nearly all of its competitors is in its history and international reach." Or as Mike Corbat put it yesterday, in response to a question about perhaps spinning off or selling some assets to increase shareholder wealth:
I think when you look at the way we come to work,3 we think our strength comes from our global network and the interconnectivity of our network and our ability, as we’ve described it, to lead in a company our clients and customers around the world and that’s products, that’s businesses. ... And I think that the importance of a bank that can do the things that we do for its global clients is only becoming more valuable and we think that the future lies in that.
Or consider the super-easy way to stop destroying shareholder value: give money back to shareholders. Citi's book value is $61.57 per share, and its TBV of $51.19 per share, versus a market price of $41-something, meaning that depending how you count a dollar in Citi's hands is worth about eighty cents. Just give the dollar back to shareholders and you've instantly made them a 25% return, and eternally grateful.
But they can't. Because, one, they don't generate enough capital to return any, and two, they're in the doghouse with regulators after Vikram's efforts to do just that. An analyst asked about Citi's capital return request in its stress-test submission, and Corbat replied:
The way we approached CCAR was probably not surprising to most. It’s really job one or mission one really to put a submission in there where we could get approval. And so we’re obviously focused on doing that. I think second thing we were focused on is in 2013 giving ourselves the goals of getting to and breaking a 9.5% Basel III tier common ratio.
Mission one, notice, is "don't get smacked down by regulators again"; mission two is "keep building capital"; "give money back to shareholders where they can just stop destroying it themselves" is a neglected third at best. In practice that means:
Citigroup Inc. has asked regulators for permission to repurchase just enough stock to counter dilution from routine share issuance, according to people familiar with the company's plans. ... Citigroup's conservative request underscores how carefully the company has tread since the rejection last year of its request to repurchase as much as $8 billion worth of stock. The denial contributed to the forced resignation in October of Chief Executive Vikram Pandit. ... Citigroup hasn't asked for permission to increase its dividend, currently a penny quarterly ...
This is the problem with being as accomplished as Citi at destroying shareholder capital: you keep needing more of it just to dig yourself out.
Citigroup Goal Is to Stop Shareholder Capital Destruction [Bloomberg]
Citi 4Q Earnings Call Transcript [Seeking Alpha]
Citi Seeks Limited Buyback [WSJ]
2.That's just a figure of speech, of course. I envy the hell out of them; I'd be happy to put up with some analyst guff to get paid what they're paid. They probably even have working computers! Imagine the luxury.
3.Btw putting things in terms of why or how Citi bankers "come to work" is something of a tic for Corbat; he used it four times in the earnings call. I have this vision of him psyching himself up every morning: "Why am I going to work again? *long pause* Oh right shareholder value ... global networks ... products ... businesses ... gaaaaah."