Michael Corbat, congratulations on becoming the new chief executive officer of Citigroup (C)! Here is a list of about 6 billion things that require your immediate attention.
Corbat, 52, replaced Vikram Pandit just one day after Citigroup reported better-than-expected quarterly earnings, leading some analysts to say that the nation’s third-largest bank by assets had turned a corner. Even so, in a measure of just how much repair work looms for Corbat, the bank’s share price is still 89 percent less than it was the day Pandit took the reins in 2007.
Corbat did not lay out a grand strategy for reversing the bank’s fortunes. In his Day One memo to the bank’s 262,000 employees, who had no advance warning of the CEO switch, he advised them to expect changes. The next day, on an internal conference call with the firm’s managing directors, he endorsed the status quo. “I think it’s all-important for everyone to know that I’m going to maintain the company’s fundamental strategy,” he said, according to a recording provided by Citigroup. Corbat said he would focus on the firm’s core businesses, especially those in emerging markets, while continuing to sell off underperforming assets. That approach may not satisfy investors and analysts, who in interviews laid out prescriptions for change in nearly every aspect of the bank.
All of the nation’s big banks came out of the financial crisis facing daunting challenges. The Dodd-Frank reforms and the Card Act eliminated billions of dollars in easy profits by clamping down on debit-card fees and overdraft penalties. Low interest rates have made commercial lending less lucrative, and banks are getting less revenue from trading stocks as volume slows. The pressure is so great that even Sandy Weill—the man who merged Travelers Group with Citicorp to create the modern financial supermarket—suggested this summer that the era of megabanks may be over.
Some of Citigroup’s rivals, though, have clearer strategies. Wells Fargo (WFC) staked out a position as America’s largest mortgage provider. JPMorgan Chase (JPM) also has profited from mortgage lending, as well as fixed-income trading, earning enough to overcome the wrong-way London Whale bet on credit derivatives that cost it about $6.25 billion through the first nine months of the year.
At the top of Corbat’s agenda, several analysts suggest, should be accelerating Citigroup’s effort to streamline its range of businesses. The bank has already shrunk considerably since the days when it sought to offer every product imaginable to individuals and companies around the globe. Pandit assigned Corbat in April 2009 to sell $573 billion of assets as boss of Citi Holdings, the division created to hold unwanted businesses. They included private equity stakes, auto loans, a life insurer, and a student-loan firm. There’s more cutting left to do. “It needs to become small enough to manage—it’s out of control,” says Simon Johnson, who teaches at the MIT Sloan School of Management and is a Bloomberg View columnist. Corbat, whose background is in commercial banking, may choose to reduce Citigroup’s investment banking activity, several analysts say. Citigroup declined to comment.
Corbat must also mend relations with regulators. Pandit suffered a setback in March when the Federal Reserve rejected his plan to buy back billions of dollars in stock, saying the bank did not have enough capital. Ensuring Citigroup does well on the government’s next stress tests—which attempt to measure how banks would fare in poor economic conditions—would be a first step. Sheila Bair, former chairman of the Federal Deposit Insurance Corp., mocked Pandit in her recent memoir. In an interview, she praised Corbat: “He’s very strong operationally, which is what Citi needs.”
Pandit was a hedge fund manager when he joined Citigroup. His predecessor, Charles Prince, was a lawyer. Corbat, who graduated from Harvard in 1983, has spent 29 years at Citi, including stints running its corporate lending and wealth management divisions. His familiarity with “the banking side of banking is good,” says Johnson. “A lot of these firms have got themselves tangled up in securities businesses that the CEOs don’t know how to manage. And if he can return them to basics, and making money on those basics, that would be a very good thing.”
Corbat might want to improve Citigroup’s also-ran standing in mortgages, says Christopher Whalen of Tangent Capital Partners. Corbat, whose most recent post was heading the bank’s Europe, Middle East, and Africa business, is also well positioned to expand lending overseas, especially in emerging markets where interest rates are higher than in the U.S., says Richard Bove, an analyst at Rochdale Securities.
Citigroup’s largest problem may be internal. The company, Bove says, “is a political swamp. It’s a snake pit.” Cleansing the culture must be a priority, says Mike Mayo, an analyst at Crédit Agricole Securities (ACA:FP). “So whether it’s the inappropriate pay for subpar performance; the lack of adequate disclosure, such as returns by business line; the failure to properly oversee the many different businesses; or the poor tone set at the top of the firm for corporate governance, they all add up to the need to improve the culture,” Mayo says. Long a Citigroup bear, he changed his rating to buy after Corbat’s appointment. The new CEO, he says, has a chance “to more aggressively make financial targets clearer, control expenses, improve disclosure, and align executive compensation with performance.”
Corbat knows a little about bruising games. At Harvard, he was a standout lineman on the football team, good enough to draw the attention of several NFL scouts. He chose to pursue investment banking over a shot at pro ball. “I’m just not psyched to be somebody’s piece of meat somewhere,” he told the Harvard Crimson in 1982. Now that he is atop Citigroup, he may discover that was his fate all along.