Size of words
Investors have had a lot to digest over the past few weeks, but when the stock has sold aggressively, analysts are hopeful.
Shares of Citigroup (ticker: C) fell nearly 7% on Tuesday, after the Wall Street Journal lost nearly 6% on Monday, with the bank facing a consent order from the Federal Reserve and the Office of the Comptroller of the Currency inadequate risk management controls. for.
Creditors — the type of fault that was the result of manual processes that are being upgraded, said Citigroup Chief Financial Officer Mark Mason at a conference on Monday. Then, last week, Citigroup announced that chief executive Michael Corbett would retire in February and Jane Fraser, who is currently the bank’s president, would take the top spot.
The timing of the leadership change was initially questioned. This makes more sense after the journal’s report, as overhauling the systems and processes that the bank needs to complete is expected to be a multiple process, requiring a leader.
“A number of corrective projects are underway in the city to strengthen our control, infrastructure and governance,” a Citigroup spokesman said on Monday. “However, while we have made significant and demonstrable progress in each of these areas, we believe that we are not yet where we need to be and which will have to change.”
While it is understandable that investors do not want to wait for a change, analysts reiterate their rapid ratings on Citigroup, noting that – while a difficult pill to swallow – the consent order gives Citigroup its control and streamline There is a need to improve operations.
“The new control issue involving Revlon and a possible new consent order (unconfirmed by Citi) from regulators, the incoming CEO should urge Citi to restructure and partially break it down,” said Wells Mergo senior analyst Mike Mayo. Written in a note on Tuesday. Mayo has repeatedly called Citigroup to consider selling its non-US consumer businesses in Mexico and Asia.
Analysts also believed that the regulatory and other issues floated in the bank, assuming that the bad news had already been put into stock. Although some analysts have lowered earnings forecasts, they still prefer the turnaround story.
Jeffrey Hurt, managing director of Pepper Sandler, said, “The need for Citigroup to improve its risk and control systems is not a new topic, and we believe that Citigroup shares a lot of potential bad news in tangible book value.” Trade at 67% of value. ” & Co., wrote in a note on Tuesday. He said the bank had disclosed a $ 1 billion investment in infrastructure and controls earlier this year and recently created the role of chief administrative officer. Still, Hurt cut the bank’s 2020 earnings estimate from $ 3.75 to $ 3.36 and reduced the 2021 forecast by 2% to $ 6.85.
The prospect of higher spending weighed on the bank, but analysts believe Citigroup will be able to offset those costs elsewhere. On Monday late night, it was reported that the bank would soon begin retrenchment of employees, something that is expected to affect less than 1% of the firm.
A spokesperson for Citigroup said, “We will do our best to support each individual, including the ability to apply for open roles in other parts of the firm and provide a separation package.”
An additional expected reserve build for a potential loan loss, which was revealed Monday by Mason, also weighed on the shares, even though he insisted that the build would be “worthwhile less” than the former.
But analysts took the reserve build as a signal to be extra cautious about the economic recovery and to be extra cautious with the bank according to the new Current Credit Credit Framework, which in fact sees “signs of tension” among US consumers , Given that 80% is not. Customers have discontinued the defrail program and are paying as agreed.
Morgan Stanley analyst Betsy Grasek wrote in a note on Tuesday, “Higher reserve builds mean more reserve releases today.”
Given Citigroup’s recent trading, investors are not ready to buy hope right now.
Write Carlton English at [email protected]