Citigroup offers first hint of price tag for risk overhaul

Citigroup’s expenses are going to rise in 2021, and its overhaul of risk management and internal control systems will be the primary culprit, Chief Financial Officer Mark Mason warned investors Wednesday.

Speaking at an industry conference, Mason offered a first glimpse at how much the global bank will spend to fix long-standing risk and compliance issues that led this fall to a pair of federal enforcement actions and a $400 million civil money penalty. While he did not give a dollar figure, he did say that noninterest expenses are likely to be “up a couple percent in 2021 tied to the transformation investments.”

If full-year expenses come in at $42.6 billion for 2020, the consensus call among analysts according to FactSet Research Systems, then a 2% increase would push full-year 2021 expenses well above $43 billion.

“So, [it’s an] important effort,” Mason said during a question-and-answer session at the virtual Goldman Sachs U.S. Financial Services Conference. “[The] management team [is] fully committed to it. I think we’re making good headway in terms of scoping out the plans that we intend to execute against.”

Until now, Citi executives have been silent on the cost and timeline of the overhaul, except to say the bank has spent about $1 billion this year to enhance infrastructure, risk and controls. They have been more open about what the multiyear project will entail. Last month, Chief Administrative Officer Karen Peetz outlined a plan that includes the creation of a “transformation oversight committee” led by Chairman John Dugan and a steering committee led by incoming CEO Jane Fraser as well as efforts to simplify certain business operations to reduce the number of technology platforms while tweaking internal culture to increase accountability.

The $2.2 trillion-asset company, which has struggled with risk management and internal controls issues in the past, caught regulators’ attention once again when it accidentally paid $900 million in August to creditors of the cosmetics company Revlon. The bank went to court Wednesday to try to recover more than $500 million that hasn’t been returned by some of the creditors.

Mason said the increase in expenses related to risk management will pay off.

“It is a transformation. It is an investment,” he said. “And I think it’s an important point that I continue to highlight because as an investment we do expect a payback on [it]. We do expect to have a more efficient organization on the other side of this.”

Mason also provided an update on the credit outlook for the fourth quarter. He said Citi continues to see “very stable performance” in terms of credit for both consumers and corporate clients and expects that some of its $29 billion in loan-loss reserves will be released based on current credit trends.

But ultimately credit performance could depend on whether there is another round of federal stimulus. His comments echoed those earlier in the day of Bank of America CEO Brian Moynihan, who at the same conference urged Congress to pass another stimulus bill to help consumers, certain business sectors, nonprofits and states hang on until vaccines are widely available.

Though consumers have been “incredibly resilient” in their ability to weather the economic crisis and purchase sales activity is strong, “the reality is that I think a stimulus is important,” Mason said.

“The next prospect of a stimulus in 2021, I think that's important for certain parts of the economy,” he said. “And we’re likely to see losses on the consumer side, losses in general start to pick up in 2021 and peak … in the back half of 2021 as it relates to the consumer part of the portfolio.”