Citi's Fraser defends expenses, long-term investments

Bloomberg

UPDATE: This article includes comments made during Citi's earnings call.

Citigroup CEO Jane Fraser made her feelings about expenses crystal clear on Wednesday: The megabank, which has been spending money to simplify its business model and overhaul its risk management programs, will not forfeit long-term investments for short-term profitability gains.

So that means operating expenses remain elevated, at least temporarily, Fraser told analysts during the bank's fourth-quarter earnings call. And while costs should decline after this year — executives said less than $53 billion annually is the goal — the current higher-than-desired expenses are a big reason for the company's decision to revise a profitability gauge for 2026.

Citi now expects its return on tangible common equity, a metric that shines a light on a bank's overall performance, to be somewhere in the range of 10% to 11% in 2026, down from the three- to five-year target of 11% to 12% that was announced during Citi's Investor Day in 2022.

"As CEO, I will not sacrifice the right long-term investments in our growth and competitiveness for short-term expediency," Fraser said on the call. The revised ROTCE forecast "is a way point. It's not a destination. And we know what we need to do. We've got our arms around all of this."

Earlier in the call, she said that she "could have taken a short-term decision" to reduce certain investments. But "I'm just not going to do that. You shouldn't want me to do that," she said.

Fraser, who is about to enter her fifth year as chief executive of the $2.4 trillion-asset Citi, has been spearheading one of the largest transformations in the company's history, and the list of accomplishments on her watch continues to grow. The company has exited underperforming markets, reduced layers of management and realigned its businesses into five core units.

Still working on the overhaul

Challenges remain. It's still revamping and upgrading its risk management compliance and internal controls systems, which have caused numerous blunders and resulted in various regulatory actions over the years. Last summer, the Federal Reserve and the Office of the Comptroller of the Currency ordered Citi to pay an additional $135 million of civil money penalties, saying the bank's data quality management improvements were moving too slowly.

On Wednesday's call, Fraser was adamant that the company is moving in the right direction. The ultimate goal is to improve financial performance and revive its long-lagging stock price.

Citi's return on tangible common equity for all of 2024 was 7%, up from 4.9% in 2023 but down from 8.9% reported for 2022. Big-bank peer JPMorgan Chase's ROTCE for 2024 was 21%.

The revised ROTCE forecast for 2026 is still better than some analysts' expectations. Saul Martinez, an analyst at HSBC, said in a research note Wednesday that he's calling for 9.8%.

Meanwhile, Citi's stock price has been trending upward for months — as of mid-afternoon Wednesday, shares were up about 7%, likely reflecting the company's announcement that its board approved a $20 billion share repurchase plan — but it has long been one of the worst-performing on Wall Street.

"Our intention is to continue to improve returns well above" the revised ROTCE target for 2026, Fraser said. "And we are accountable for doing so. We are relentless in our determination to run the bank more efficiently, fulfill Citi's potential and meet the expectations of our shareholders."

Betsy Graseck, an analyst at Morgan Stanley, pressed Fraser to explain why Citi isn't being more aggressive with share buybacks. The company said it plans to buy back about $1.5 billion during the first quarter of this year.

It did not provide guidance on when it plans to conduct additional repurchases.

Part of the reason for not making a bigger push is that the industry is waiting to see what capital rules get implemented. While the proposed Basel III endgame rules were largely watered down last year and could see further changes with President-elect Donald Trump at the helm, some banks are still exercising caution when it comes to capital-related decisions.

"In terms of timing, like our peers, we're not committing to a particular time frame for this," Fraser said. "But you can see our commitment. You can hear our commitment."

Net income rose on higher revenues

During the fourth quarter, Citi's revenues rose 12% year over year while expenses fell 18% and the cost of credit tumbled 27%. As a result, net income was $2.9 billion for the three-month period compared with a loss of $1.8 billion that was recorded during the same quarter in 2023.

For the full year, Citi's revenues totaled $81.1 billion, slightly exceeding the company's forecast of $80 billion to $81 billion. Expenses, which were $54 billion for all of 2024, came in higher than the company had been projecting — which had been in the range of $53.5 billion to $53.8 billion.

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Earnings per share totaled $1.34 for the quarter, up from a loss of $1.16 from the year-ago period. Analysts polled by S&P Capital IQ had expected earnings per share of $1.22.

During 2024, Citi spent $2.9 billion on risk management-related improvements, Chief Financial Officer Mark Mason said on the call. That's up 1% from the previous year, driven by the need to make more enhancements in data. On technology, the bank spent $11.8 billion for the year, in areas such as digital innovation, new product development and client experience, he said.

The company expects 2025 revenues of $83.5 billion to $84.5 billion. Expenses, meanwhile, are expected to be "slightly lower" than $53.8 billion, Citi said.

The company did not put a hard number on anticipated ROTCE this year, saying only that it is projected to be higher than the 7% recorded for 2024.

Cutting retail divisions overseas

In recent months, Citigroup has continued to make progress on its business simplification efforts, which have largely been focused on selling or winding down retail franchises in 14 overseas markets. In early December, the company completed the separation of its institutional banking business in Mexico from its consumer, small and middle market businesses.

Citi now operates two separate financial groups in Mexico: Grupo Financiero Citi México and Grupo Financiero Banamex. It plans to conduct an initial public offering of Grupo Financiero Banamex, the timing of which will depend on regulatory approvals and market conditions.

Of the 14 markets, Citi has exited consumer franchises in nine countries to date, Mason said. It is close to winding down three retail franchises, he added.