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Citigroup CEO Jane Fraser faces disgruntled staff and calls for from regulators in a troublesome first 12 months

Citi CEO Jane Fraser makes brief remarks during a meeting with US President Joe Biden and other chief executives to discuss the looming sovereign debt ceiling in the South Court Auditorium in the Eisenhower Executive Office Building October 6, 2021 in Washington, DC.

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Frustration has been building in parts of Citigroup over late bonus payments and tight budgets, two implications of the bank's response to its regulatory oversight, according to people with direct knowledge of the situation.

According to the sources, workers ranging from junior salespeople to senior executives have been embroiled in months of investigations sourced from an anonymous employee grievance portal. The bank is freezing bonuses and performance reviews for employees under investigation, even if the claims are unfounded, according to the people, who asked not to be identified for fear of reprisals.

The cumbersome internal reviews are a surprising fact of life at Citigroup, where CEO Jane Fraser has made headlines for speaking out about work-life balance and other ways to gain an hiring advantage over competitors. They illustrate how regulatory scrutiny has taken a toll on employee morale, making the already difficult task of transforming Citigroup even more difficult as 54-year-old Fraser nears her one-year anniversary at the helm of the company.

Fraser, the first woman CEO of a major US bank, finds herself in a tricky balancing act: to overtake a company that has severely underperformed US peers for years, she must improve yields and grow the business while cutting spending in check and has to plow money into placating regulators.

Investors have been skeptical so far. While 2021 was the best year for the banking industry in more than two decades due to rising interest rates, Citigroup didn't participate in the rally. Since being acquired by Fraser in March 2021, the bank's stock is up 2.7%, while Bank of America is up 38% and Wells Fargo, also a turnaround project, is up 56% over the period.

Fraser, a former McKinsey partner who took over after predecessor Mike Corbat accelerated his retirement, started her tenure with a bang, announcing in April that the bank was exiting 13 markets in Asia and Europe. The strategy was to simplify the bank and focus on its strengths in global corporate cash management and US credit cards, and to grow in wealth management.

The departures, including last month's announcement that Citigroup was exiting its retail banking business in Mexico, were welcomed by analysts, who took it as a sign that Fraser would leave no stone unturned in its bid to reshape Citigroup. After all, its predecessors had resisted calls to downsize the bank's global footprint, and Fraser himself had overseen some of the operations to be trimmed.

Uber competitive

But while rival banks have seen their shares rise over the past year and fintech companies like Block's Cash App have gained millions of users, Citigroup has struggled. The company's revenue slumped 5% to $71.9 billion in 2021, while expenses rose 9% to $48 billion — what one dynamic analyst calls "negative operating leverage" and the complete opposite , which banks normally aim for.

Part of the jump in costs resulted from the completion of the consent orders. Regulators fined the bank $400 million and issued two consent orders in late 2020, demanding sweeping improvements to risk management and controls after the bank accidentally transferred $900 million to Revlon creditors. One of the edicts in the orders was for Citigroup to improve the way it tracks and handles employee grievances.

"Executing the plan while working on the consent decree is the hard part," said Glenn Schorr, banking analyst at Evercore. “Every business they're in is wildly competitive, every one of them has neobanks and fintechs and other banks and private credit managers all chasing them. It is difficult to do something on all these fronts at the same time.”

To make matters worse, major investor ValueAct, which had played a role in hastening Corbat's exit decision, seemed to lose faith in his bet and reduced its position over the year. Then, in December, the bank announced it would suspend share buybacks for months to raise capital for international standards, the only major US bank to do so.

Citigroup's low share price means it's the only bank among the top six U.S. institutions trading below its tangible book value, a key metric in the banking world that essentially means the bank is more likely to destroy shareholder value than it creates. Competitors JPMorgan Chase and Bank of America are trading at more than double their tangible book value.

Developments over the past year, including a tone-deaf compensation plan that critics say rewards executives for just getting their jobs done, prompted Wells Fargo banking analyst Mike Mayo to publish a scathing report in October entitled "Will Citi Die?" Achieve book value in our lives?”.

"Earlier this year, Citigroup was by far the most hated bank stock," said Mayo, who admitted in a phone interview that he had rated the company "long and wrong" after calling it a buy. "Hopefully I won't be on my deathbed still waiting for Citi to hit book value."

In response to this article, Citigroup spokeswoman Jennifer Lowney had the following statement:

"We believe our stakeholders understand that there are no quick fixes and want us to create real value over time," Lowney said in an email. "We're proud of the early progress we've made and are committed to putting in the hard work it takes to get the right results."

Structural Disadvantages

Many of Fraser's challenges stem from structural disadvantages it inherited from Citigroup's emergence as the original megabank two decades ago.

The bank owes its current design to former Chairman and CEO Sandy Weill, who led Citicorp to merge with Travelers in 1998 to create the world's largest financial services company. His vision: a global financial supermarket, cobbled together through countless takeovers.

The three men who succeeded Weill at Citigroup over the next two decades—Chuck Prince, Vikram Pandit, and Mike Corbat—all struggled to make the different parts of the sprawling company work.

A pivotal moment in the bank's history occurred during the 2008 financial crisis, when a massive reshuffle of the financial hierarchy resulted in winners and losers. Stronger institutions like JPMorgan swallowed up the weaker ones and grew by leaps and bounds.

At first, Citigroup looked like one of the former: It had a potential deal, brokered by regulators, to acquire Wachovia's retail banking business, which was the fourth-largest U.S. bank by assets at the time. But it lost to Wells Fargo, who offered to buy all of Wachovia at a far higher price.

As the crisis dragged on, Citigroup's distressed assets and risky bets forced it to undertake the largest public bailout among US banks. To raise money, it heavily diluted shareholders by raising new shares and sold its retail brokerage firm, Smith Barney, with its vast army of financial advisors, to Morgan Stanley. The move would haunt Citigroup as Morgan Stanley's focus on wealth management has been praised by investors.

Small big bench

As Citigroup muddled through the post-crisis decade, it never gained the traction in US retail banking that the Wachovia deal would have given it.

The bank has just 689 branches in the US, compared to well over 4,000 each at JPMorgan, Bank of America and Wells Fargo. As a result, Citigroup does not take cheap deposits from US customers like its competitors do, making its funding costs among the highest among its peers.

As formerly troubled banks like Bank of America and Morgan Stanley began to emerge as high performers after the crisis, only Citigroup remained behind. The stock, currently around $66, is a far cry from its all-time high of $588.80 set in August 2000.

Meanwhile, the synergies from the bank's global sprawl, after Weill acquired companies from Sao Paulo to Tokyo, never materialized. Instead, according to a former Citigroup executive, the overseas operations suffered from poor oversight and underinvestment.

"Citi missed its chance to break into the US retail market," said the former market leader. "They wasted a lot of money going for a global strategy when it's basically a wholesale bank that yields lower returns than retail banking."

The executive described the non-US companies as "melting ice cubes" because Citigroup was underinvesting in faraway markets like Taiwan or Malaysia, local competitors were becoming fierce, leaving the bank further behind.

For example, Banamex, a storied name in Mexico, was the country's second largest bank when it was acquired by Citigroup in 2001 for $12.5 billion. When Citigroup announced it was exiting retail banking in the country this year, the unit's market share had fallen by nearly half.

Fraser said she has completed her cleanup of Citigroup and will present a new strategic vision and multi-year plan to investors on March 2, the bank's first Investor Day in years. Analysts expect her to provide mid- and long-term targets for return on tangible equity — a key industry metric calculated by dividing a bank's earnings by its equity.

Break the cycle

To win, the bank must break a cycle of underinvestment that leads to underperforming returns.

Citigroup is picking its spots, hiring 500 front-office workers in its wealth business, 200 corporate and investment bankers, and working to digitize parts of its flagship corporate cash management business, CFO Mark Mason said in October.

However, some executives at the retail bank contend that while the mandate is set for growth, resources are limited as attention and money go into implementing the company's consent orders. Citigroup has more than 4,000 employees spread across six projects dedicated to the broad mandate of repairing risk management systems while injecting billions of dollars into technology upgrades.

That has frustrated some that both traditional and fintech competitors have a funding advantage, giving them an advantage in highly competitive markets. Venture capitalists invested $134 billion in fintech startups last year, prompting traditional players like JPMorgan to ramp up their investment budgets to stay competitive.

In the absence of its competitors' physical network, Citigroup has been locked into a strategy that emphasizes partnerships, which can be an efficient way to expand a bank's reach. However, it also leaves the bank open to the whims of its partners: Its deal with Google to offer users bank accounts — a move that initially sparked waves of euphoria from Citi — fizzled after the tech giant ended the project.

bonus limbo

Few things, however, have frustrated employees like the internal investigations that can drag on for months while the bank deals with a backlog of complaints filed by its own employees.

Complaints can be submitted anonymously through the internal employee relations portal, forcing HR staff and attorneys to deal with a barrage of issues ranging from legitimate allegations of misconduct to minor disagreements or opinions about business strategy. (One person compared the complaints line to New York's 311 service.) One of the more common complaints is related to the bank's Covid vaccine policy, this person said.

Another person familiar with the program said the complaints line and bonus policy were seen as necessary after the bank's employees were implicated in ethical failings such as the Libor and FX trading scandals.

While this individual said that not all complaints result in bonuses being withheld, only those that cross a threshold of seriousness, others said they were instructed to withhold year-end performance reviews and compensation discussions for anyone under investigation.

Citigroup declined to say how many internal complaints it collects or what percentage of investigations result in confirmed employees.

The policy of withholding premiums, which began about three years ago, has caused employees to stumble. For older workers, performance-related pay can account for the bulk of their annual pay. One employee had a review held up for more than a year before finally being paid. Another threatened to leave unless her case was expedited.

"I asked HR, 'Why is this taking so long?'" said one of the people. "They said, 'We have so many complaints, we're not making any progress.'"

The dynamism contributes to an atmosphere of reflection and resistance to change, people said. The bank also takes too long to approve new products and sometimes fails to communicate changes to key internal stakeholders before releasing announcements, the people said.

Those factors could contribute to attrition as financial-sector competitors offer pay raises to leave Citigroup, people say. In recent months, the bank's US retail banking head and chief marketing officer have left to join competitors.

'She's the one'

Still, Fraser has also managed to attract her share of outside talent, picking up a former Treasury Department official as general counsel and hiring Goldman's chief diversity officer and JPMorgan's chief data officer for key roles.

This year may not go much smoother for Citigroup than last. Last month, the bank's CFO conceded that the bank's yields — already the lowest among the top six U.S. banks — are likely to fall this year as Wall Street revenue slows and the benefit from freeing up reserves subsides.

However, just a year into her tenure, Fraser is counting out no one. If its plan for March's Investor Day is seen as credible and it makes progress toward its goals, analysts say the stock should rally. If anything, the extreme pessimism embedded in the stock means shares can't go much lower.

"It's a tough job, I don't envy them," said a former manager. "If there's anyone who can do it, it's her."

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