By Tatiana Bautzer and Saeed Azhar
NEW YORK (Reuters) -Citigroup investors have rewarded CEO Jane Fraser with a share price boost after Fraser announced a sweeping overhaul of Citi’s sprawling structure in September, cutting costs by laying off 5,000 employees. Next, they want to see growth in wealth management and investment banking.
Wall Street investors have welcomed Fraser's overhaul, but warned the CEO has major challenges ahead to boost returns and catch up with rivals, including regulatory problems, lackluster earnings and an unsettled workforce.
"If this was a chess game, I would say the opening phase is over, and now the middle phase begins," said Peter Nerby, an analyst at ratings agency Moody's (NYSE:MCO).
Citi's stock is so depressed that it is hard to lose money betting on it, said Daniel Babkes, portfolio manager at Pzena Investment Management, which manages more than $60 billion and owns Citi shares.
"We are confident the bank can control expenses after the reorganization," and it has strong growth prospects in corporate banking, he said.
Citigroup shares rose 49% since it announced the overhaul in mid-September, outpacing a 26% climb for the KBW bank index. The bank's stock trades at 0.57 of book value, a measure of performance that falls short of JPMorgan Chase (NYSE:JPM)'s 1.73 or Bank of America's 1.1.
But the company's turnaround efforts also caused internal turmoil. Workers avoided signing up to long-term projects during the six-month reorganization because they were unsure if they would be laid off, said a source who declined to be identified discussing personnel matters.
The process was lengthy because it affected many levels of the organization, said a separate source close to the company.
The outlook for Citi is improving because of its job cuts, the quality of its loan portfolio and its reduced exposure to paper losses on securities, said Ian Lapey, a portfolio manager at Gabelli Funds, which oversees $30 billion and owns Citi shares.
Citigroup's reshuffle represents an inflection point that will increase its efficiency, said Hunter Doble, a portfolio manager at Hotchkis & Wiley, which has $31 billion under management and owns shares of Citi.
Meeting the bank's target of 11% to 12% return on tangible equity would fuel big jump in the stock, given that its current profitability is much lower and will get closer to industry peers, Doble said.
Citi will report its first quarter earnings on April 12 and hold a virtual shareholders meeting on April 30. It lost $1.8 billion in the fourth quarter after taking several one-off charges that included losses with currency devaluation in Argentina and higher contributions to the FDIC, that ensures deposits.
The lender's biggest challenges are improving profits in banking and wealth management, according to Nerby at Moody's.
CHALLENGES AHEAD
In an effort to boost performance, Fraser recently hired two prominent executives to run the divisions: Viswas Raghavan, former head of global investment banking at JPMorgan, and Andy Sieg, who previously led Bank of America's Merrill Wealth Management unit.
The recruitment of highly compensated executives was a snub to internal talent and detrimental to morale as employees were going through waves of layoffs, said the first source and another two people who also declined to be identified discussing personnel matters.
In September, Fraser acknowledged the morale issue, saying the moves would not be "be universally popular within our bank," but added that "our strongest performers are going to be fully supportive of these moves, and it is absolutely the right thing to do for our shareholders."
"Outsiders are what Citigroup needs now to really bring change," said Bank of America analyst Ebrahim Poonawala.
On Tuesday, David Livingstone, Citigroup's Chief Client Officer, announced in a memo seen by Reuters the hiring of Alex Craddock as new Chief Marketing and Content Officer. Craddock, expected to join next month, was most recently at BlackRock (NYSE:BLK) and will lead an integrated marketing effort for all businesses.
Fraser has said Citi will leverage its relationships with the world's largest corporations to boost revenue in investment banking and wealth management. She also plans to drive more growth through a newly-created division focused on client service. Still, analysts are awaiting more details on the strategy for the key units.
Another area of focus is Citigroup's U.S. consumer business, which is much smaller than rivals'. Retail deposits only account for $105 billion of the company's total $1.3 trillion in deposits, with corporate deposits making up the bulk of the remainder. By contrast, JPMorgan Chase and Bank of America each have $1 trillion or more in consumer deposits.
The U.S. retail business is a drag on returns, finance chief Mark Mason told investors in February when asked about the bank's strategy, saying the bank has less than 700 branches. Competitors have much larger networks.
When asked for comment about its plans in consumer banking, Citi spokespeople referred Reuters to executives' earlier statements on its goals: To grow in the six U.S. metropolitan areas where it has more branches, boost digital channels and prudently grow mortgages.
Overseas, Fraser has made progress on her commitment two years ago to exit from 14 markets. Citi has completed sales of nine businesses in Asia, including in Taiwan, Philippines, Malaysia, India and Indonesia. The bank is also winding down businesses in China, Korea and Russia, and will try to sell its Polish bank and carry out an initial public offering for its Mexican business next year.
Citi will showcase its services division -- which Fraser refers to as the company's crown jewel -- at a June 18 event for investors. The unit, which provides cash management, clearing and payments services for the world's biggest corporations, reported record revenue of $18.1 billion last year. The business is helped by Citi's vast global presence in 95 countries.
As Citi proceeds with divestitures in international retail, services will account for a bigger chunk of its future profits, said Lapey at Gabelli funds.
"Despite disappointing earnings over the last couple of years, the company appears to be well positioned now," he said.