Citigroup sets new targets; analysts remain skeptical

By David Henry and Noor Zainab Hussain

NEW YORK (Reuters) -Citigroup Inc unveiled a raft of new targets as it laid out its strategy for the next three to five years on Wednesday, but analysts remained skeptical about whether it can successfully execute the plan.

The bank set new profitability targets and gave detail on the revenue and loan growth that will be required to achieve them, but also warned of rising expenses.

The targets were posted as Chief Executive Officer Jane Fraser hosted the bank's first investor day in five years, just over a year since she took the helm at the fourth-biggest U.S. bank by assets.

Fraser has been tasked with transforming a business whose share price lagged rivals like JPMorgan Chase & Co and Bank of America during her predecessor Michael Corbat's eight years in charge.

"We have an urgent need to address the issues that have kept our firm from living up to its full potential," Fraser told investors. "Our business mix is somewhat disadvantaged and that needs to change to drive higher return fees and growth."

Citigroup also has the largest Russian exposure of any U.S. bank, presenting Fraser with another headache.

The bank could lose billions of dollars on nearly $10 billion of exposure to Russia but expects actual losses to be less than that, Chief Financial Officer Mark Mason said.

Turning around the bank's performance would "take time," Fraser said.

Citigroup is aiming for a return on tangible common equity (RoTCE) of 11% to 12% in the next three to five years. That still trails rivals but would be an improvement from its recent performance, and in line with what most analysts were expecting.

The metric measures how well a bank uses shareholder money to produce profit.

Fraser and other Citigroup executives laid out the bank's plan for growth.

It hopes to be the leading bank servicing companies doing business across borders and a global leader in wealth management, as well as gain market share in investment banking, trading and at its U.S. consumer business, Fraser said.

"All good aspirations and would result in a better and more profitable bank – just easier said than done," said Evercore ISI analyst Glenn Schorr.

Fraser said her tenure had begun with "tough feedback" from regulators, directors and employees about Citigroup's shortcomings.

After Citigroup had spent much of a decade cleaning up from losses in the financial crisis, Fraser said, "we simply did not invest enough in elements of our operating model in technology and in the associated risk and controls."

The bank has spent more in the past few quarters to fix issues regulators identified in its controls systems.

Citigroup warned that expenses will rise between 5% and 6% this year, excluding the impact of divestitures, reflecting that ongoing investment and the cost of retaining and attracting staff in a highly competitive environment.

The new targets "might be modestly disappointing to the market," said Keefe, Bruyette & Wood analyst David Konrad.

Citigroup shares were down 2.4% in the morning after it posted the targets while most other large U.S. bank stocks rose. Later the shares gained as executives took questions and closed up 1.7%, though still less than some rivals.

Citigroup said its expense efficiency ratio will improve to 60% to 63% in the near-term, compared to 65% in 2021. For the medium-term, that metric is expected to be less than 60%, the bank added. A lower efficiency ratio means a company is better at managing costs relative to revenue.

The short-term revenue outlook was also bleak.

For the current quarter, the bank expects a mid-single digit decline in revenue, excluding divestiture impacts.

Citigroup, which said its priority was to return capital, expects to pay dividends of nearly $1 billion in the first quarter of 2022.

The bank said its outlook for the medium-term includes having revenue growth at a 4-5% compounded annual rate, led by gains in its corporate payments business, as well as global wealth management.

Citigroup said its targets assume a healthy economic environment, overnight interest rates rising to 2%, loan growth of 6-7% annually, and revenue and deposit growth of 4-5%.

Since Fraser became the CEO, Citi's shares had fallen 11% through Tuesday while the index of S&P 500 bank stocks has gained 7%.

(Reporting by David Henry in New York and Noor Zainab Hussain and Niket Nishant in Bangalore; Editing by Sriraj Kalluvila, Matt Scuffham, Nick Zieminski and Bernard Orr)