Since Citi failed its Federal Reserve mandated Doomsday stress test this week, no one person on Wall Street has been more vocal about getting answers than CLSA analyst Mike Mayo.
Mayo has a history of butting heads with Citi’s top brass. In 2010 he even suggested that the bank was cooking its books. Since former CEO Vikram Pandit exited the firm and Michael Corbat was ushered in, however, Mayo has raised his expectations for the bank’s long term success.
This failure with the Fed has made him less optimistic.
“I’m adamant that Citi cannot afford to have business as usual,” he told Business Insider. “Investors will be more furious if Citi treats the value of the stress test as simply a delay in the strategy that they had already planned.”
According to a piece in today’s Wall Street Journal, Citigroup was warned. In multiple meetings, the Fed had tried to articulate Citi’s shortcoming in terms of managing risk, despite the fact that in a simulated economy downturn, the bank’s capital fell to 6.5% of assets, higher than the 5% Fed mandated minimum.
This isn’t to say that Mayo thinks Citi is mincemeat. He still sees long term value in the firm, but his multi-year price target has been lowered from $US66 per share last fall, to $US58.
In short, it’s going to take Citi a little longer to get on track than he thought before. But he’s going some ideas as to how the bank can right the ship.
You could call them demands, even. There are ten:
- Communicate more openly with investors about problems/major issues
- Repair relations with regulators and fix the processes that were insufficient
- Enhance expense controls with more details on where, what and when
- Accelerate the disposition of assets and businesses in Citi Holdings
- More seriously consider spinning off Banamex or at a minimum make Citibank Mexico more similar to other markets
- Consider selling off parts of the U.S. retail business (mortgage banking, private label cards)More aggressively retreat from low-return markets,
- Fire those responsible for the objected capital plan, including the CFO
- Move the annual meeting back to New York and webcast proceedings to allow for material information, and
- Show more skin-in-the-game by the board and top management with $US1mil.-plus stock purchases
Armed with these ideas, expect Mayo to make a lot of noise at Citi’s annual shareholder meeting in St. Louis on April 22. He’s bought his plane ticket, booked his hotel room, and even looked whether or not the Mets are playing the Cardinals while that week — but the teams are actually playing in Queens, at Citi Field.
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