Before Citigroup bulls bust out the champagne after the bank’s earnings beat this morning, it’s important to remember two thorny issues that will certainly come up at the Citi’s annual shareholder meeting later this month.
One issue forces the bank to hemorrhage cash, the other prevents it from returning money to shareholders.
First — analysts say the bank still has to get rid of dead weight on its balance sheet. That weight takes the form of underperforming, low-return businesses and Citi Holdings, the bank’s cluster of bad assets and businesses put together after the financial crisis.
David Hilder, banking analyst at Drexel Hamilton told CNBC’s Squawk Box that Citi “is dragging around a certain amount of capital and assets that are not terribly productive, not really producing earnings.”
Citi Holdings is worse than “unproductive.” It lost the bank $US284 million in Q1 2013. That’s down a lot from the same time last year ($798 million) but analysts like Mike Mayo say the bank needs to sell assets even faster.
Mayo also recommended the bank consider “selling off parts of the U.S. retail business (mortgage banking, private label cards) and more aggressively retreat from low-return markets.” Those are the sluggish businesses that Hilder is referring to.
The second issue with Citi analysts want to see cleaned up is the bank’s legal mess in Mexico. Last month regulators accused Citi’s subsidiary, Banamex, of defrauding clients.
It’s one of the reasons the Federal Reserve didn’t give Citi the go-ahead to return money to shareholders as the bank had planned. Yes, the bank has a lot of capital (a quantitative measure of their health) but the Fed is also looking at qualitative measures like risk management and fraud detection processes.
Now the government’s probe into Citi and Mexico is getting deeper, and has extended to a ‘failure to report’ issue regarding suspicious transactions at a California Citi unit. Investigators think those transactions may have been an attempt by Mexican drug cartels to launder money.
Citi needs to “more seriously consider spinning off Banamex or at a minimum make Citibank Mexico more similar to other markets,” according to Mayo.
Meanwhile, the issue of CEO pay is also getting a lot of attention at the bank once again. Back when Vikram Pandit was in charge, shareholders voted against his $US14.9 million pay package. This year two proxy firms are urging shareholders to vote against the company’s executive pay package. They will slug that out at Citi’s annual meeting in St. Louis on April 22nd.