Citigroup warns it risks losing $4bn from Russia exposure

Citigroup risks losing roughly $ 4bn because of its exposure to Russia, the bank said on Wednesday, as the war in Ukraine complicates its plan to pull out of the country.

Earlier this week, Citi disclosed it had $ 9.8bn of total exposures to the country at the end of last year, making it more vulnerable to sanctions against Moscow than other large US banks.

The exposures include its Russian retail bank, which it put up for sale last year, and deposits with Russia’s central bank, which was sanctioned by western powers on Sunday.

In a “severe stress scenario” the bank could lose “a little less than half of that exposure,” chief financial office Mark Mason told analysts at the bank’s investor day on Wednesday.

But Mason said the final loss could be significantly lower depending on how the situation in Russia unfolds. “We’ve been managing. . . very proactively to bring that number down, ”he said.

Jane Fraser, chief executive, announced plans to sell most of the bank’s international consumer operations in April last year to focus on more profitable business lines.

Since then, Citi has reached deals to exit roughly half of those markets, a process that has been marred by more than $ 2bn in writedowns. It has not completed a sale of its Russian retail bank, however.

Susan Katze, Credit Suisse analyst, lowered her estimate for Citi’s 2022 earnings for the second time this year on Tuesday, saying the Russian exposures had “tempered our expectations for share buybacks”.

Citi addressed its potential losses from its exposure to Russia on Wednesday as it set a new profitability target. The target indicated the US bank will continue to lag behind Wall Street rivals in the coming years as Fraser pursues a costly restructuring program.

In an investor day presentation, the bank’s first in almost five years, Citi said it was targeting a return on tangible common equity (ROTCE) of 11 per cent to 12 per cent over the next few years.

By comparison, Morgan Stanley is aiming for a long-term ROTCE of at least 20 percent, Goldman Sachs has set a goal of 15 percent to 17 percent and JPMorgan Chase has a target of 17 percent.

Bar chart of ROTCE goal in% showing Citi lags Wall Street peers with profitability target

The gap to peers underscores the challenge facing Fraser, chief since February 2021, to re-energize the bank after a series of missteps. But higher spending tied to her plan to reorganize the bank around five core business lines, along with updates to Citi’s technology to satisfy regulators, will mean it will take years to bring performance in line with others on Wall Street.

“It’s frankly not a surprise that we’ve been outperformed by our peers, and we failed to meet the expectations of our investors,” Fraser said in a presentation. “Our maniacal focus right now is on getting to these medium-term targets and building credibility with you along the way.”

Citi is the only US bank stock trading below its tangible book value, in part owing to its persistently lower ROTCE, according to analysts at Barclays.

Citigroup missed a few targets set out during its last investor day in 2017 and its shares have fallen further behind peers after executives made repeated promises to close a profitability gap that investors have complained about for years.

When the restructuring was complete, Citi would focus on “five core interconnected businesses”, Fraser said. Those businesses include treasury and trade services, global wealth management, corporate and commercial banking, markets and US personal banking.

The bank’s profitability has also faltered owing to higher spending to address a regulatory consent order after US authorities concluded that Citi had failed to correct “longstanding deficiencies” in its processes and technology.

Excluding divestiture expenses, Citi’s operational costs will also be up to 6 per cent higher in 2022 as the bank doubles regulatory spending to $ 3.5bn and steps up investments in higher-performing businesses such as its treasury and trade services unit.

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