Source: PaxForex Premium Analytics Portal, Fundamental Insight

Like most major banks in 2020, Citigroup faced challenges related to high credit costs and ultra-low rates caused by the pandemic. The bank has also been and continues to deal with regulatory issues related to its internal compliance, data, and risk management.

In late 2020, the bank announced that its longtime CEO, Michael Corbat, would step down earlier than expected. The new CEO is Jane Fraser, who has worked at Citigroup for the past 16 years. With a new leader and plenty of challenges to overcome, let's go over a few things investors are looking forward to this year. 

• Transition to a new approach.

Citigroup has long frustrated investors by failing to deliver the same returns as the bank's rivals, which may explain part of the reason why Corbat resigned earlier than expected. During her first earnings call as CEO last week, Fraser said one of her top priorities was to "update the current strategy." And judging by her high-level comments, it seems that Fraser wants to double Citigroup's global capabilities. Right now, Citi already operates in 160 countries and jurisdictions, but the direction makes sense for Fraser, who led the bank's Latin American region before becoming CEO.  

According to Fraser, the bank's leadership is currently "evaluating which companies can take the lead in a much more digitized world." That assessment could eventually turn into a major upheaval at the bank, where business segments are being reshuffled, some being phased out and others being strengthened." It's already starting to make itself felt, with the bank recently announcing that it will merge consumer wealth management and private banking into one business area. The bank also recently announced new executives for Citigroup's U.S. consumer banking and treasury and trading solutions divisions. The bank's management team is still working on its strategy, but more news should emerge this year. 

• Resolving regulatory issues

A unique issue facing Citigroup has to do with internal control and risk management issues. Recently, regulators imposed a $400 million civil penalty on the bank for failing to resolve these long-standing issues, some dating back to 2013 and 2015, according to the Federal Reserve's consent order. The issues were also exposed after Citigroup accidentally handed over $900 million to several creditors of cosmetics brand Revlon. In the end, management attributed the error to a manual "clerical error" and the bank's "outdated" software.

All of this means that the bank will have to invest heavily in fixing or adding infrastructure that will eventually improve the bank's internal controls and return it to normal operations. Citigroup Chief Financial Officer Mark Mason said the bank spent $1 billion on transformations in 2020, which included investments in technology and specialists. Mason expects the bank's total spending to grow another 2% to 3% in 2021, much of which will also be added to transformation spending.

Fraser said management has specific work streams in place to meet all of the necessary challenges. She added that representatives would be presented with a gap analysis in February and an implementation plan in May.

• Shares buyback

After a recent stress test showed that major U.S. banks could maintain adequate capital levels under much worse-than-expected economic scenarios, the Fed lifted its ban on buybacks. Citigroup will begin buying back shares this quarter and expects to be able to buy back about $1.8 billion worth of stock in the first quarter. However, the Fed currently limits capital distributions to average net income for four quarters. If that restriction is lifted later this year, which is possible, Citigroup could increase the pace of its buybacks. Management has not said at all that it would do so, but the bank is currently sitting on excess capital, so it is certainly possible.

• Increased profitability, but lower efficiency

Like most banks this year, Citi should be able to generate higher profitability due to lower lending costs, the likely ability to release loan reserves back into earnings, and the ability to buy back shares. However, despite the higher profitability, the bank is likely to be less efficient in the short term. The efficiency ratio rose in 2020, and it could rise again this year.
Mason said earnings are expected to decline in 2021 as the bank's stellar market division performance begins to normalize in 2020, and net interest income on assets such as loans will also continue to decline amid low-interest rates. Parallel to the increase in costs that Mason warned about, one gets an increase in efficiency ratios.

While the price is above 60.00, follow the recommendations below:

• Time frame: D1
• Recommendation: long position
• Entry point: 61.00
• Take Profit 1: 64.00
• Take Profit 2: 67.50

Alternative scenario:

If the level 60.00 is broken-down, follow the recommendations below:

• Time frame: D1
• Recommendation: short position
• Entry point: 60.00
• Take Profit 1: 58.00
• Take Profit 2: 54.65