One on One with Howard Mason of Sanford C. Bernstein
Thursday, December 14, 2006
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SUSIE GHARIB: A frank assessment tonight on the nation's largest bank, Citigroup. In New York City today, Citi's CEO Charles Prince, told analysts he shares investors' frustration with the bank's lackluster stock performance. Citi's shares are up more than 8 percent so far this year, but that lags the almost 12 percent average gain of its competitors' stock. Prince says he expects investment spending next year to be less than half of this year's levels and he says growing the revenues at the consumer bank is taking longer than he had expected. Joining us now with more analysis about Citigroup, Howard Mason, large cap banking analyst with Sanford C. Bernstein. Hi Howard.
HOWARD MASON, LARGE CAP BANKING ANALYST, SANFORD BERNSTEIN: Hey, Susie, thanks for having me on the show.
GHARIB: Let's begin by talking a little bit about some of these comments from Citigroup CEO. He said also that the company will be leaner and thinner, cutting costs and focusing on international acquisitions. Does this strategy make sense to you?
MASON: It does. I think it is interesting that Chuck Prince expressed frustration about the stock price and today made out his plan for turning that around in 2007. And it had two basic components. The first was to boost revenue growth by increasing the investments overseas and by linking together the various businesses that Citigroup has in the U.S. consumer segment and secondly, by managing expenses. And as you talked about Susie, part of that is being more conservative in investment spending. Another part of it is promoting Bob Droskins (ph) to the position of chief operating officer so that there is a single individual accountable for firm-wide expenses.
GHARIB: Now some people, some investors have been talking about breaking up Citigroup into pieces or selling off parts of it. Do you think that that would be a more viable option?
MASON: I think CFO Sallie Krawcheck addressed this very effectively in the meeting. She said the basic frustration with investors and management have with Citigroup is the lagging stock price and she attributed that to earnings quality. And her point was that before recommending a solution, we need to diagnose the source of the earnings quality issues. And she pointed out that this is probably not because of the various Citigroup businesses are under run roof and in fact was much more likely to do with the rate environment. And, indeed, Citi has found its profitability hurt as interest rates have risen in the U.S. And given that it now looks as if the Federal Reserve has ceased to raise interest rates, that alters well the profitability going forward into 2007. And that, in turn, should improve earnings quality and hedge the performance of the stock.
GHARIB: Let's talk a little bit about the management changes. On Monday, Citigroup named a new chief operating officer, who you just mentioned, Robert Droskin. Are you satisfied with that change? Or do you think more management changes need to be made?
MASON: I don't think more management changes need to be made for the time being. I think it was important that Citi showed investors the commitment to managing expenses on a firm-wide basis. As Chuck Prince pointed out, Citigroup had revenue growth year to date in 2006 at 5 percent, but expense growth, if you exclude some one-time items of 9 percent and that comparison simply doesn't work. So Citigroup needs to get a grip on its expense growth and I think that having Bob Droskin appointed as chief operating officer with an initial and immediate focus on structural reengineering of Citigroup to manage expenses is a very positive development. And we need to give him time to make that work.
GHARIB: All right. We have about 45 seconds left. I want to talk you about the stock. It moved up a bit today. You have a buy recommendation on it. Tell us why.
MASON: I have a buy recommendation on it, Susie because I think the stock price has lagged its peers in 2006 as a result of Citi's exposure to rising short rates. Citi has a disproportionately small deposit franchise in the U.S. and so really is exposed to rising short rates. Now that short rates are stable, I think Citigroup's profitability will improve and I think that will create positive earnings surprise in 2007, leading the stock to outperform.
GHARIB: All right. Howard, do you have, do you own this stock and does Sanford Bernstein have a relationship with Citigroup?
MASON: I do not own the stock and Sanford Bernstein does not have a banking relationship with Citigroup.
GHARIB: All right. Thank you so much for coming on the program. We really appreciate hearing your thoughts.
MASON: Thank you so much Susie.
GHARIB: We've been speaking with Howard Mason, large cap banking analyst with Sanford C. Bernstein.
