Mike Mayo ❤️ Citi

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Wells Fargo’s bank analyst Mike Mayo has a well-deserved (if not entirely unblemished) reputation for being an unusually acerbic member of the “great quarter guys!” industry. But it seems he’s a fan of Citi’s Jane Fraser.

Mayo has — cough — history with Citi, but has been bullish for at least a year now. And he has started 2024 by jacking up his already punchy one-year price target to $70 and predicting it will more than double to $119 within the next three years.

It’s hardly pre-financial crisis levels, but Citi’s stock price is $51 even after a big jump since late October. It has quickly gotten queasy the handful of times it has crossed $70 for the past decade, and hasn’t even gotten vaguely close to $100 for 16 years.

Here’s Mayo’s rationale for why Citi is now Wells Fargo’s bestest banks pick, or “glass at 60% full,” as he puts it. His emphasis below:

Investors repeatedly tell us — “Don’t talk to me about Citigroup!” To us, this negative sentiment creates a more favorable setup for a potential double in the stock over 3 years. Citi is undergoing its most significant restructuring in decades given its “org simplification”, “transformation”, and business exits. We disagree with the many investors who say that Citi is unmanageable, unquantifiable, and/or un-investable.

(1) Citi is becoming more simple. Citi is transitioning from 50 yrs. as a universal bank in dozens of countries to 5 LOBs. This includes the elimination of two inter-company business lines, new direct reporting from the LOBs to the C-suite for the first time ever, and collapsing of management layers from a remarkably high 13 to 8. Exits in targeted non-U.S. markets are mostly done (9 of 14) and with line-of-sight on the rest.

Wholesale areas (est. 60% of core Citi) are positioned for share gains with its ~5K multinational and ~12K corporate clients in 3 LOBs: Services (27%, mostly payments), Markets (25%), and Banking (8%). All LOBs, including the other two—Personal Banking (29%, mostly cards) and Global Wealth (11%)—should have more clarity from better 2024 disclosure. [All LOB percentages in this report are based on 2024E revenues ex-legacy businesses.]

(2) Citi’s financials over three years should refute two big concerns—efficiency and capital. First, we expect strong positive operating leverage even with its consent order, aided by its biggest headcount reduction in its history (est. 25K+) that results in lower comp by est. $3B (~10%) and leads to flat-to-lower expenses for 2023E-2026E. This would come after a 3-year increase in core expenses of est. 1/4 (up $10B 2020-2023E).

Second, we forecast buybacks to reduce shares by 1/5 even though Citi could be one of the most penalized under new Basel 3 and other capital rules (CET1 up 16-19% per Citi). We est. regulatory capital to increase ~10% assuming relaxed proposed rules and Citi’s mitigating actions. Even with Basel 3, we still est. Citi will likely have excess capital over 3 years equal to half its current market cap.

(3) Citi is our #1 large-cap bank investment. To us, the macro factors that caused the CEO of competitor JPM to call banks “uninvestable” in 2023 seem to have softened, including recently proposed regulation (likely eased) and interest rates (worst seems behind). Also, Citi’s de-risking seems at least partly shown by the best-in-class performance of its bonds during 2023, which now trade in line w/the other big 6 banks and better than regionals. Citi also avoided the big issues of 2023 after failures of regional banks and Credit Suisse and has about the lowest exposure to CRE/office.

(a) Book value has increased while the stock declined. It’s not like Citi has destroyed book value or, to us, has a big hole in its balance sheet like during the Global Financial Crisis (GFC). Since year-end 2019, TBV increased from $70 to $87 as of 3Q23 (with a further increase to est. $113 in 2026E) while Citi stock declined from $80 to $51 as of Dec. 29, 2023 (vs SPX up about 47%).

(b) Returns implied by the stock market equal only est. half of Citi’s target. For those looking for a “margin of safety” for an investment—we believe Citi looks like a stock to own. We est. that Citi’s market value implies an ROTCE of only about 5-6%, or about half Citi’s target of 11-12% in 2025E-2026E.

(c) 1 LOB (“Services”) = almost all of Citi’s market cap. We est. the value of the Services LOB (est. 1/4 of core revenues) at about 4/5 of Citi’s market cap ($75B vs $99B as of Dec. 29, 2023) assuming a P/E of 12-13x on 2024E earnings of $6B. Most of Services (3/4) come from TTS, whose clients typically have a presence in 5+ countries of Citi’s 95 country network and value its resiliency—when Citi was literally failing during the GFC (4Q07-4Q09), TTS deposits (1/2 of total) still increased by 1/5.

(d) Dividends provide an extra 10%+ return. This is based on est. $12B of cumulative dividends over 3 yrs. on market cap <$100B.

It’s true that Fraser really does seem to be willing to make some dramatic moves. Alphaville’s eyebrows shot up on the pre-Xmas news that it was shuttering its entire muni business — an area in which Citi was once absolutely dominant. That sent a pretty powerful signal.

But, of course, there’s a reason why it’s widely called Shitibank; the sprawling, gormless Citi has for a v v v very long time proven adept at blithely ambling onto various rakes around the world.

As Mayo lays out in his $22 bear case scenario, “history is not on Citi’s side to effectively execute”, given that it is “a bank that has spent decades destroying trust”. Seven CEOs over the past 25 years have each unveiled a “transformation project” supposed to reinvigorate it, but with little to nothing to show for it.

But now that we think about it, it’s been a while since Citi hit the headlines for the wrong reasons. If Fraser really does manage to make Citi vaguely competent then surely that would rank as one of the greatest feats of corporate history.

Further watching