Citigroup forecasts higher expenses as it revamps its business model

The faster-than-expected economic recovery is opening certain doors to invest in growth businesses, and that means expenses are going to rise this year, Citigroup executives warned Wednesday.

The $2.2 trillion-asset company is now forecasting an annual expense uptick in the mid-single-digit range for 2021, up from 2% to 3% projected in March. The increase grabbed the attention of analysts who wanted to know if the numbers would creep up even more in coming months and whether momentum would extend into 2022.

Chief Financial Officer Mark Mason tried to allay any concerns about rising costs while also defending the company’s decision to spend more money now on business segments that are expected to strengthen profitability and returns in the future.

Citi’s management team is “going through a very thoughtful strategy refresh and as we go through that we are identifying … some real strategic opportunities to invest in the franchise,” Mason said during Citigroup’s second-quarter earnings call. “And we’re not going to miss this window of opportunity.”

Citi reported operating expenses of $11.2 billion for the second quarter, up 7% year over year and 1% from the first quarter. The company has been forecasting an increase in spending since December when Mason offered a glimpse at how much it would cost to fix long-standing risk and compliance issues; last fall those problems led to a pair of federal enforcement actions and a $400 million civil money penalty.

The business revamp undertaken by CEO Jane Fraser is also driving higher expenses. Fraser, who was promoted to the role on March 1, has set out to simplify Citi by exiting underperforming businesses and doubling down in areas that already generate healthy profits and those that are ripe for large-scale growth, including the U.S. consumer unit.

On Wednesday, Mason said the quick pace of the economic recovery is driving some of the decisions to make “accelerated investments” in certain areas, such as credit card marketing. Credit card spending — which is rising across the industry as consumers resume travel and dine out more — rose 40% year over year, returning to prepandemic levels, Mason said.

At the same time, Citi is spending money on wealth management, commercial banking and treasury and trade services for multinational corporations, all businesses with “strong growth prospects” and “returns that are north of 20%” in a normal economic environment, he said.

The company is in the process of selling retail franchises in 13 overseas markets, including China, India and Australia, Fraser said. The first round of bids was “very encouraging and competitive,” she said.

Mason declined to share expense guidance for next year, but he was confident that Citi will spend what it needs to spend “in a smart fashion” to position the company for the future.

“If we see more investment opportunities in 2021 or 2022, we’re going to go after them because we know that we can deliver on the benefits and returns that are associated with putting that money to work,” he said.

Citi reported net income of $6.2 billion for the second quarter, up significantly from $1.1 billion in the year-ago period thanks to the lower cost of credit. During the most recent quarter, Citi released $2.4 billion in reserves. End-of-period loans were down 1% year over year.

Like JPMorgan Chase, credit card payment rates are stifling loan growth, though Citi said it expects rising card activity to translate into loan growth during the second half of the year.

Neither Fraser nor Mason disclosed anything new Wednesday about Citi’s business realignment. But the comprehensive plan will be presented during an investor day being planned for the first quarter of 2022.

“We’re going to put our entire vision for the firm in front of you, so you can then hold us accountable for executing against it,” Fraser said.

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