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Why investors should believe in Citigroup CEO Jane Fraser

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Yahoo Finance’s Julie Hyman, Brian Sozzi, and Myles Udland discuss outlook for Jane Fraser as Citigroup’s new CEO with Mike Mayo, Wells Fargo Senior Research Analyst.

Video Transcript

MYLES UDLAND: All right, welcome back to Yahoo Finance Live on this Monday morning. We begin the month of March. Markets are rallying. Also, first day at work for New Citi CEO Jane Fraser leading the bank through what one analyst is calling restructuring 7.0 over at Citigroup. Analyst behind that call is Mike Mayo. He's Senior Equity Analyst at Wells Fargo Securities.

Mike, always great to talk with you. So let's-- let's start with how, you know, you highlight in a note to clients this morning story from the "Journal" out yesterday about Fraser's ambitions here for Citigroup. How do you think about some of the things you saw in that story? And how does it maybe fit into or surprise for a framework that you were looking at as Fraser takes this top job at Citi?

MIKE MAYO: Well, I think the surprise is the degree that the new CEO of Citigroup, Jane Fraser, is hitting the ground running. The story in "The Wall Street Journal" says that there is a, quote, "significant restructuring that might be on its way." And this is a complete about-face.

As you guys know, I attend annual meetings. I've attended more annual meetings at Citigroup than for any other bank. And when I say that, I go to the Investor Days for people on Wall Street, but these annual meetings are for more retail investors. It's my chance to quiz the board of directors that oversee the managers.

And for the last four years, Citigroup's management, including the board of directors, has been adamant, saying their restructuring is done. They don't need to restructure. Basically a polite way of saying, Mike Mayo, go away. And now with this "Wall Street Journal" article, that is an about-face from what they've said for the last four years, repeatedly said for the last four years, that yes, we will go ahead and have a big restructuring.

And in fact, that is exactly what's needed at Citigroup, as I've been repeatedly saying for a while. And if so, then they can unlock some of the-- the trapped capital and unleashed value at the firm. We estimate-- this is the big number here. Here you go. The stock price started today at $66. We estimate the sum of the parts are $111.

So simply by selling off some assets and realizing some of that value, that could certainly be good for shareholders. Now, this is the seventh CEO. We call this restructuring 7.0, because the other six CEOs have had some form of restructuring. But now it's needed more than ever before, because this two-decade experiment known as Citigroup has failed when it's come to strategy, execution, financial metrics, and certainly stock price performance.

BRIAN SOZZI: Mike, Jane Fraser, she's been there for a good bit of time. Why should investors believe that she will be a breath of fresh air and, in fact, announce this big restructuring? And then follow up on that, what assets are for sale at Citi?

MIKE MAYO: Well, I mean, she has been there a little less than two decades. She's been the number two person for the last year. So what's good is she really knows Citigroup. And what's a little surprising or needed is the degree of the restructuring that's likely to come.

Now, the article mentioned a sale of the Asian consumer business. It specifically mentions a sale of South Korea, which Citigroup bought in 2004, the Koram acquisition for $2.4 billion, the sale of maybe Vietnam. And by the way, we're talking consumer businesses. And if they sold all of the Asia consumer, that would be about one tenth of the firm.

We've also called for sales of the Mexican consumer business, which would be another 6%. So there are certainly assets which, if they sold, might even result in gains. So that would be good. So my three-point checklist for Citigroup, number one, sell all international consumer.

Number two, reorganize around their payments businesses, which comprise about 37% of revenues. And point three is go ahead and take the charge to retire the old, clunky computer systems. And that would be good for investors. It would be good for them resolving the issues with regulators. And it could finally see this underperforming stock price perform better ahead.

JULIE HYMAN: Mike, it's Julie here. A lot of the changes you've been talking about are concrete changes, right, in terms of restructuring, selling off assets. I'm also curious about the intangibles. Because even though, as we've been talking about, Fraser has been there for a while, she wasn't in charge. So culturally, and this is where I'm getting into the intangibles, what can she change? And what do you expect her to change at Citi?

MIKE MAYO: Well, I mean, what Citi needs is better accountability from the top down to the bottom. And so she can certainly increase the intensity. She can improve the accountability. She can improve the transparency. And you know, I think that this is, like, management 101. So while she may have been a team player, sometimes when you're a team player and you get that number one spot, that's your chance to go ahead and make changes.

On the other hand, from the 10,000-foot level, she is a strategic thinker. You know, she's ex-McKinsey going way back. She's had several different positions within Citigroup. We'd like to see her do what James Gorman did at Morgan Stanley, but do that at Citigroup.

And sometimes it's the simple decisions that are the most powerful, a reorganization of businesses and new business lines, so restructuring it so that you can better manage it so that you can better measure it. And so I think those are probably her core strengths. And if she can just implement a few simple, powerful changes like that, then Citigroup could finally realize more of the value, realize more of its potential, because it has the ingredients.

I mean, you're-- one of the-- half the company, the wholesale business, you're in 98 countries around the world. You're moving cash for corporations. You're-- you're one of the largest capital market firms in the world.

So that half of the company is pretty easy to understand. And that competitive advantage has only increased, especially against the European players which have pulled back, the likes of UBS, and Credit Suisse, and HSBC, and Barclays, and-- and Deutsche Bank. So that half is fine.

Then the other half, it's a lot of credit cards. They're the number one credit card firm in the world. But they need to better leverage that into other consumer products. And when they can't do that, and especially outside the US, they should probably discard that.

MYLES UDLAND: You know, Mike, you've given us, certainly, an outline of where Citi is today through this conversation. But you just said something interesting in an earlier answer. You talked about the two-decade experiment known as Citigroup. And I guess as you think about that as an analyst, like, how do you kind of plot that course from-- like, when does that begin? Is that the decision to spin out Travelers and then go-- like, how are you thinking about that history of Citi and-- and sort of how this era might be remembered?

MIKE MAYO: Well, I mean, it started with Sandy Weill and John Reed, late 1998, when they merged Citicorp with Travelers. And we dubbed that merger Noah's Ark, because they brought two of everybody along. Not many would remember that, but they had two CEOs, two heads of consumer, two heads of wholesale. It was a mishmash of cultures. It didn't work.

And then eventually, you had Enron and WorldCom a couple of decades ago now and there were changes a couple of years after that. And then you had Chuck Prince, who was a former lawyer, I don't think he was ready to take that role. Then you had Vikram Pandit, and that didn't work out very well.

By the way, through all of this, I was-- at different times, I was shut out from the company. I wasn't allowed to ask questions. I wasn't allowed to have meetings. I was raising the alarm. And I just found a very shareholder-unfriendly attitude.

Then eventually, you got to Mike Corbat for the last seven or so years. And I think he did a good job in being-- making Citigroup much more conservative, resilient, you know, less chance of bankruptcy. Citi has effectively gone bankrupt, like, five times in the last century, again, implicitly gone bankrupt. So the risk of that happening certainly has gone down.

But Citigroup's played it too strategically safe over the last seven or eight years. And so now we tee it up to Jane Fraser. She inherits a strong balance sheet, much better liquidity and capital.

They're not likely to go bankrupt. The bond spreads for Citigroup's debt reflects that. But it's one thing to have a solid foundation. It's another thing to go ahead and do something with it. And that's Jane Fraser's challenge and opportunity.

BRIAN SOZZI: Mike, is part of the problem with Citi, and this will be an ongoing problem, I suspect, they have a 16-person board of directors, and they've been there for-- for some time. How do you get a big restructuring through with a 16-person board?

MIKE MAYO: You know, they have to do it. They must absolutely do this. And to the extent that ValueAct is still an activist investor-- and they've been vocal, speaking at a conference late last year, the head of ValueAct-- it would be nice to see them join the board. But they've had these special agreements with Citigroup.

So it'd be nice to see, you know, Jane Fraser working with others who can cause a change on that board, because it has not worked. The board has not held Citigroup management accountable enough. And this goes back over one year, five years, 10 years, or since that late '90s merger of equals.

And so the best example of that is, I mean, the CEOs have gotten paid over $400 million over the past couple of decades, and the stock price is down over-- like, down, like, 80% or 90%. That's-- that's not capitalism, and that-- that doesn't work. You know, so I-- this is where I-- that's why I go to annual meetings, because if capitalism is not working, then it's up to the shareholders, the owners of the companies and those who represent them, like me, to go ahead and speak up.

And if that doesn't happen, then you see what happens, then Washington, DC, regulators jump in there. So it's time to hold Citigroup and their managers more accountable. And one way to do that is to go ahead and make some changes to that board. And I hope Jane Fraser has some flexibility to do so.

MYLES UDLAND: All right, Mike Mayo, Senior Equity Analyst at Wells Fargo. Mike, always great to get your thoughts. Thanks so much for jumping on this morning. I know we'll stay in touch as the Citigroup saga unfolds over the years ahead.

MIKE MAYO: Thanks for having me on.