Citi Struggles with Employee Training Amid Efforts to Fix Regulatory Issues, But Investment Banking Shows Strength

Citigroup continues to face challenges in training employees for key roles in risk, compliance, and data management, according to the bank’s internal assessments. This issue has been a contributing factor to the years-long delays in resolving regulatory problems, despite the bank spending billions on an extensive overhaul.

The report sheds light on why it has taken Citi so long to address regulatory issues, even as the bank posted a smaller-than-expected decline in profit for the third quarter, thanks largely to gains in its investment banking business, particularly in debt underwriting.

Citigroup, the third-largest U.S. lender, joined rivals JPMorgan Chase and Wells Fargo in benefiting from a recent rebound in capital markets, as corporate clients began issuing more debt and equity. CEO Jane Fraser, who has been pushing to simplify the company, boost profits, and resolve longstanding regulatory problems, acknowledged the bank’s ongoing challenges.

In 2020, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve fined Citi $400 million, ordering the bank to fix persistent failures in risk management and data governance. Progress has been slow, however. "We are still hiring, particularly in areas around transformation and around risk and controls to ensure we’ve got the appropriate level of resources to get after those things the way we need to," said Citi’s Chief Financial Officer, Mark Mason.

Regulators issued another fine in July for the bank’s lack of sufficient progress in addressing these issues. However, Citi received some relief earlier this month when the Federal Reserve terminated a 2013 enforcement action tied to the bank’s anti-money laundering programs.

"In a pivotal year, this quarter contains multiple proof points that we are moving in the right direction and that our strategy is gaining traction," Fraser said in a statement. The bank has tapped technology head Tim Ryan to work closely with Chief Operating Officer Anand Selva to address its ongoing data management issues. Citi has also added a section in its quarterly filings to provide updates on its progress related to its consent orders, which are tied to regulatory penalties.

While regulatory problems remain, investment banking provided a bright spot for the second consecutive quarter, with revenue surging 31% to $934 million. Wall Street executives are optimistic that the Federal Reserve's interest rate cut last month will create opportunities for more deals and initial public offerings.

"You’ve heard me talk for a number of quarters about the pipeline and announced deal volume being strong," Mason said during a call with reporters. He noted that Citi has "always been strong in debt capital markets" and continues to see benefits from investment-grade issuance as clients return to the market.

Citi's total operating expenses dropped by 2% in the third quarter, although the bank increased its total allowance for potential credit losses by about $1.9 billion. This drove net income down to $3.2 billion, or $1.51 per share, compared to $3.5 billion, or $1.63 per share, a year earlier. Nevertheless, Citi surpassed analysts' expectations of $1.31 per share, according to estimates compiled by LSEG.

Citi’s CFO also addressed consumer trends, noting that lower-income consumers are under pressure, while middle-income consumers have become more selective with their spending. However, the highest-earning consumers are still driving most of the spending growth, focusing on experiences and essentials. "The consumer in our portfolio is really continuing to perform as expected, and they’ve returned, frankly, to familiar, seasonal patterns," Mason said.

Despite the positive earnings report, Citi shares fell 1.5% in morning trading, after initially rising 2% before the market opened.

The bank’s services revenue rose 8% to $5 billion, buoyed by a 24% jump in securities services revenue, which reached $1.4 billion. A stock market rally at the end of the quarter lifted equities trading revenue by 32% to $1.2 billion, which in turn helped overall markets revenue grow by 1%. However, bond trading revenue fell by 6% to $3.6 billion.

Citi’s U.S. retail banking division saw revenue grow 3% to $5 billion, driven by 8% growth in credit card revenue to $2.7 billion. On the other hand, retail banking revenue declined by 8%, and its retail services unit, which handles credit card partnerships, saw revenue dip by 1%.

In discussing the retail services division, Mason said, "It’s really about, how do we improve the returns, repricing and in some instances, exiting those partnerships." He pointed to positive returns from a credit card launched with retailer Dillard’s earlier this year, noting that Citi is carefully reviewing return levels as it renews its card agreements.

Citi's wealth management division, a crucial component of Fraser’s growth strategy, posted 9% revenue growth in the quarter, reaching $2 billion.

Citi’s third-quarter earnings report comes on the heels of Bank of America’s profit drop due to lower interest income, while rivals JPMorgan Chase and Wells Fargo posted better-than-expected results last week, supported by strong consumer finances.

Year to date, Citi shares have climbed 28%, outperforming the 25% gain in the index tracking large-cap banks and the S&P 500 index’s 23% rise over the same period.

By fLEXI tEAM