Citigroup Investors were Right to Say No
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
55% of Citigroup (NYSE: C) shareholders said no to the bank´s executive pay package, this may have been unexpected by many, but it´s clearly a rational decision. The fact that shareholders are starting to wake up and applying a deeper scrutiny to companies and their payment practices sounds like a very healthy trend that needs to be incentivized in the interest of fair corporate practices and transparent incentives.
Vikram Pandit, the company´s CEO received almost $15 million last year in compensation, Citigroup shareholders, on the other hand have not been so fortunate. Shares of Citigroup have been clearing underperforming other banks in the last year with a loss of more than 20%. Citigroup´s lackluster performance was only matched by Bank of America (NYSE: BAC) which is also in strong negative territory for the year.
In the following chart we compare the returns for the last year obtained by investing in Citigroup, Bank of America, Wells Fargo (NYSE: WFC), JP Morgan (NYSE: JPM) or Financial Select Sector SPDR (AMEX: XLF) the ETF which tracks 81 companies in the financial services business. Citigroup is underperforming other big banks like Wells Fargo and JP Morgan and is even well below the ETF for the year.
The last year has not been a particularly positive period for banks, so maybe Citigroup could be underperforming the sector due to the general context. Sometimes the more risky stocks underperform when the markets are going down and they over perform to the upside, and Citigroup can be considered one of the riskiest among big banks.
But that is not the case, if we look at a 6 months period; even Bank of America which is also considered quite risky in terms of asset quality is doing a lot better than Citigroup. This is probably because Bank of America passed the Federal Reserve´s latest stress test in March of this year, while Citigroup was one of the most notable failures from that test.
Financially, the bank is not out of the woods yet, the company has a ROA (Return on Assets) ratio below 0.6% when before the crisis those figures used to be comfortably above 1.2%. The company has been reporting some increases in the risk profile of its assets lately but revenue is being challenged by a lower asset base, while Citigroup keeps working on its balance sheet investors should not expect to see any consistent increase in revenue.
Analyzing an Institution like Wells Fargo, which took a much more conservative approach during the credit bubble, its performance has been a lot better lately, and the bank is expanding into more business as many rivals choose to retreat to take care of their liquidity needs.
Wells Fargo CFO, Tim Sloan, told Dow Jones that the company is expanding into Europe by buying loans and businesses that European banks need to sell in order to protect their balance sheet. Wells Fargo is also expanding into student lending, an area in which rivals like JP Morgan are cutting back.
According to Wall Street Journal:
J.P.Morgan recently said it would restrict student loans to customers who do other business with the bank, because “the private student loan market has continued to decline and government programs have expanded to help more students.”
Sloan sees things very differently. “We think we can expand” student lending. The last time I checked, a third of the people in this country go to college”–including two of his own kids–”and a good portion of those need to borrow some money to do that.”
Wells Fargo is expanding and capitalizing the liquidity needs of its competitors; JP Morgan is doing much better than in the past, but still needs to be careful. Even Bank of America is starting to look better when it comes to the quality of its assets and its financial strength.
Citigroup, however, still has a lot of work to do in order to put its financial house in order. I hope management will be able to go through this difficult period successfully, and they will deserve a nice paycheck when they do. But that is not the case right now, and investors were smart to pay attention and defend their best interest.
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