Citigroup Gives Wall Street a Sobering Message

Incoming Chief Executive Jane Fraser’s historic appointment last week shed a light on Citigroup ’s upside potential. But investors hoping that might spark a rebound were greeted instead by news Monday that “the next phase” of the bank’s investment will be “strengthening” and “transforming” its risk and control environment—and a subsequent 8% correction in the shares over Monday and early Tuesday.

A presentation by the bank detailed $1 billion in investments in 2020. That is roughly 2% of analysts’ forecast for 2020 operating expenses. However, the bank also noted that prior tech enhancements were generating productivity savings to fund more investment spend. This “should create capacity for these investments while holding expenses more or less flat,” Chief Financial Officer Mark Mason said at the Barclays Global Financial Services Conference.

This week’s stock move is perhaps an overreaction to that level of overall spending. But there is context to consider: The investment comes as Citigroup is in the midst of dealing with a breakdown that led to an erroneous $900 million bond payment. The Wall Street Journal also reported that federal regulators are preparing to reprimand Citigroup for failing to improve risk systems.

Trading at one of the steepest discounts to book value among its peers, Citigroup has huge potential for a sharp turnaround. Yet the timing of any rebound is increasingly hard to figure.

For one, the pandemic’s ongoing effect on banks’ overall expense plans is still murky. Banks have had to spend to accommodate employees and customers and to make emergency small-business loans. Wells Fargo , in the midst of an even w

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