Citigroup’s ruthless remake

0:03Good morning from the Financial Times. Today is Monday, July 13th, and this is your FT News briefing. It's earnings week on Wall Street, and Citigroup is one of the big earners after years of change. Plus, there's some drama at the World Economic Forum. So at the moment, there's a little bit of a vacuum in power within the WEF. They need a permanent chair, and they also need to find a chief executive. I'm Safiya Ahmed, and here's the news you need to start your day.

0:42Wall Street banks are reporting quarterly earnings this week, and they're likely to have some good news to share, at least when it comes to investment banking. The five largest American investment banks are set to announce their biggest haul in investment banking fees in almost five years. That's JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup. A Bloomberg estimate puts their projected total at$11.1 billion. That's up by almost a third from this time last year. The banks have SpaceX's blockbuster listing to thank for this windfall, plus a resurgence in mega mergers.

1:23now let's zoom in on one of those banks specifically citigroup it's expected to report another solid quarter for earnings tomorrow it hit a key profitability metric earlier this year too and that prompted its ceo jane fraser to set even more aggressive targets back in may this is the first earnings report since she set those now things haven't always looked so rosy for Citi. Fraser has done a reset of the bank since she took over in 2021, but some of the moves she's taken have been controversial internally. I'm joined now by the FT's Akilah Quino. She covers U.S. banking. Hey, Akilah. Hi. So give me a sense of where Citi's financials are going into this earnings report.

2:03So Citi's going into this, you know, on the back of a very strong share price performance. There's really been a sort of turnaround in the stock and the bank was the highest performing last year. And I think now it's all about trying to prove to the market that there are still more upside because it still lags behind peers in terms of scale profitability and share price. And the bank is also crucially still under two consent orders from banking regulators that have to do with this big erroneous payment they sent to relevant creditors back in 2020. And, you know, that's still weighing on its reputation and on the stock potentially.

2:44Right. Now, the consent orders you're talking about come from when Citi accidentally wired almost$900 million to creditors of the cosmetics group Revlon instead of a$7.8 million interest payment that it meant to send. But let's go back to Fraser. As I understand it, she's done quite a bit of restructuring at the bank. Tell me what exactly she did and what impact it had? Yeah, so she's done what people consider to be the most ambitious, the most amount of change in at least a decade for the bank. So at first, she decided that she would change the business model of the bank. So this kind of super global bank that had a retail presence in several markets, she decided to pare that back, exit 14 markets, and just focus on where, as she says, the bank has the right to win.

3:34So making it a more simple business and more profitable business. She also changed the structure at the top. So she got rid of an entire management layer to prevent silos in the bank. And she really was forced to do that because of regulatory pressures. And then finally, she then took a big swing and gamble and decided to cut 20 ,000 jobs over three years at the bank to simplify its operations and, again, like boost profitability. Are there any other big moves that Fraser has made as part of her overhaul? So she's made two big hires to run the wealth business, which was underperforming. She poached Andy Sieg from Bank of America, where he was running Merrill Lynch.

4:21Since he joined, there have been complaints to Citi's board about his management style and his leadership. There was also a lawsuit against him, alleging sexual harassment by him, which the bank says has no merit. On the banking side, on the investment banking side, Citi hired Viz Raghavan from J.P. Morgan. With him, we're not aware of any complaints, but we wrote this big piece in the FT showing that when the bank had hired him, he actually was on his way out from J.P. Morgan, in part because of bullying allegations. And so, yeah, both of these hires have made waves. And Jane Fraser and the bank have really stood by them and argued that the kind of discontent is needed because of the financial improvements they're making.

5:11So what is the path forward for Citi now? Citi still has to get its consent orders lifted from U.S. regulators. They claim that they've completed 90 percent or nearly all of their transformation work. And then the other part is we have to prove to investors that it has capacity to grow and compete properly. And so that's leveraging things like AI and winning in the kind of new digital assets ecosystem, making use of their big payments franchise and all of that. Akilah Kino is the FT's U.S. banking correspondent. Thanks, Akilah. Thank you.

5:55The U.S. launched fresh strikes against Iran yesterday evening. They're the latest in a string of attacks that started last week. It comes after Iranian forces hit a commercial ship that was transiting the Strait of Hormuz. That's a critical waterway for oil and gas transport. After a week of clashes that have been escalating between the U.S. and Iran, the two countries are still at odds about what exactly is happening in the Strait of Hormuz. Tehran yesterday announced that the Strait is closed, But U.S. President Donald Trump said the exact opposite. He says it's open. Now, Iran yesterday also launched a large wave of attacks at U.S.-aligned Arab states.

6:31That included Bahrain, Kuwait, Jordan, Qatar, and Oman. Those were in response to the U.S. bombing Iran heavily on Saturday.

6:44Board members at the World Economic Forum are clashing over the organization's future. 28 board members helped to organize the annual Davos meeting, but some of the forum's trustees want to bring that number down. That could reshape how the organization makes decisions. This comes as the WEF has been reckoning with its reputation more broadly. Here to discuss is the FT's banking editor, Ortenza Aliyei. Hi, Ortenza. Hi. So can you explain why some of the forum's trustees want to make the board smaller? I think there's this general perception that having 28 members on a board makes it slightly difficult to make decisions.

7:20And there is this belief among people like BlackRock Chief Executive Larry Fink and Roshi Vice Chair Andre Hoffman, who co-chair the WEF at the moment. They think that kind of power needs to be concentrated into a smaller group of people because it increases efficiency, it can help with accountability and just move processes faster. Now, the other faction, which is being influenced by Klaus Schwab, who founded the WEF and led it until last year when he was ousted after dual investigations into his conduct, of which he was eventually cleared. They want to maintain this large board and they want to maintain it because there's this diversity of opinion and it touches on the spirit on which the WEF was initially founded.

8:09Now, the one thing that the faction with Fink and Hoffman is also trying to do is change some of the bylaws at the WEF, one of which would remove Schwab's ability to appoint a family member to the WEF board and therefore remove basically any influence he has over the WEF. And we should also mention that the World Economic Forum declined to comment. Okay, so you've got Fink and Hoffman trying to remove Schwab's influence by shrinking the board, and then Schwab is trying to hold on to it by keeping it the same size. Now let's zoom out for a second. What else exactly is happening at the WEF? So at the moment, there's a little bit of a vacuum in power within the WEF.

8:49Obviously, Hoffman and Fink are co-chairing it, but they need a permanent chair. And they also need to find a chief executive. One of the scandals at the WEF has been that Borgay Brende, who was its chief executive, had to resign earlier this year after an investigation into his links to the convicted sex offender Jeffrey Epstein. So they've got these two very key positions that need to be filled. Adding to that, there's a little bit of an existential crisis within the WEF, because the WEF was designed as this globalist institute. And as we've seen, politics has become much more polarized. There's been the rise of populism, and its very essence has been questioned.

9:32So they're really in need of finding permanent leadership and actually choosing the direction that the WEF is going to go in. How do you think changes to the board could affect the scope of Davos going forward? Well, the big question hanging over the WEF now is whether Christine Lagarde, who we know as the European Central Bank president, will apply to lead the group. Now, she's supposed to be leaving her post at the ECB in October 27. There's some talk that it might be earlier, but really they're sort of waiting to see if she puts herself forward or throws her hat in the ring to become its chair.

10:11Now, one of her biggest supporters is Schwab, and she's seen as someone who could be a unifying figure within the WEF, but it's not guaranteed that she will apply or that she will eventually get the job. We should say that both Lagarde and Schwab have declined to comment. The other issue that the web faces is this issue of legitimacy. You know, it was founded as this place where there would be a gathering where people discuss the issues facing the world. And I think increasingly it has started to appear out of touch with your average citizen. and the issues that they discussed, which used to be climate change, you know, cooperation, globalization, I think those have really fallen to the side amid the rise of populism, obviously Donald Trump, and how polarizing politics itself has become.

11:03Hortensa Aliye is the FT's banking editor in London. Thanks, Hortensa. Thanks for having me. You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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