Citigroup May Face Reprimand For Not Fixing Risk Systems – Report

Citigroup Inc. could be facing a public reprimand by US federal regulators for failing to improve its risk-management systems, the Wall Street Journal reported.

Shares dropped 5.6% to $48.15 at the close on Monday. The preparations for the reprimand by the Office of the Comptroller of the Currency and the Federal Reserve accelerated planning for Citigroup (C) CEO Michael Corbat’s retirement, according to the report. Regulators didn’t ask Corbat to step down, but the prospect of an expensive, multiyear systems overhaul to meet regulators’ concerns made him believe that it was best left for his successor, Jane Fraser, it was added in the report.

Last week, Citigroup announced that Corbat will retire in February, surprising investors who expected him to stay in the job for longer. In memos to Citigroup staff Thursday, both Corbat and Fraser admitted that the bank needs to transform its internal systems for risk and compliance, the report disclosed.

US regulators are weighing public reprimands of the firm because of continued deficiencies in its infrastructure and control functions, which it had been asked to fix in the past. The overhaul would require an expansive set of technology and procedures designed to detect problematic transactions, risky trades and anything else that could harm the bank.

“We are completely committed to improving our risk and control environment,” a Citigroup spokeswoman said, citing the bank’s efforts to strengthen controls, infrastructure and governance. “However, while we have made significant and demonstrable progress in each of these areas, we recognize that we are not yet where we need to be and that has to change.”

Regulators have accused Citi’s management for not giving priority to the risk-management overhaul, according to the report. A recent high-profile flub, Citigroup’s accidental $900 million payment to creditors of cosmetics company Revlon Inc., was seen as evidence of weaknesses in the system.

Citigroup shares have plunged 40% so far this year, but analysts have a bullish outlook on the stock with a Strong Buy consensus. That’s with a $68.44 average price target, implying 42% upside potential lies ahead.

Wolfe Research Steven Chubak last week reiterated a Buy rating, saying that the stock is “meaningfully undervalued” as it trades at about 0.8 times tangible book value at a time when peers trade at or above tangible book.

“We anticipate very favorable credit updates from management teams at the upcoming [bank] conferences,” Chubak wrote in a note to investors.

The analyst forecasts a “very attractive risk/reward” scenario with the bank expecting more than 10% return on tangible common equity by 2022 as economic conditions improve and credit levels recover. (See C stock analysis on TipRanks)

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