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NEW YORK, March 31 (Reuters Breakingviews) - The bank that once proclaimed it never sleeps is rousing from a coma. After years of operational fumbles, Citigroup’s (C.N), opens new tab shares have outpaced Wall Street peers ​to rise 58% over the past 12 months. Yet it still pays dearly for customer deposits while generating ‌subpar returns. With U.S. authorities as amenable as they’ve been in years, boss Jane Fraser would be well-served by acquiring some extra size.

Citi dismissed the idea that it is “planning to buy” a rival lender, after Bloomberg reported, opens new tab that executives had discussed the idea with regulators. There is cause for conservatism: the bank only ​now seems to have wrangled its error-prone back office, which led to fat-finger trades and payments like the $900 million wire to ​a customer’s creditors, opens new tab.

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Fraser has made headway, though. Citi’s market value, boosted by improvements in investment banking and ⁠wealth management, recently eclipsed its tangible book value, a key investor benchmark, for the first time since the 2008 financial crisis.

Even so, the ​bank’s deposit costs sit 60% higher than major U.S. rivals such as JPMorgan (JPM.N), opens new tab and Wells Fargo (WFC.N), opens new tab, according to Visible Alpha. Low funding ​costs, driven by sticky consumer balances, are the secret sauce of American banking. The issue is that Citi gets more than 70% of its deposits from corporate customers, who are more apt to seek better deals. Buying a consumer‑heavy regional bank could shift the balance in Fraser’s favor.

Truist fits the bill, and ​trades at a cheaper valuation than other candidates to boot. The Southeast regional lender’s cost of deposits sits at 1.8%, versus 2.5% ​for Citi. Simply smushing the two together would raise the buyer’s return on tangible common equity, or ROTCE, to 11%, from about 9% for Citi ‌alone.

Furthermore, a ⁠1999 Federal Reserve study, opens new tab found that the average bank merger results in a 4% cost reduction. Tax that windfall at the standard corporate rate, and ROTCE rises to 12%. Big banks also consistently pay less for deposits. Bank of America’s interest costs are just 0.6% on consumer balances. If a bulked-up Citi can drive down Truist’s deposit costs to that level, ROTCE would jump to nearly 14%.

A rule ​of thumb is that a bank’s ​share price roughly tracks returns: ⁠a 10% ROTCE should translate into a valuation, broadly speaking, of one times tangible book value. Put the two banks’ market values together, add a 20% premium for Truist, and credit them for ​the aforementioned profitability uplift, and they should trade at about 1.4 times, creating about $40 billion in extra ​shareholder value.

Grinding down ⁠deposit costs takes time, but peers show such goals are attainable. Whatever Citi may be saying about deals, now is a great time to strike one.

Follow Stephen Gandel on LinkedIn, opens new tab and X, opens new tab.

Context News

• Citigroup executives are considering whether they should buy a regional bank, Bloomberg reported on March 27. The ⁠bank’s executives ​have reached out to regulators, who were receptive to the idea of an ​acquisition, according to the report.
• Citi dismissed the report, saying in a statement to Reuters that “the suggestion that Citi is planning to buy a regional bank, wealth brokerage - or ​any other financial services firm - is baseless speculation.”

For more insights like these, click here, opens new tab to try Breakingviews for free.

Editing by Jonathan Guilford; Production by Maya Nandhini

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Stephen Gandel

Thomson Reuters

Stephen Gandel is an award-winning journalist who has covered banking and financial markets for more than two decades. Prior to joining Reuters Breakingviews, Gandel had been the U.S. banking correspondent at the Financial Times for the past two years.

He previously worked at The New York Times as the U.S.-based news editor of DealBook, the Times’ daily business newsletter, and was on a team of reporters who won an Emmy for live interviews. He was also a senior reporter for CBS News and a markets columnist for Bloomberg.

Gandel spent 14 years at Time, working for Money, Time and Fortune magazines, where he was the only reporter to ever win the company’s Luce award four years in a row. His work was also recognized with a SABEW Best in Business award, and an Excellence in Journalism award from the NYSCPA. He is a graduate of Washington University in St. Louis, and lives in Brooklyn with his wife and two children.

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