CLSA’s Mike Mayo is as excitable as ever:
Citigroup faces “do-or-die time” as the Federal Reserve administers an annual stress test to the struggling bank, an analyst said.
“Either Citi gets it done or it’s time to more aggressively break up the company,” Mike Mayo, a banking-industry analyst at brokerage firm CLSA, told Crain’s New York Business.
Citi has flunked the test twice in the past three years, and insiders say Chief Executive Michael Corbat probably can’t survive another failure. The bank submitted its paperwork earlier this month and should get results in mid-March. [Emph. added]
Actually, Citi failed its stress last year not because regulators found its financial condition wanting. The company has ample capital, and passed the “quantitative” portion of the test without a problem. Rather, Citi missed on the qualitative part. In particular, the Fed indicated it had concerns regarding the company’s ability to project losses in “material parts of its operations.”
“Taken in isolation,” the Fed’s report said, “each of the deficiencies would not have been deemed critical enough to warrant an objection, but when viewed together, they raise sufficient concerns regarding the overall reliability of Citigroup’s capital planning process.”
My translation: “We flunked Citigroup because we felt like it.” A year later, the company is financially stronger now than it was then. It’s also smaller and simpler, having exited (or in the process of exiting) multiple businesses worldwide and shed $40 billion in assets. Will Citi pass its stress test this year? Who can say? The regulators seemed to act somewhat arbitrarily in 2014 and I don’t know why they might not again in 2015. But I’m at a loss to see why Mike Mayo’s permanent default solution to fixing the company—breaking it up—is either inevitable or such an obviously good idea. Regulators have such sway over banks now that if they wanted Citi to get small in a hurry up they’d order it to do so and not bother waiting for the results of any stress tests. Nor are the advantages of Citi’s global reach likely lost on them. And the regulators certainly understand the company’s financial strength
So, no, should Citi fail its stress test again, it won’t be clear that “it’s time to more aggressively break up the company.” I’m not sure why Mayo would even say that except that (this being Mike Mayo) he seems to prefer to always strike a faux-provocative pose.
What do you think? Let me know!