Why Citigroup's CEO is retiring earlier than expected, paving the way for the first woman to run a major U.S. bank

Key Points

• A series of events – some unforeseeable, others more squarely under Michael Corbat's responsibility— made him speed up his retirement plans. Instead of staying for another three years after a key October 2019 announcement, he will leave in February, or about 18 months after making Fraser president.
• For years, regulators have told Citigroup that its technology systems were subpar. The bank would push back, telling the regulators it was an unfair assessment. But when Citigroup accidentally delivered almost $900 million to lenders of Revlon, the company couldn't make that argument anymore.
• Investors, including ValueAct Capital, an activist hedge fund based in San Francisco, may have been growing impatient with Corbat, according to the people.
• Executives who report directly to Fraser had no idea the news would hit, according to people with knowledge of the matter.

When Citigroup president Jamie Forese announced he was stepping down in April 2019, it set off a chain of events that culminated Thursday when the firm announced it will appoint Jane Fraser as CEO, making her the first female head of a major U.S. bank.

Forese, a 33-year veteran of Citigroup, was widely seen as CEO Michael Corbat's heir apparent, the person who would take over the third-biggest U.S. bank if something happened to Corbat. Now, it was anybody's game.

Fraser, a rising star and former McKinsey partner who ran the bank's sprawling Latin American operations, saw the opening she'd been waiting for.

She let Corbat know that she was getting interest from executive recruiters to run a major bank, and if Corbat wanted her to stay, she needed to be promoted, according to people with knowledge of the situation.

It was effectively a two-horse race: Stephen Bird, who led Citigroup's consumer bank at the time, also told Corbat that he was fielding calls from interested parties and needed clarity.

The matter was settled by October of last year, when Fraser was named president – Forese's old title – and the new global head of consumer banking. She was generally more popular internally than Bird, whose top-down style, fashioned during his years in Asia, rubbed some the wrong way. Bird left Citigroup, and later was named CEO of British asset manager Standard Life Aberdeen.  

At the time, Corbat told insiders that he envisioned being Citigroup CEO for another two to three years.

It turns out, a series of events – some unforeseeable, others more squarely under Corbat's responsibility— made him speed up his retirement plans. Instead of staying for another three years after that October 2019 announcement, he will leave in February, or about 18 months after making Fraser president.

Technology fumbles and stock stumbles

For years, regulators have told Citigroup that its technology systems – cobbled together through decades of acquisitions – were subpar. The bank would push back, telling the regulators it was an unfair assessment.

But when Citigroup made a mistaken payment of nearly $900 million to Revlon lenders, the company couldn't make that argument anymore. The bank called the massive blunder a "clerical error" and asked for the lenders to return the money. Some are refusing to do so, and the matter is now tied up in court.

During much of his tenure, Corbat focused on trying to hit targets he'd given for the bank's efficiency ratio, which is an industry metric that looks at expenses as a percentage of revenue. But he struggled to do so at times, and that resulted in a focus on keeping costs down.

"Infrastructure spending was a choice," said one of the people with knowledge of the situation.  "Mike opted to deliver a better operating ratio rather than invest in the infrastructure."

Then there's the stock price. Citigroup nearly capsized during the financial crisis, and Corbat inherited a sprawling, inefficient empire when he took over in 2012.

Even though he was dealt a tough hand, however, he made strategic decisions that in hindsight look like fumbles. Despite its presence on street corners across New York City, Citigroup has always had far fewer branches than rivals JPMorgan Chase and Bank of America. While those firms were busy building out that branch network during and after the financial crisis, Citigroup didn't expand, giving those lenders a distinct funding advantage.

The result is that Citigroup stock has climbed about 40% since Corbat's tenure started in October 2012, compared with the 140% increase of JPMorgan shares in that period.

Investors, including ValueAct Capital, an activist hedge fund based in San Francisco, may have been growing impatient with Corbat, according to the people. ValueAct founder Jeff Ubben left the fund in June.

"ValueAct was likely an outsized voice among investors to encourage change," Mike Mayo, the veteran bank analyst with a long, at-times contentious history of covering Citigroup, said in a phone interview. "This is what they do. They exert pressure behind the scenes."

Others have pushed back on that assertion, saying that investors didn't agitate for change and pointed out that Citigroup stock had touched $80 a share in January, before the coronavirus pandemic struck. They now hover around $50 a share.

This year, the shares have lost 36%, leaving the bank trading below its book value.

Surprised insiders

When Citigroup released its press release announcing Fraser as CEO, the media immediately fixated on the historic nature of the announcement: The U.S. banking industry, dominated by men for decades, will finally have a female CEO at a top bank.

But that obscured the weird timing of the announcement. Executives who report directly to Fraser had no idea the news would hit, according to people with knowledge of the matter. Mayo was also surprised, saying in a Thursday research note that "CEOs don't typically want to leave in the middle of a crisis, especially if upside is pending."

When asked about the details in this article, Citigroup spokeswoman Jennifer Lowney had this statement:

"It has been Mike's intention to retire in 2021 since Jane was appointed president of Citi last year," Lowney said. "Announcing his plans now allows ample time for a smooth CEO transition, which was important to Mike given that he did not benefit from one."

"As CEO, Mike increased Citi's returns significantly, closing the gap with our peers," she concluded.