Michael Corbat On Recession, China Slowdown, And A Bounce In M&A

CNBC Exclusive: CNBC Transcript: Citigroup Inc (NYSE:C) CEO Michael Corbat Speaks with CNBC’s “Squawk on the Street” Today

Citigroup CEO Michael Corbat

Image source: CNBC Video Screenshot

WHEN: Today, Thursday, May 2, 2019

WHERE: CNBC’s “Squawk on the Street

The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Citi CEO Michael Corbat on CNBC’s “Squawk on the Street” (M-F 9AM – 11AM) today, Thursday, May 2nd. The following is a link to video of the interview on CNBC.com:

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Watch CNBC's full interview with Citi CEO Michael Corbat

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JIM CRAMER: Joining us now exclusively on his 59th birthday, which he probably doesn’t want me to say, here at post nine, we have Michael Corbat, the CEO of Citi. Michael, it’s great to see you.

MICHAEL CORBAT: Good morning. It’s great to be with you guys. Thanks for having me.

JIM CRAMER: In April, you were in front of Congress and you said our ability to talk ourselves into the next recession could occur. I thought that was a great note. Because what it says is confidence sometimes can trump even robust employment. Can you explain to people at home how you talk yourself into recession?

MICHAEL CORBAT: Sure. So actually, the line, Jim, came when, on our fourth quarter earnings call in early January, an analyst asked me what were the biggest risks that I saw, and I said one of my biggest fears is that we are potentially in the process of talking ourselves into the next recession. And when you think about this economy, so much of it is confidence. Consumer confidence, and in particular, business confidence. A lot of what the tax stimulus was meant to do. And business wants consistency, it wants clarity. And I think the fourth quarter was very unsettling in particularly to business. And I think a great barometer, and David – you’ve talked about it, is M&A, where we see that, you know, despite this backdrop, we’ve got M&A down 17%. And if it weren’t for a couple of big chunky deals, we would probably be well down into the 20s. That’s confidence in the C-Suite. And businesses are not planning for the next 30, 60, 90 days. We are planning for three years, five years, seven years. And if you start to see some of these signs and start to get some of these fears and we start with the rhetoric of slowdown and recession, people have a tendency to pull back. And so, I was really glad to see that coming into the first quarter we regrounded, that confidence has begun to come back. And I think backed by the numbers of where we came in on growth at 3.2%, we will see tomorrow, but the jobs reports last month was pretty strong. So, I am hoping we are healing some of that rhetoric that has been out there.

DAVID FABER: Yeah, well, we may see some of a bounce in M&A, as well. I’m curious, though, we know you as a global bank and there does seem to be more, to your point, positive sentiment about your economy here. But what about Europe? What about Asia? Where obviously you have very important franchises. I think the sense is Europe, in particular, is a real weak spot in the global economy. Do you agree?

MICHAEL CORBAT: Yeah, you know, if we look at today, I think the numbers that have come out re-energize people in terms of where the U.S. economy is. I think the other surprise in the first quarter, second quarter, has really been China. That we were fearing a China slowdown. We talked about a lot of china stimulus being put forward in the second half of last year and into the first quarter. I think that’s now taken seed. And I think we see a Chinese economy that’s stabilized. I think it feels better. Clearly, trade talks feel like they have got a bit of momentum, so I think we could continue to see that trajectory. But as you say, I think the weak link out there is away from the two book ends of the U.S. and China. And it is really Europe. And how does Europe really break itself into a better growth cycle? And, you know, we have had some slowing. We are back into negative rates in some territories. And that’s tough to overcome.

DAVID FABER: Is it? Yeah, so what gets you there then? Because we have been having that conversation for a long time.

MICHAEL CORBAT: I think it takes the rest of the world. I think it takes the rest of the world to stay on track. What we have said, if Europe just continues to need time: time the heal, time to get the growth. They are going through some electoral things. Obviously, we’ve got Brexit obviously continuing to be there. Maybe it will be there for a while. So, I think it just needs time.

JIM CRAMER: I want to speak to the inexpensive nature of Citi stock. You have been buying back stock, 7, 8% of it. The market is not giving you credit I feel. Because for 17 months your stock hasn’t really moved. How do you explain why it is good to buy back stock at tangible book value, and how—that ultimately you are going to produce fabulous earnings growth and at the same time shrink the huge number of shares that you have?

MICHAEL CORBAT: Well, since I have become CEO we have taken our share count down by over 25%. The past year we took them down by about 9%. And so, we get that embedded EPS growth in share buyback. First quarter, we bought back about $5 billion worth of stock. Couple of years ago, we talked about a plan to go in and return at least $60 billion of capital to our shareholders over three CCAR cycles. Two thirds of the way through, we are over $40 billion of that done. Obviously, the end of June we will get our next series of results and we hope to tick that box as having done that. And as you talked about, that, you know, returning that, reducing the share count, getting the embedded EPS growth. So, a bit of top line growth, good expense discipline, share buyback. Return on return of capital.

CARL QUINTANILLA: You mentioned confidence, business confidence, planning. And on the manufacturing front, we have seen some surveys roll over in Chicago, ISM. I saw some reaction yesterday that some of it is due to trade, worries about trade. Even worries about the southern border. How much is riding on us getting a trade deal with China in two weeks ostensibly now?

MICHAEL CORBAT: I think expectations, Carl, are there that we are going to get something done in the second quarter, in the next few weeks. If we don’t get it, I think there will be a lot of disappointment and I think you’ll see some of those fears come back. We are optimistic that we think we are going to get something done. And again, going back to where we started the conversation, business wants clarity. Business wants the ability to plan and predict. And if your supply chain, whether it is coming from the southern borders or whether it is coming from Asia, from China, whether it is coming from Europe and you don’t have clarity in terms of your supply chain, you are having to plan for that or plan alternatives for that and that’s unsettling.

CARL QUINTANILLA: Did Powell’s explanation about transitory nature of inflation make sense to you yesterday?

MICHAEL CORBAT: I think so. You look, and you say, listen, we have got the S&P at a high. We just posted 3.2% growth. I don’t know how you cut rates in that environment. Right? And I give the Fed a lot of credit. One is putting credibility back into the balance sheet. You know, we don’t see it in the near term. At some point, we will get a recession. We want a balance sheets that’s credible. We want rates in a position where the Fed has the ability to act and stimulate the economy. And so, we didn’t see -- I didn’t see anything that led me to believe that we should be cutting rates, that we should have cut rates yesterday.

JIM CRAMER: I think there is a bizarre nature to this market. If you have fintech, so to speak, you have fin-technology people will pay pretty much anything for it, 30, 40 times earnings. If you are a regular bank with sine good growth and a good balance sheet, people don’t give you much credit. You have a, for instance, you have Treasury and Trade solutions. Michael, if you brought that public, it might be worth half of your valuation. How do you, as a traditional banker, look at a company like a Square or anything in payments and say, ‘You know what, that’s not worth as much as my own internal businesses’?

MICHAEL CORBAT: Well, you know, one is, as you mentioned, our Treasury and Trade solution is in a number of our businesses. You know, we had, I think what I would describe as a real solid quarter across the board. Good growth in terms of our credit card business. Good growth in terms of our investment banking business. Our fixed income business materially outperformed the street. Around the globe, Mexico, Asia—good growth. And then our annuity businesses, Treasury and Trade solutions, and our security solutions, 7% growth. And by the way, I think it is the 15th consecutive quarter of year-over-year earnings growth in that business. So, I think it is an underappreciated asset and just something through time we are going to continue to show the value in.

DAVID FABER: Michael, something that caught some investors eye was ValueAct taking a fairly significant position and sort of reaching an agreement with you guys in terms of supporting management, at least until the end of this year. Can you give us any insight in terms of the relationship with that large, usually now very long-term investor, and how you are working with them, if you are at all?

MICHAEL CORBAT: Sure. So, we signed, David, a cooperation agreement to share some information with them. As you cite, and as we did our due diligence, they have been constructive owners and holders of company stocks over time. Listen, if they have great ideas, we’re wide open to them. So, we have engaged them. We have talked about -- we have been transparent with everybody in terms of our plan and the thing we are doing. And we believe we are executing against it. We have been educating them. I think we’ve been in constructive dialogue with them. And we continue, you know, to plan to do that going forward.

DAVID FABER: I also note you have a relatively new Chairman, CFO, Head of ICG, even U.S. consumer. There’s a lot of new people potentially bringing new perspectives. Is that something you were seeking, and do you expect there is going to be a different decision making as a result of those new positions or new people in them?

MICHAEL CORBAT: Yeah, so, when you are talking about new people, they are new to their positions, they are not new to our firm. They have been there, coming up through the ranks. They have earned these opportunities. And what I would describe is when you look at the people who are leaving, retiring, a lot of generational movement. We have had tremendous stability. We have been building a bench and I couldn’t be happier, prouder of the people, and, also, you know, to congratulate the people who have been in those seats and done a great job.

CARL QUINTANILLA: Speaking of the ranks, it seems like every day there is an executive comp story. And you were asked on the hill about your executive pay ratio and what employees should think about it. And you basically said I would hope it is inspirational to our rank and file. Did that resonate when you came back home?

MICHAEL CORBAT: I hope so, because my answer is I am that person. I hope so. I started in 1983 at $17,000 a year. And I through the grace of god, through hard work got to where I am. So, I am that person who said, ‘Maybe if I work hard enough I can get there.’

CARL QUINTANILLA: But if the ratio is what it is, what is the upside limit? There must be a ceiling somewhere before it gets observed.

MICHAEL CORBAT: Well, I think in there, the numbers will challenge themselves, Carl, because they are not apples to apples. We run -- we have got 200,000 people, many of them outside the United States. We have 40,000 people in Mexico. I’ve got people in the Philippines. I’ve got people -- so to compare Citi against a U.S. company, our average employee in the United States makes right at about $100,000 a year.

JIM CRAMER: Let me ask you about something that happened yesterday. You’re a traditional banker, 1983. You have been around. Did you ever think you would have a, this signed of silly site called Twitter and the President would urge the Fed chief to cut rates down to one and it would be taken seriously?

MICHAEL CORBAT: I would say today, in those 36 years, Jim, I would say more and more nothing surprises me.

JIM CRAMER: Alright. And I want to speak to something personally that you did a little more than a year ago, you set restrictions on firearms by business customers. Has it hurt business? Has it helped? Has it mattered? And why did you do it?

MICHAEL CORBAT: I think, as expected, when we put out our policy, it was put out in the form of a policy, we got reactions on both sides. There were those that applauded and felt that it was a great movement. Again, you look at yesterday, North Carolina. Closing day of school. We have got to do something about it. And there were those who were adamantly against it believing that business shouldn’t be taking second amendment stances. Ours wasn’t a second amendment stance. It was simply around what we believed was a push around some best practices that might help a challenge.

CARL QUINTANILLA: Well, but you have so many of these hair trigger policy decisions. For example, sponsoring an event with the President of Brazil and knowing what he has said about LGBT. I mean, how do you balance all of those things? You know you are going to get blowback.

MICHAEL CORBAT: I think, most importantly, we spend a lot of time making sure people understand the values of our company. I hope in the case of that there is no question in terms of our support, our unwavering support for our LGBTQ community. And you know, in there, we are supporting the Brazilian Chamber of Commercials. We have operated in Brazil for many, many decades. And, you know, I think we are very clear in terms of our stance. But, we spend a lot of time, Carl, making sure that we are communicating those messages and that we are clear with our people.

DAVID FABER: Earlier--

JIM CRAMER: Did anyone--

DAVID FABER: I’m sorry -- earlier this week, I sat down with David Solomon, CEO of Goldman Sachs. You know, we talked a lot about the changes at that institution, that seemed to be, or not seemed to be but are much more focused on the consumer. On building a mass affluent brand and a platform to service them. More, potentially, of competition for some of your franchises. Do you see that as a potential competitor in the future? Do you think that they have an opportunity to succeed at Goldman?

MICHAEL CORBAT: You know, again, I think that the strategy is one that I have read about, is -- you know is a bit of a niche strategy in terms of the wealthy or ultrawealthy trying to kind of cater and get deposits--

DAVID FABER: Consumer loans, consumer deposits. I mean, it is not your typical investment banking strategy.

MICHAEL CORBAT: But I would also describe that it is not necessarily your typical run of the mill, high street, Main Street consumer bank either.

DAVID FABER: Right.

MICHAEL CORBAT: And so, from our perspective, we think we have got the ability to combine the best of both. Of having the physical presence and being able to provide that experience, and at the same time, investing heavily into technology. And if you look, and what we talked about in the first quarter earnings call, was de novo around some experimenting we’re doing, we grew a billion dollars of consumer deposits online just kind of experimenting in new ways of attracting new customers to the bank.

JIM CRAMER: Well, excellent. I want to thank Michael Corbat, and his wife, Dawn, who is here, your daughter. We always like to point out when someone brings their family, we kind of get a kick out of it. Michael Corbat is the Chairman and CEO of Citi. Great to see you, sir.

MICHAEL CORBAT: Thanks for having me.



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver