Mike Mayo, managing director at CLSA Americas, spoke with Tom Keene and Michael McKee on Bloomberg Radio this morning. Mayo said Citigroup, Bank of America and Comerica should move faster to restructure, including selling more assets, to catch up with competitors that are generating better returns: “All three of those banks have failed to create value for every year for the last eight years. And so our question for the board of directors is if you’re not getting it done, what is your plan B?”
He said: “You have some banks like JPMorgan and Wells Fargo with very good returns. Citigroup has poor returns. That’s why our team is going to the annual meeting on Tuesday to say some of your peers are getting it done.”
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On annual meetings, Mayo said: “In this Bank of America case, that meeting lasted less than 15 minutes. Who is more important than the owners of your company? So what I’d like to see just for starters is for Bank of America to answer the questions that are asked next Wednesday and don’t artificially end the meeting after two hours or one hour or 15 minutes. At least go three hours. These are your owners. You have one time a year to ask questions of Bank of America’s board.”
Mike Mayo: Bank Management Teams Need To Be Held More Accountable
Tom Keene: This is a thrill, folks. Most people in the media get Michael Mayo for one minute, two minutes, three minutes here. He goes this, this, this. We get a longer battle with him here today. And to drive forward the idea of governance at banks and the idea of what they do at their annual meetings.
But first, Michael Mayo, you are optimistic on the banks as a business plan, right?
Mike Mayo: Absolutely. Tom, we’ve changed our position on the banks. As you know, we were very negative last decade before and through the financial crisis.
But now the bank balance sheets are safer than they’ve been in decades. Risk is lower than it has been any time since the financial crisis. And you’re seeing early signs of traditional lending revenues improve. So in the words of Karen Carpenter, we’ve only just begun.
Tom Keene: [Humming], okay. I’m not going to sing –
Michael McKee: Don’t get him singing.
Tom Keene: Okay. Don’t get me singing my Carpenters.
But, Mike, at the same time, you want to hear more about their business plan. Why is a bank annual meeting different from John Deere or Caterpillar’s annual meeting?
Are you picking on Brian Moynihan and the others? Or is there something unique about their quiet and their secrecy?
Mike Mayo: So we’re more positive on banks. But it’s not a blind recommendation. We think that the management teams of the banks need to be held more accountable.
And for me personally I’ve written research reports on Wall Street –
Tom Keene: Right.
Mike Mayo: – and got shut down. Testified to Congress, got shut down. Wrote a book. Things still haven’t changed yet.
And you have the new proposal for payrolls on Wall Street. That’s not going to do it. All the micro-management in the world is not going to do it.
At some point, you say we see management teams come and go. Let’s hold the boards of directors more accountable. In other words, if your sports team keeps losing games and they get a new coach year after year, at some point you want to talk to the general manager. And this is the equivalent of doing that.
Michael McKee: I wonder what – to follow up on what Tom said in terms of the business plan, the business plan used to be you take deposits and you lend them out and you make money. And then it evolves into everything from investment banking to trading on your own account. And we’ve seen how well that worked out in the last quarter.
So what is a successful financial institution going to look like next?
Mike Mayo: A successful financial institution generates returns above the cost of capital. That would be something called return on equity. And some banks have good returns, and some banks have bad returns.
So the annual meeting next week for Citigroup, Bank of America, and a regional Bank of America – all three of those banks have failed to create value for every year for the last eight years.
And so our question for the board of directors is if you’re not getting it done, what is your plan B? And maybe your plan B should be some asset sales for restructuring, or even in the case of Comerica, an absolute sale.
Michael McKee: Well, do they become utility like?
Do they go back to the old retail banking model of deposits and lending? Or is all the other financial engineering that they do still a key part of how you get that return on equity?
Mike Mayo: It’s a little bit back to the future directionally like the 1950s where not banks as utilities, but banks with more utility-like outcomes, where banks are pillars of strength and stability.
And, by the way, collectively we’re fighting the last war. There is not going to be a bank calamity coming up. Banks have more capital than they’ve had in 80 years. They can absorb another financial crisis and still have more capital than they had before the last downturn.
Tom Keene: How do you respond to what I’m sure you hear from bankers that we need to keep our plans quiet? We can’t tell Mike Mayo at the annual meeting what we’re doing.
Mike Mayo: Enough. Tom, you’re setting me up here.
Tom Keene: I know I can tell.
Mike Mayo: No, we’re not doing enough. I’ve been doing this 25 years. You have one time a year to ask questions of the directors at banks, one time a year.
By the way, these are your owners. And the one that infuriates me the most is Bank of America.
Tom Keene: What do they do specifically? Quickly here, and we’ll come back.
Mike Mayo: Okay, well, if it’s too quick save it because –
Tom Keene: What’s the number one thing they do? They don’t give you Rangers tickets?
Mike Mayo: Well, we recommend Bank of America’s stock now. So we’re positive we’d have much more upside if they had a better tone at the top. Their September 22nd shareholder meeting they literally pulled the microphone away from somebody midstream, mid-sentence while he was asking a question.
Tom Keene: Okay, well, we’ll come back. It’s a fired up Michael Mayo of CLSA. A lot to talk about, and what a distinction. He is enthusiastic on the banks, but. We’ll continue with the but of bank transparency.
Michael McKee: We’re talking with Michael Mayo from CLSA, a bank analyst. And before the break you were talking about banks, as you go to their annual meetings, are going to have to explain themselves and what their plans are.
Some shareholders already concerned about what Citigroup’s plans are. (Inaudible), I think it is called Proposition VIII, something like that. Isn’t that what Michael Corbat has been doing?
Hasn’t Citi been trying to essentially shed the unprofitable parts of the business?
What would this do that isn’t already being done?
Mike Mayo: Well, the good news is Citigroup last year had the best returns since before the financial crisis. The balance sheet is very strong. They’ve moved in the right direction. They have simplified and they shed a lot of assets, as you pointed out.
But they haven’t done enough. And so for Citigroup or any bank with returns below the cost of capital, their returns are low for all of the last eight years, what is plan B? It has been a long time now. Enough waiting. Do more. Sell off some assets. Redeploy those proceeds.
I mean Citigroup under one financial metric trades at 80 percent of its tangible book. The stock price is below the book value. And so that means investors don’t have enough confidence that the future will improve enough.
So we’re going to – to me the question at the meeting is why not consider Plan B? Why not get more aggressive with your restructuring?
Tom Keene: I’ve got a bunch of questions here, but if Citigroup is a ten for one reverse split, the stock has gone from next to nothing to $50, down to $4.66. And they do a fancy split to make it $46.60 a share.
What jumpstarts those stocks? It’s free cash flow like with every other company, right?
Mike Mayo: Absolutely, better free cash flow. But relative to the equity Citigroup has to hold.
So the good news is Citigroup is a lot safer. Their capital is a lot –
Tom Keene: Agreed, agreed.
Mike Mayo: – (inaudible). The bad news it’s tough to generate returns on those higher levels of –
Tom Keene: Do they need –
Mike Mayo: – (inaudible).
Tom Keene: – just fewer people? I mean I get it up here right now their headcount.
I mean all of these banks are loaded up with employees. Citigroup has 225,000 people. Where is that number in five years?
Mike Mayo: Well, it has come down quite a bit already. And we think Citi will continue to be smaller as the years go on. They have streamlined quite a bit. But they need to perhaps restructure more aggressively. Those businesses that are – you know, capital hogs –
Tom Keene: You just want –
Mike Mayo: – (inaudible).
Tom Keene: – them to go faster is the heart of it all.
Mike Mayo: Well, they’re not getting it done. I mean you have some banks like JPMorgan and Wells Fargo with very good returns. Citigroup has poor returns. That’s why we’re going – that’s why our team is going to the annual meeting on Tuesday to say –
Tom Keene: Right.
Mike Mayo: – some of your peers are getting it done. It’s time for you to get it done. Board of directors, what is management doing? If they can’t get it done, what is your plan B?
Tom Keene: And, Mike, what you can do from Gainesville is go right down to Coral Gables. They’re holding the meeting at the University of Miami. Why are they holding the meeting in the middle of nowhere?
Mike Mayo: You know, we’re very frustrated with the behavior, not just of Citigroup, but for many of these banks which hold their annual meetings far away. Two years ago, I went to Citigroup’s annual meeting in St. Louis. What does St. Louis have to do with Citigroup’s investors?
And so this is – Citigroup has gotten better. You know what is good about Citigroup? They’re the only large bank with a separate chairman from the CEO. The chairman, Mike O’Neill is a long time bank restructuring expert. And he is on the scene. This is the one time of year you actually get to hear from that chairman, Mike O’Neill.
So for all the issues, including having the annual meeting down in Coral Gables, Florida at the University of Miami, they have made some positive governance changes.
Michael McKee: Well, can they sway you? Can you be persuaded that they are on the right track? You’re very negative on them, and yet you’re praising the management as people who know what they’re doing and who seem to be committed to what you want them to do.
Mike Mayo: Well, we’re more positive on the stock. We’re very positive on the stock. It is very inexpensive. The fundamentals have improved. It just hasn’t improved enough.
So it comes down to returns. Returns have improved also, the best in a decade. But they are still not at that threshold where you go from value destruction to value creation.
It’s a fair question for any bank. If your returns are lousy, what is the board of directors doing to make sure that returns will be adequate and closer to peer levels?
Michael McKee: Now, how do you resolve the tension between what you want them to do on behalf of shareholders, which is make more money, which incentivizes management maybe to take more risk, and regulators who say no, no, no, don’t do that, we just want you to survive?
Mike Mayo: Well, I think regulators and investors can be on the same page. I mean Citigroup directionally has more utility-like outcomes. Directionally, they have less risk than they’ve had since before the financial crisis and going back even further, and to the extent that banks – the regulators want Citigroup and other banks to streamline and simplify.
And I think investors would be more enthusiastic if Citigroup went faster to shed some of their assets. I mean Mexico is what we brought up. Why not sell your Mexican bank? For almost all of Citigroup’s history, they didn’t have this bank in Mexico.
Or sell off some other appreciated assets and use those proceeds to buy back your own stock. It’s like seeing dollar bills and paying 80 cents for every dollar bill that you buy.
So the financial analysis here, it’s really straightforward. Just execute better.
Tom Keene: And now on a Friday, folks, in honor of those that will sit for the CFA exam come June, we ask a deferred tax asset question. Douglas, in Florida, notes that all these banks, and in particular Citigroup, have a strange thing sitting on their balance sheet, a deferred tax asset. I guess that’s sort of like Citi Stadium, whatever it is, where the Mets play.
What is a deferred tax asset? And how critical is that for Mr. Corbat to keep the house of cards going, particularly as it regards to book value?
Mike Mayo: Well, that’s a great question. It’s a technical question. Just think of it in terms of a tax benefit. Citigroup has a tax benefit of almost $50 billion.
Tom Keene: That’s going to come someday.
Mike Mayo: As they earn more earnings, they get to use those tax benefits, their tax credit.
Tom Keene: Right.
Mike Mayo: And that is hurting their returns to the other point.
But at some point you say, boo hoo, we don’t have better returns, we have this big tax credit. And our response is, okay, use your tax credit. And one way to use that tax credit is to sell appreciated assets and don’t pay taxes on those gains. So get more aggressive in using that tax credit.
Michael McKee: You are also going this week to Bank of America. And you’ve mentioned Citi is the only one that has split the CEO and chairman’s job. Is that back again, to do something to make Mr. Moynihan shorten his business card?
Mike Mayo: That’s done. We didn’t like the way that was done. Last September 22nd, they had a special shareholder meeting in Charlotte. I was there. I asked one of the four questions. And as I was saying before we went to break before, before the last question, they literally pulled the microphone away from the person asking the question.
Tom Keene: And this is a small mom and pop investor.
Mike Mayo: Yes, they pulled – mid-sentence they pulled the microphone away.
But this wasn’t an ex-employee or wasn’t me. This was the representative of CalPERS and CalSTRS. They manage $500 billion of assets under management for millions of employees, public service employees in the State of California – firemen, police, teachers. And they pulled the microphone away because he had reached the two minute limit even though he had traveled 6,000 miles round trip to ask his question and represent the State of California, $500 billion of assets under management.
Oh, by the way, the CEO, Brian Moynihan, and the lead director, Jack Bovender, Jr., were on the stage and did absolutely nothing. This is not just bad corporate behavior.
Tom Keene: What would like from Mr. Moynihan?
Mike Mayo: Well, I’d like to see him just answer all the questions. But Berkshire Hathaway, they have an all-day annual meeting. By the way, that meeting –
Tom Keene: That’s a scary thought. You and Warren Buffett asking questions on stage.
Mike Mayo: Well, I mean in this Bank of America case, that meeting lasted less than 15 minutes. Who is more important than the owners of your company?
So what I’d like to see just for starters –
Tom Keene: Please.
Mike Mayo: – is for Bank of America to answer the questions that are asked next Wednesday and don’t artificially end the meeting after two hours or one hour or 15 minutes. At least go three hours. These are your owners. You have one time a year to ask questions of Bank of America’s board.
A positive step, the new lead director at Bank of America, the start of the annual report says we want to engage with shareholders more. Well, let’s see if those words are backed up with actions.
Tom Keene: Mike Mayo, thank you so much, with CLSA. Fired up. But I want to make the distinction again, he is positive on the banks as a general statement, even though sharply critical of some of their governance methods and techniques.