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Citigroup Gets a Reprieve: Mike Mayo

Still, Mayo did not necessarily get the answers he was seeking at the meeting. His main question: Under what circumstances will the bank consider strategic alternatives such as breaking itself up?

Shares of Citigroup would trade nearly two-thirds higher on a "sum-of-the-parts" valuation than they do now, by Mayo's estimate, suggesting that the franchise is considerably undervalued.

"We believe the plan we are operating now will generate returns over time," Chairman O'Neill told Mayo. "Our objective is to generate returns above the cost of capital. If management reaches a conclusion that it is not possible, we have to consider alternatives. But importantly, we think we can," he added later.

"Our business model is the right one. We have started on a path, put out public targets on returns on efficiency," said CEO Mike Corbat. "There is more we need to deliver in terms of transparency but give me some time."

Mayo believes that Citigroup is moving in the right direction but as someone who has followed the bank for 15 years, he is aware of its poor track record in execution.

"We'd like to see Citi have a Plan B given the multitude of Plan As that did not pan out in the 15 years since Citigroup was formed," he wrote in a recent report ahead of the meeting.

"Citigroup had the best first quarter among the big banks, but "don't confuse a quarter with a quindicennial," wrote Mayo. "Citi stock remains 90% below its pre-crisis level (or 50% lower after adjusting for its increase in share count) and, in our view, reflects the failure of resource allocation, oversight and management that stretches back to the formation of the company in its current form in 1998."

Following the meeting, Mayo says he is "half reassured" as meeting the Chairman in person reinforced his positive impression of him.

Still, he felt that the bank has to show investors that it is analyzing other alternatives and he is pushing for more disclosures on profitability metrics. "They should disclose their return on equity by business and by sub-segment. Then maybe we can make a determination about which businesses they should sell. Let the sun shine on Citi's returns."
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