Would Citigroup ever consider buying another US bank?

Banks have ramped up their mergers and acquisitions (M&A) activity over the past six months, with the announcement of several major regional banking deals. Many believe mergers and acquisitions in the sector could pick up again later this year and wonder how big of a deal we could potentially see in the space. The big US banks are loaded with capital and could have more excess capital when they likely release the reserves they are holding for potential loan losses later this year. One of the largest banks in the United States, like, say, Citigroup (VS -3.14%), buy another large commercial bank? We’ll take a look.

Would Citigroup consider it?

Citigroup is in a unique position. While the four largest banks in the United States abound in capital, JPMorgan Chase and Bank of America are not allowed to buy another depository institution. US banking laws prohibit a bank from acquiring another if the acquisition would push that bank to more than 10% of the US deposit market. And Wells Fargowhich would really be at or above the limit if it weren’t for regulatory reasons, is still close to the 10% threshold.

Bank % of US filings*
JPMorgan Chase 10.5%
Bank of America 10.1%
Citigroup 4%
Wells Fargo 8.3%

Data source: Bank Financial Reports, Federal Reserve. * = as of December 31, 2020

Citigroup, which runs a more global operation, has plenty of room to grow in the United States through inorganic opportunities. With $16.8 trillion in deposits in US commercial banks as of March 17, Citigroup has enough room to buy one of the largest regional banks below and stay below the 10% threshold.

Image source: Citigroup.

Now, would Citigroup even consider a significant acquisition of a US depository bank? RBC Capital Markets analyst Gerard Cassidy actually asked that question during Citigroup’s latest earnings call, which new CEO Jane Fraser more or less avoided answering. However, Fraser said, “We see significant growth opportunities and our home market is an important one.” Citigroup also had about $21 billion in excess capital over its regulatory minimums at the end of 2020, so it has cash to work with.


There are currently a few roadblocks in Citigroup’s way. Last year, regulators slapped the bank with a $400 million civil penalty for its failure to address and improve internal controls related to compliance, data and risk management.

The U.S. Office of the Comptroller of the Currency (OCC), which regulates domestic banks, also issued a cease and desist order requiring Citigroup to receive “no objection” from the OCC before proceeding with important acquisitions. Citigroup may therefore need to process the order before considering acquisitions. This is not uncommon, as banks usually need to be in good standing with their regulators before doing things like expanding.

Even if Citigroup had the blessing of its regulators, the bank could be in trouble anyway as regulatory issues have hurt its stock price and valuation. The bank is currently trading around $73 per share, slightly below tangible book value, a valuation that currently sits at industry lows.

Bank valuations are important for acquisitions if the acquiring bank makes an equity transaction in whole or in part, which is common. The higher the acquirer’s valuation relative to target, the less dilutive the purchase price will be to the acquirer bank’s equity – shareholders generally don’t like to see a transaction result in dilution that takes too long time to recover. At its current valuation, Citigroup would not be in a strong position for an acquisition.

Is this a possibility?

I would be a little surprised to see Citigroup make a short-term acquisition. The bank has a lot of work to do to fix its regulatory issues and get back in line with its regulators. As I mentioned, its valuation isn’t strong right now, and the bank just installed a new CEO, who is in the process of refreshing Citigroup’s strategy. That seems enough to keep the bank busy right now.

But I wouldn’t completely rule out an acquisition, as many expect Citigroup’s share price to rally further, which would boost its valuation. Additionally, if the bank is emphasizing its US consumer franchise, an acquisition could be a great way to jump-start the overhaul. It will be interesting to see what Fraser has to say about the bank’s new strategy during its upcoming earnings call and when the bank unveils its implementation plan in May.

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