Investors cheered earnings from many of the biggest banks this past week with one notable exception: Citigroup Inc.

The stock of the nation’s third-largest lender fell 5% on the day of its third-quarter earnings announcement despite beating expectations and showing revenue growth across all five of its divisions.

Through Thursday’s close it was up just 0.8% for the week, while other big-bank rivals from Bank of America (BAC) to Morgan Stanley (MS) churned considerably higher on renewed optimism about the industry.

A big reason for Citigroup’s challenging week was the confusion that took hold during an exchange CEO Jane Fraser had with analysts on Citigroup’s earnings call Tuesday.

It happened when Fraser did not immediately refute a question from analyst Mike Mayo about whether regulators had placed a new asset-cap restraint on Citigroup. After the bank’s stock fell, she later returned to the subject and tried to end the speculation about any new regulatory handcuffs.

"Let me be crystal clear, we do not have an asset cap, and there are no additional measures,” Fraser said. “And not expecting any,” she added.

The exchange was a reminder of the pitfalls facing Citigroup as it tries to convince investors that it has its compliance problems under control and that regulatory scrutiny won’t interfere with a multi-year transformation of the company that began last year under Fraser.

The questions from analysts about the possibility of new constraints were spurred in part by a letter that Sen. Elizabeth Warren (D-Mass) sent earlier this month to the Office of the Comptroller of the Currency.

The Senator urged the bank regulator to impose new growth restrictions on Citigroup and consider forcing a breakup if it doesn't adequately reform its long-troubled risk management and internal controls systems.

"It may be time to break up Citi," she said in the letter.

The idea of growth restrictions is a reference to a so-called asset cap that sets a ceiling on how big a bank can get until it satisfies regulators that any outstanding concerns have been resolved.

Such a growth restriction was imposed on the US retail operations of Canadian bank Toronto Dominion (TD) last week after it pleaded to anti-money laundering charges.

Wells Fargo (WFC) has also been operating under an asset cap since 2018. It was imposed after a federal investigation uncovered millions of bank and credit card accounts that were opened for customers without their knowledge, to meet sales goals.

'Will there be headwinds? Yes.'

Citigroup is certainly no stranger to challenges with regulators, even recently.

In July, its overseers hit the bank with $136 million in fines for failing to make sufficient progress on consent orders imposed by the Federal Reserve and the OCC in 2020. Earlier in the summer regulators also found weaknesses in Citigroup’s "living will."

There have been signs of some progress on old problems, too. Earlier this month, the Fed said it had ended a decade-old enforcement action it filed against Citigroup in 2013 relating to anti-money laundering policies.

What Mayo wanted to know on the Tuesday conference call with bank management was whether Citigroup can bring down its expenses while investing in regulatory, compliance and data initiatives the bank needs to escape the 2020 consent orders — and whether it has or is facing the "asset cap."

Chief Financial Officer Mark Mason tackled the questions first. He pointed out that the bank has said it plans to cut its expenses from $53.8 billion to a range of $51 to $53 billion in 2026. That cost reduction is predicated on Citigroup being able to unwind certain international business units in addition to reducing its headcount.

"​​Will there be headwinds? Yes," said Mason, referencing the bank's multi-year transformation effort. "We're also investing in risk and controls and regulatory spend to support improving our operations,” he added.

Fraser discussed how Citigroup was "focused on simplifying our operational model, modernizing our infrastructure, risk and controls, and all of that reduces risk as we go" but didn't directly address the asset cap.

Mayo followed up by asking if Citigroup's regulatory issues were a client or internal problem. And also asked more about a possible asset cap.

"We are working closely with our regulators. We incorporate their feedback, as well as our own lessons learned if we fall behind in an element of the consent orders," said Fraser. "So I feel very comfortable."

It wasn’t until Fraser was asked a third time about an asset cap 30 minutes after the initial question that she shut down the speculation.

"There was a bit of a pause and then some apparent confusion among investors before management was able to clarify unequivocally that there is no asset cap and that there are no additional restrictions beyond what has already been disclosed," Piper Sandler analyst Scott Siefers said a note.

Siefers didn’t change his $73 price target for Citigroup next year.

'Buy!'

Citigroup’s third-quarter results did beat expectations and its Wall Street unit did well as dealmaking optimism surged. But the bank's profits and net interest income both fell from a year earlier.

Some investors may still be worried about a critical measure of Citigroup’s transformation plan under Fraser: a profitability metric known as ROTCE (return on tangible common equity).

For its third quarter Citigroup posted a 7% ROTCE, down from 7.2% last quarter and far from the 11% to 12% it has vowed to reach in 2026.

"Slogging along at a ~7% ROTCE, there's no question that Citi is a laggard and thus a suitable punching bag for shorts,” said a note from Oppenheimer, which lowered its price target by $1 to $91.

"That said, we think that Fraser and Mason have gotten expectations to where they can confidently beat them."

Other analysts also offered some optimism.

"Despite the increased regulatory overhang on the stock in recent months, we note the progress that management continues to make in order to boost franchise profitability," Bank of America analyst Ebrahim Poonawala said in a Wednesday research note, pointing to Citi's improving wealth unit.

Even Mayo, who was the first to ask this week about an asset cap, had some nice things to say afterwards.

"Management's comments should put this issue to rest barring some unforeseen event," he said in Tuesday research note following the call.

Wells Fargo analysts currently project Citigroup to achieve a 10% ROTCE target in 2026 and Mayo said he still thinks Citigroup can get there.

"Buy! Especially If You Left Before the End of the 3Q24 Call!!" he wrote.

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.

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