'There's a palpable sense of relief' after First Republic is bought out, says Citi CEO Jane Fraser

Citi CEO Jane Fraser sits down with Yahoo Finance Executive Editor Brian Sozzi at The Milken Institute Global Conference to discuss JPMorgan's acquisition of First Republic Bank, the overall health of the U.S. banking system, why the current banking crisis is different than 2008 financial crisis, the potential for a recession, and the outlook for Citi.

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- JPMorgan Chase coming to First Republic's rescue, the Jamie Dimon-led bank emerging as a buyer of First Republic after the regional bank failed over the weekend. Citi CEO Jane Fraser is saying that these particular banks were poorly managed and that the US banking system overall is solid.

Fraser making those comments on a panel alongside other financial leaders at the Milken Institute Global Conference in LA today. My colleague Brian Sozzi is at the Milken Conference. He had the opportunity to speak with Fraser herself. Brian, it's good to see you. What else did she have to say?

BRIAN SOZZI: Good to see you guys as well. So we found Citi CEO Jane Fraser in good spirits despite a very large competitor in JP Morgan getting a lot stronger, notably in the wealth management business, as it acquires First Republic in what many sources have told me here is a sweetheart deal for First Republic. But I asked Jane Fraser her views on that deal, the outlook for banking, and what it all means for Citi.

JANE FRASER: There's a palpable sense of relief from everybody this morning because it's sad to see a bank fail, for sure.

BRIAN SOZZI: You must have read my notes because I was going to start with that. This is a remarkable day in the banking space. Things that you've seen before. I've seen it before covering financial services. Just your thoughts. How big a sigh of relief is it?

JANE FRASER: Look, I think this was the last remaining main uncertainty of the small handful of banks that did not do a good job with asset liability management. And also, whether the victim of the steepest rate curve increase we've seen in 40 years, but nonetheless, it is a small handful.

And as we look at the overall US banking system, this is a strong, this is a safe, this is the envy of the world. And it's easy at moments like this to forget that. Each of the banks have got its role to play.

The global banks, like ourselves, play a leading role in the global capital markets and financial markets. The national players, the regional players, the smaller banks, all serving different client bases with different scale, different purposes. But this system works.

And I think we've all been grateful, as the large banks, to be in such a strong position as we were during the pandemic and we have been in the recent turmoil, to be able to step in and play our part supporting clients in the markets.

BRIAN SOZZI: To the average investor out there, and as someone who lived and operated through the great financial crisis, does this feel like that? Does this resemble anything from that situation more than a decade ago?

JANE FRASER: Not in the least. This is very, very different. I think that the banking system-- I can speak for our own bank. Much, much simpler, much more focused business model. We have a diversified and very resilient business model, a lot of clarity who we are. Our credit position is very strong.

90% of our international exposure is investment grade. 85% of our entire corporate exposure is investment grade. 80% of our portfolio is prime on the consumer side. This is very different for the large banks. This is different for the system overall. Consumer is in good health. The corporate is in good health.

We do think we are probably heading into a recession at the back end of this year. There is likely to be credit tightening. There's some stresses ahead, commercial real estate and the like, but this should be manageable.

BRIAN SOZZI: How do the mechanics work? So you were part of that consortium of banks in March that invested, what? $5 billion in First Republic. What happens to that money?

JANE FRASER: Yeah. So let's spend one minute on how remarkable that in a little over a day, the 11 largest banks in the US system get together and put $30 billion. At a point where there is a confidence crisis going on in the market, in just over a day, put that in to buy the time for that crisis to pass and for a solution to be put in place.

That's quite remarkable. I think we should all feel proud that that's what happens and also take a lot of comfort from that position. Now, I think we all move on. And we were buying time, not a solution to the First Republic situation. And the regulators did what they needed to do, and they've clearly got the situation addressed. And now we move forward.

BRIAN SOZZI: What is this deal? You essentially now have a competitor getting larger. What does that mean to a Citigroup?

JANE FRASER: Look, I think you're seeing, as I said at the beginning, you see different banks playing different roles. And there's a tendency to think about the large banks only in the domestic context. We play a critical role globally. Our own institution moves $4 trillion of volume daily. That's the GDP of Germany, daily, for 5,000 multinational companies around the world.

And so there is a very, very important role that the US capital market plays in the global financial system. It is the envy of the world, but it plays a critical stabilizing, innovative force and is a mainstay of the global economy and financial system. So let's understand the roles that different players play and be grateful that the system works as well as it does.

BRIAN SOZZI: Do you see more consolidation in the regional banks?

JANE FRASER: I think we'll see more consolidation in amongst the smaller institutions because it's likely that the minimum efficient scale will be rising. But there are 4,700 banks in the US. That's a lot.

BRIAN SOZZI: That's a fun fact.

JANE FRASER: There is room for consolidation here without big structural changes to the core strength of the system. So yes, I do expect to see some consolidation amongst those players. That's probably a good thing. But I think it's important not to overexaggerate it, either.

BRIAN SOZZI: Is it is it fair to say this crisis is over, or is there multiple innings to it?

JANE FRASER: Certainly. This phase is over. Tell me what happens to the debt ceiling, and I will give you a sense as to--

BRIAN SOZZI: What happens?

JANE FRASER: --what lies ahead. Well, at the moment, the market's got a sense of humor failure over the debt ceiling. We're seeing earlier than we have done before the concerns starting to play out in Treasury. Some of the pricing for June through September is certainly coming off. The CDS spread is wider.

So there is rising concern here. I'm not going to comment on the politics. That's up to the politicians to do their job. But the consequences of a problem there are very dire, and it really is the last thing that we need right now in the world, is America to default on its debt. So let's hope it does not come to that.

BRIAN SOZZI: So should investors should be paying more attention to that issue than you would think in the markets, or at least the markets are showing at this point?

JANE FRASER: We're starting to see the investors paying more attention to it. So I think that is happening much earlier than it's happened in the past, and I hope that will act as an impetus to get this resolved in a bipartisan way.

BRIAN SOZZI: Jane, where is Citi's transformation?

JANE FRASER: Oh.

[INTERPOSING VOICES]

BRIAN SOZZI: I've been telling my team that Citi has put up, let's say, three, maybe four good quarters in a row, and you do get a sense things have turned the corner with Citi.

JANE FRASER: Well, we're a bank on a mission. We're very clear about who we are. We are the bank with-- to be the preeminent partner for-- banking partner for institutions with cross-border needs. Full stop. That's it.

It's a very simple strategy. It's one that makes the bank more focused. The businesses we have, the five core businesses, connect very well together in serving that client base. It makes the bank less risky. It will make the bank with a resilient diversified business model, as we've seen over the last few weeks that that's panned out well.

And one where it will drive our returns because I need to meet our medium-term return targets that we've laid out. We'll then be wanting to meet longer-term targets, which we'll set subsequently. We're just getting it done, and with this real urgency behind it.

We've closed now most of the divestitures we need to do in Asia. We'll have two more we'll close at the end of the third quarter and the fourth quarter. So we'll be able to really simplify the bank's organization structure after that, as well.

Single-minded purpose. We know what we are. We know what we need to do, and we're making good progress getting on with it.

BRIAN SOZZI: Interesting day, of course, for Citi because as you heard from Jane Fraser right there, they have done a lot of good things to improve the culture at the company, to improve the earnings power of the company. They've done this by cutting expenses, leaving businesses that may be not as profitable as they would have liked.

But again, you are now-- if you are Citi, you see a competitor in JP Morgan that got a great deal on Washington Mutual during the crisis, got a great deal on Bear Stearns during the crisis. Now another good deal with First Republic. And like we heard from other folks here at the conference, the strong are only getting stronger.

And that strong bank-- not that Citi isn't-- but that strong bank, that dominant bank-- at least in the US, it is-- appears to be JP Morgan, while Citigroup is a little more focused-- or at least it appears, based on what we heard from Fraser-- more focused on that multinational opportunity.

- Yes, Sozzi. Great interview there. I thought it was very interesting, just what Fraser had to say about the turnaround efforts where Citi has been successful over the last several quarters. I also love, though, what she had to say about JP Morgan coming in and buying First Republic. She said that it was a sense of relief here.

And it's only a small handful of banks that are in this position, something similar to what we heard from Jamie Dimon when he was on a call with analysts, with investors earlier today. So given the sense that this is a positive here not only for JP Morgan, potentially-- that stock up just about 2% today-- but more broadly speaking for the stability and more so the confidence that a deal like this brings back and restores here for the banking sector.

BRIAN SOZZI: Well, Seana, there is no other alternative. The alternative is this bank doesn't go to JP Morgan. It fails, and then you see contagion spread to more regional banks, and then the big banks, like a JP Morgan, Citigroup.

I think what you've seen throughout this banking crisis or turmoil, whatever you want to call it, over the past month and a half, two months, is that regulators are willing to step in and other big banks are willing to step in here, get these deposits, and ultimately save the broader financial system from the mess that was the great financial crisis.

- Certainly, investors are very encouraged by the steps that we have seen from the big banks over the last six weeks or so. Brian Sozzi, great interview. Thanks so much.