The one big bank that had a challenging week

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.

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