Citibank has survived but I don't think the bank has much of a future

04/27/2010 8:30 am EST


Jim Jubak

Founder and Editor,

“We have turned the corner,” Citigroup CFO John Gerspach, said when he announced Citigroup’s first quarter 2010 financial results on April 19.

But I have to ask, What corner is he looking at?

Can’t be the corner of 40th and Broadway near my office in Manhattan. There a dingy Citigroup branch with beat up ATM machines is barely hanging on in competition with a refurbished JPMorgan Chase (JPM) branch down the block (with ATMs that deposit checks without a deposit slip) and a brand new Capital One (COF) office up the block.

Can’t be the corner of 104th and Broadway near my house where a new Sovereign bank branch is siphoning off accounts from local small businesses that used to be Citigroup customers.

Can’t be the corner of my desk where I’ve got my JPMorgan Chase mortgage bill stacked near my Fidelity credit card bills. I get regular annoying phone calls from Chase asking me if I want to refinance my mortgage. I can’t remember ever getting a mortgage marketing call or letter from Citigroup. And my wife and I once had a Citigroup mortgage and we have an account with the bank.

And this is what’s happening in the bank’s home market and what was once its core business of consumer and commercial banking. If Citigroup has trouble on this turf, you know it’s in trouble everywhere.

The truth is that Citigroup has indeed survived. But that, as hard and desperate as that struggle was, may have been the easy part. (This doesn’t mean Citigroup is out of the woods entirely. It could still get caught up in the kind of legal action the SEC (Securities & Exchange Commission) has filed against Goldman Sachs (GS). For more on what banks might be most at risk see my post )

What’s hard to see is a future in which Citigroup is anything more than an also ran.

Just name me one business where within five years it’s plausible that Citigroup will be one of the best 10 banks in the world. While the global financial system is better off today because Citigroup didn’t fail in 2008, the world of 2010 and 2011 doesn’t need Citigroup for much of anything. With apologies to Irving Berlin, Anything Citigroup can do some other bank can do better.

On April 19 Citigroup reported its first operating profit—14 cents a share—since the third quarter of 2007. The bank charged off only $8.4 billion in loans this quarter--a huge number but still 16% lower than in the fourth quarter of 2009. Its Tier One capital common ratio, a measure of the strength of a bank’s most conservative kind of capital, stood at a huge 9.1%. It was just 3% at the depths of the financial crisis.

I don’t think there’s any doubt now that the bank will survive. And that’s a huge achievement. This is a bank that required $25 billion in capital from U.S. taxpayers in October 2008 and another $20 billion in December of that same year.

But look at the bank still left standing.

Citigroup’s strategy is to split itself in two.

All the really bad businesses and some that aren’t so much bad as outside what Citigroup now defines as its core business have either been sold already or lumped into an group called Citigroup Holdings for eventual disposal. The list of businesses that Citigroup has exited includes the Smith Barney brokerage unit (rolled into a joint venture with Morgan Stanley (MS) but headed for eventual sale), Nikko Securities (the third largest brokerage company in Japan), and insurance company Primerica (partially spun off in a March 2010 initial public offering and Citigroup plans to sell the rest as soon as practicable).

But Citigroup Holdings still contained about $500 billion in assets at the end of the first quarter. That’s about 25% of Citigroup’s total assets. Still on the block, if the company can find a buyer are CitiFinancial (a consumer lending business that offers car loans, unsecured personal loans, home equity loans, and mortgages), CitiMortgage, and various toxic mortgage, credit card, and loan assets that Citigroup has either been unable to sell or that it has put off selling until prices for such assets recover.

But let’s not focus on the stuff that won’t any longer be part of Citigroup once this plan is fully executed. Instead let’s look at what business will form the new Citigroup.

There will be a scaled back investment bank. A private banking business. Branded credit cards. And the big core business of global consumer and commercial banking.

I can name the current leaders in most of these businesses. And it’s hard to see how Citigroup will effectively compete in most of them. In investment banking, for example, I don’t see Citigroup in the same league with Goldman Sachs (GS), JPMorgan Chase (JPM) or Bank of America (BAC)—especially now that it owns Merrill Lynch. In credit cards I expect Citigroup to lose share against the other  Big Five players such as Bank of America—which  bought credit card giant MBNA in 2005—JPMorgan Chase, and Capital One Financial (COF). And it’s hard to see how Citigroup’s travails have burnished its brand in private banking.

No, when it comes down to the future of the bank all pretty much hinges on the global consumer and commercial banking business.

This business was once Citigroup’s glory. And I’m sure that if I sat in CEO Vikram Pandit’s shoes I’d build my strategy for Citigroup’s future around this unit. The business is certainly still formidable with 4,000 branches in 39 countries. In 2009 68% of revenue came from outside North America so you’d have to say that Citigroup has a good chance at grabbing a big hunk of the banking business in the world’s developing economies.

That was once the plan for the bank’s future. Back in the days when John Reed, who had pioneered consumer banking innovations such as the ATM, was CEO of what was then Citibank. Before a merger with Sandy Weill’s Travelers Group ushered in the era of the financial supermarket—and ushered Reed out the door in 2000.

But the world has changed. And new and stronger competitors have emerged in consumer and commercial banking while Citigroup took its strategic detour into the financial supermarket.

So, for example, while Citigroup’s global network of 4,000 branches in 39 countries seems formidable, competitor HSBC (HBC) now has 8,000 branches in 88 countries and hard-charging Banco Santander (STD) has 13,600 branches. According to the BrandFinance Banking 500 study of the world’s top bank brands, released in February 2010, HSBC is, for the third year running, the top bank brand in the world. Bank of America is No.2, Banco Santander No. 3, Wells Fargo (WFC) No. 4, and Citibank No. 5.

I think that rating is deceptively high. Trends are running strongly against all the developed market banks and the next few years are likely to see developed economy banks now in the top 20 in the BrandFinance study (such as Societe Generale (SCGLY) or Credit Suisse (CS) or Citigroup) give way to rising developing economy banks (such as Brazil’s Banco Bradesco (BBD), Industrial and Commercial Bank of China (IDCBY), and Bank of China (BACHY).) The survey notes that Industrial and Commercial Bank of China is already the world’s largest by bank deposits.

U.S. and European banks face another stiff challenge over the next decade due to regulatory changes that are going to make limit the amount of capital that banks can raise or borrow in the financial markets—the preferred source of funds for developed world banks before the financial crisis—and raise the importance of gathering deposits from customers as a way to raise funds. That will penalize banks that have neglected their consumer networks and reward those who have built deposit gathering machines such as Banco Santander and HSBC. (For more on the regulatory changes facing developed economy banks see my post of April 23, .)

Which, of course, bring me full circle to the Citigroup branches in my work and home neighborhoods in Manhattan. These aren't the kind of branches that a company pinning its future on consumer and commercial banking runs. They look like the branches of a bank that’s going to give up market share point by point over the next decade.

If I’m wrong, you’ll be able to see it physically in Citigroup’s branches in the not so distant future.

There’s quite possibly a branch near you. Talk a walk or drive over. Does that branch look like the future to you?

Citigroup isn’t the only company to have come out of the Great Recession with major damage to its brand. There is, in fact, a lot of that going around—and not all the damage is occurring for the same reason. Think about recent news from Toyota Motor (TM) and Nokia (NOK).

It's not pretty when a global brand takes a hit.

Full disclosure: I own shares of HSBC in my personal portfolio.
  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STOCKS