The incredible shrinking bank may have to shrink more.
In the hours after Tuesday’s surprise announcement that Citigroup CEO Vikram Pandit was stepping down, speculation was rife, and facts scant, about what lay ahead for the third-largest US bank.
However, one possibility given high odds by financial analysts: More cost-cutting, more shrinking and more focus on boring, traditional banking, like making loans.
“It’s going to get a lot smaller,” said Gerard Cassidy, a long-time banking analyst at RBC Capital Markets. “You’ve got to shrink to make big money.”
In the nearly five years since Pandit took over as CEO, he shed businesses and cut jobs. Staff fell from 375,000 when he took over to 262,000. His resignation came a day after the bank announced what many analysts had hailed as terrific earnings for the third quarter.
Once the largest US bank, Citi is now the third-largest, with US$1.9 trillion in assets. It trails JPMorgan Chase, with US$2.3 trillion, and Bank of America, with US$2.1 trillion.
Citi’s new CEO is Michael Corbat, 52. He had been the CEO of Citigroup’s Europe, Middle East and Africa division. He also ran Citi Holdings, which contains assets that Citi wants to sell.
Because Corbat isn’t widely known, analysts on Tuesday were not sure how he might change the direction of the company.
For clues, some are looking to someone more well-known: the man thought to be behind Pandit’s departure, Citi chairman Michael O’Neill. O’Neill became chairman in March, when Richard Parsons left after three years.
O’Neill was elected CEO of Barclays, the British bank, in 1999, but had to give up the job immediately because of heart problems. He joined Citi’s board in March 2009. O’Neill had also been CEO of Bank of Hawaii Corp, where he was a big cost-cutter.
“When he ran Bank of Hawaii, he shut down up to 50 percent of its branches. It’s a startling number,” Cassidy said.
He added that at Citi, “if the branch banking businesses doesn’t make sense in parts of the United States, [he’ll] get rid of it.”
Tom Brown, founder of hedge fund Second Curve Capital, agreed.
“O’Neill downsized tremendously, and that’s what I think you’ll see here,” he said.
For years, the goal in banking was to get bigger, spreading expenses over more and more customers and offering a smorgasbord of services. This was the vision of Sandy Weill, the former CEO who built the bank through several deals.
However, the appeal of the one-stop shop, though not dead, has lost its luster since the financial crisis. Many banks, Citi included, were so sprawling, they didn’t even know the risks they had assumed.
As the housing market imploded, Citi lost US$32 billion in 2008, according to FactSet, a financial data provider. Nearing collapse, the bank took US$45 billion in government money.
The government converted US$25 billion into an ownership stake, which it sold in December 2010 for a US$12 million profit. Citigroup had repaid the other US$20 billion in December 2009.
In a conference call with analysts late on Tuesday, O’Neill gave few details about how the bank may change after Pandit, but he did note that it will be “extraordinarily focused on our expense level.”
Some analysts speculated the bank may place less emphasis on Wall Street trading and helping companies sell stocks and bonds to the public, the so-called investment banking in which Pandit had expertise. The business is volatile, with blockbuster profits occasionally followed by big losses.
Instead, the focus could shift to commercial banking, what Daniel Alpert, managing partner of Westwood Capital, calls the “dull and boring” businesses of lending to companies and consumers.
Dick Bove, a bank analyst at Rochdale Securities, thinks Citi will not only emphasize commercial banking, but will shift focus more overseas where the bank faces fewer rivals and could charge higher interest rates.
“If you look at domestic commercial banking, you have lower interest rates, you have higher losses, you have regulation and a high degree of competition,” he said. “If you go overseas, you don’t have any of those. You have tremendous growth.”
Citi manages 200 million accounts with customers in 160 countries.
DECOUPLING? In a sign of deeper US-China technology decoupling, Apple has held initial talks about using Baidu’s generative AI technology in its iPhones, the Wall Street Journal said China has introduced guidelines to phase out US microprocessors from Intel Corp and Advanced Micro Devices Inc (AMD) from government PCs and servers, the Financial Times reported yesterday. The procurement guidance also seeks to sideline Microsoft Corp’s Windows operating system and foreign-made database software in favor of domestic options, the report said. Chinese officials have begun following the guidelines, which were unveiled in December last year, the report said. They order government agencies above the township level to include criteria requiring “safe and reliable” processors and operating systems when making purchases, the newspaper said. The US has been aiming to boost domestic semiconductor
Nvidia Corp earned its US$2.2 trillion market cap by producing artificial intelligence (AI) chips that have become the lifeblood powering the new era of generative AI developers from start-ups to Microsoft Corp, OpenAI and Google parent Alphabet Inc. Almost as important to its hardware is the company’s nearly 20 years’ worth of computer code, which helps make competition with the company nearly impossible. More than 4 million global developers rely on Nvidia’s CUDA software platform to build AI and other apps. Now a coalition of tech companies that includes Qualcomm Inc, Google and Intel Corp plans to loosen Nvidia’s chokehold by going
ENERGY IMPACT: The electricity rate hike is expected to add about NT$4 billion to TSMC’s electricity bill a year and cut its annual earnings per share by about NT$0.154 Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) has left its long-term gross margin target unchanged despite the government deciding on Friday to raise electricity rates. One of the heaviest power consuming manufacturers in Taiwan, TSMC said it always respects the government’s energy policy and would continue to operate its fabs by making efforts in energy conservation. The chipmaker said it has left a long-term goal of more than 53 percent in gross margin unchanged. The Ministry of Economic Affairs concluded a power rate evaluation meeting on Friday, announcing electricity tariffs would go up by 11 percent on average to about NT$3.4518 per kilowatt-hour (kWh)
OPENING ADDRESS: The CEO is to give a speech on the future of high-performance computing and artificial intelligence at the trade show’s opening on June 3, TAITRA said Advanced Micro Devices Inc (AMD) chairperson and chief executive officer Lisa Su (蘇姿丰) is to deliver the opening keynote speech at Computex Taipei this year, the event’s organizer said in a statement yesterday. Su is to give a speech on the future of high-performance computing (HPC) in the artificial intelligence (AI) era to open Computex, one of the world’s largest computer and technology trade events, at 9:30am on June 3, the Taiwan External Trade Development Council (TAITRA) said. Su is to explore how AMD and the company’s strategic technology partners are pushing the limits of AI and HPC, from data centers to