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.