December 18, 2013 6:57 pm
 
Finance: Shrunken ambition
 
Citi’s cost-cutting drive has delighted investors but how much more can it cut before it squanders its global advantage?
 
Citibank To Cut 11,000 Jobs©Getty
 
 
 
The fireplace on the 39th floor of Citigroup’s Manhattan skyscraper is a relic from a different era. It was installed by Sandy Weill, who indulged a passion for high-rise hearths, martinis and cigars during the acquisition spree that culminated in him co-founding the modern Citi in 1998, back in banking’s boom years.
 
Sitting next to itunlit – on a winter’s day in 2013 is Mike Corbat, a very different chief executive for a more austere time: post-crisis Wall Street.
 
Mr Corbat, 53, was promoted to chief executive last year after Vikram Pandit was ousted. After five years of retrenchment under Mr Pandit, Citi is still the world’s most sprawling bank, with traders spanning the globe and retail branches stretching from Seoul to San Francisco. Mr Corbat has found plenty left to cut.
 
Under his leadership, Citi has announced 11,000 job losses and introduced targets for executive bonuses that require the bank to meet a return on tangible equity of 10 per cent by 2015, up from 7.9 per cent last year. Such a goal would allow it to approach the profitability of the sector’s leaders, such as Wells Fargo, Goldman Sachs and JPMorgan Chase.
 
While he has not announced a new strategic direction, Mr Corbat has started to retreat from countries that are underperforming, closing consumer operations in Uruguay, Paraguay, Romania, Pakistan and Turkey.

“We’re going to stay focused on expenses and making sure we’re getting investments in the right places, but we’re just not going to be out there spreading the peanut butter in terms of expense growth because it’s not warranted. It’s not what you need,” says Mr Corbat, a gentle smile softening the imposing 6ft 3in frame of the former college football player.

For the most part, investors and analysts are supportive of his emphasis on execution and efficiency, sensing Citi is about to return a significant amount of capital to shareholders for the first time since the crisis. “It’s not rocket science. It’s the way managements should look at the business,” says one top-20 shareholder.

Early results have been good, with caveats.

Losses bleeding from bad assets are close to being staunched as they are sold off but, Mr Corbat cautions, “I would guess the pace of that’s going to decline”.

Earnings are up, costs are down and the shares have traded at their highest level since the company narrowly avoided failure amid spiralling losses in 2009, rising 50 per cent since Mr Corbat took over in October last year. After leading its peer group in the first few weeks of the new chief executive’s tenure, Citi’s stock has now settled back into the middle of the pack.

But according to eight current and former senior executives, an internal debate is raging over whether the new regime’s drive to cut costs and improve profitability is jeopardising the long-term future of Citi.

Mr Corbat’s detractors say that, even in the leanest years, more investment was found to preserve Citi’s strongest businesses and finance new growth.

How much can America’s most international bank, which is active in more than 100 countries, retrench before it squanders its reason for existing?

Citi was already on a diet. Under Mr Pandit it had placed an enormous $700bn of non-core assets and toxic loans in Citi Holdings, a bad bank, and set about selling them off. Much of the improved performance today is the legacy of the reduction.
 
And many of the decisions to close operations in various countries, announced to great fanfare over the past 12 months, had been taken by the old regime.

No other bank in America comes close to Citi’s international presence and outside the US its only rival for global reach is HSBC. Accompanying multinational clients as they travel the world has helped Citi build a foreign exchange trading operation with more than 80 local desks, with a particular strength in Asia.
 
Its consumer operations encompass a vast business in Mexico and large operations in the US and South Korea.

Perhaps most important of all is a business considered boring next to the rest of Citi, but ultra-dependable too: the transaction services operation, a network that allows companies to manage their cash in different countries. Insiders say that the transaction services business has returns on equity which, at more than 30 per cent, the rest of the group dreams about.

The Mexico business was a $12bn acquisition in 2001. The transaction services business was built over decades by predecessors such as Walter Wriston, chief executive of Citicorp between 1967 and 1984, and John Reed, who followed him.

Neither the big-ticket purchases nor increasing investment in technology are orders of the day now. Citi can cut its way to improved profits – that was already well under way under the previous management team – but where is the next strategy?

In the consumer business, Citi has revamped its retail network in much of Asia with sleek, modern, technologically advanced branches and kiosks, which take up less space and require fewer staff.

“The goal was to do exactly the same in the US,” says one executive, who adds that rollout reached a lone branch in New York and then halted. These guys stopped that completely.” While Citi pauses, Bank of America is pushing ahead with its newexpressbranches in the US.

Another executive says the cost savings from branch closures in the US had been pledged for investment in mobile and internet banking, only for the budget to evaporate. “You asked us to shut down branches to fund digital growth but you took it as expense reduction and soaked it up in earnings.”

If “digitisation” is still part of the strategy, asks this executive, “why are you behind everyone else”? Valued executives working in those areas have left, including Michelle Peluso, who ran Citi’s digital operation but jumped ship last year to become chief executive of Gilt Groupe, the online fashion retailer.

A recent analysis of the four US banks’ mobile banking platforms by Forrester, the research firm, put Citi last in a list led by JPMorgan Chase.
 
Manuel Medina-Mora, the sharp-suited executive co-president in charge of the consumer business, dismisses the idea that the bank is missing any opportunities.

“There has been no revenue growth for the US banking industry in this decade. You demand from your organisation the productivity saves that will fund more investments,” he says, denying that promises were breached.

All the investments that we approved were made.” The bank points to several awards for its online efforts and says it is increasing its digital investment.

Citi’s US operations – with a diminishing physical presence and a flagging online offering – are a problem because the bank badly needs to make money in the US. Mammoth losses during the crisis produced benefits in the form of $50bn of tax write-offs, which can be unlocked only when the US business makes more money.

Given the strictures on spending, there is an internal debate over how much revenue should be reliant on relaxing lending standards, according to people at the bank.

They say that as only the 13th-biggest US bank by branches but the sixth-biggest mortgage seller, there is a possibility that Citi will resort to buying more mortgages from brokers rather than lending to its own customers – a riskier proposition. A Citi spokesman said that would not happen.

Overseas, a lack of investment could lead to atrophy for Citi’s best businesses, although here there is a defence from stricter regulations. On the one hand they are making Citi’s international operation less efficient as each countryfearful after Lehman Brothers’ disorderly collapse that assets will be sucked back to head office during times of strifedemands more capital and funding is kept locally.

But they are also making it harder for anyone to catch up. Deals such as a once-floated combination of JPMorgan Chase and Standard Chartered, the emerging markets-focused UK bank, are ruled out by regulators worried that banks are dangerously large.

Replicating Citi’s transaction services network would take years, and is at least as likely to come from an emerging participant such as Itau in Brazil or China’s ICBC.

“The barriers to entry have got higher,” says Jamie Forese, co-president and head of Citi’s investment bank.

Some former bankers also bristle at the supposed improved execution.

The most critical voices point to one of the final upsets of the Pandit era, the disappointing sale to Morgan Stanley of Citi’s stake in Smith Barney, a wealth management division that Citi said was worth $22.5bn but Morgan Stanley bought for $13.5bn.

Mr Corbat was responsible for Citi’s stake in Smith Barney and ensuring its interests were protected, these people note. They argue that Morgan Stanley, as the lead shareholder in operational command, was allowed to manage it in a way that depressed the valuation.

What is now certain is that James Gorman, the Morgan Stanley chief executive who coveted the business for its steady stream of revenues, got a good deal. Its profit margins have suddenly surged.

A person close to Mr Corbat says he did not have operational responsibility for Smith Barney and had moved to a different role by the time its sale was negotiated – by Mr Pandit – and notes its price was decided with the assistance of an external appraiser. Two senior Morgan Stanley executives say Mr Corbat provided scrutiny and deny that the business was burdened with any additional cost: the recent improvement has been driven by revenues, they say.

Whether the execution is better or worse, it is certainly a different style of management, according to insiders. “It’s sort of central planning and bureaucracy,” says one critic.

While Mr Pandit would speak di­rectly to people below the senior management level, these executives now find themselves with a gatekeeper in Sara Wechter, Mr Corbat’s chief of staff. Everything goes through his chief of staff whereas Vikram just used to pick up the phone,” says one.
People close to Mr Corbat say he speaks regularly to dozens of executives, visiting 50 cities and holding four two-dayoff-site” planning sessions with his top team.

. . .

Mr Corbat’s supporters argue that what some say is bureaucracy is a more structured style characterised by a rigorous analysis of performance, with executives tested against scorecards. Mr Corbat said earlier this year: “I’m a very strong believer in ‘you are what you measure’ and so we’re driving measurement and accountability throughout the organisation.”

This agenda is set by Mike O’Neill, the chairman of Citi who orchestrated Mr Pandit’s demise and championed Mr Corbat. Passed over in the running for chief executive in 2007 in favour of Mr Pandit, Mr O’Neill has proved a more interventionist chairman than exists anywhere else on Wall Street, an industry characterised by imperial leaders such as Jamie Dimon, JPMorgan’s chief executive.

Some question whether he is in fact running the show. Another big Citi shareholder asks: “There is not any right or wrong way to run these two roles but the question is whether we have the correct understanding of where the power lies, of who is the power and who is the counterbalance.”

“We divide our responsibilities,” says Mr Corbat, disguising any weariness about the suggestion that he is subservient to his chairman. “I think it works well for us. He’s very focused on the board and board governance, and he’s not focused at all on the day-to-day operations of the company.”

The new approach earns the appreciation of Mike Mayo, an analyst at CLSA, and an arch-critic of Citi under Mr Pandit.

Citi has the best high-level blueprint than at any time in their current existence,” he says. “The lack of accountability, the lack of follow-through at the top, these are what have changed.”

There is certainly a profound change from the previous chief executives. Mr Pandit had grand visions despite the tight spot presented by the crisis. His predecessor Chuck Prince infamously said Citi would keepdancing” even as it plunged headlong into the crisis. His predecessors Mr Reed and Mr Weill assembled a formidable conglomerate.

The bombastic Mr Weill, enraptured by another of his office fireplaces, once wrote: “We used to joke that we’d send up white smoke to celebrate the end of a good trading day. Perhaps it was the soaring height of our new offices, but I soon began dreaming once again about bold ways for our company to leapfrog its competitors.”

Citi will have to live without a dreamer for a while.

 

Copyright The Financial Times Limited 2013.

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