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Citigroup’s chief shrinks the bank, with an eye on growth

Citigroup’s chief shrinks the bank, with an eye on growth
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First Published: Tue, Apr 06 2010. 11 47 PM IST

Recovering giant: Citigroup chief Vikram Pandit has reduced the bank’s balance sheet to $1.86 trillion, down about 21% from its pre-crisis peak. Andrew Harrer/Bloomberg
Recovering giant: Citigroup chief Vikram Pandit has reduced the bank’s balance sheet to $1.86 trillion, down about 21% from its pre-crisis peak. Andrew Harrer/Bloomberg
Updated: Tue, Apr 06 2010. 11 47 PM IST
Citigroup Inc. is getting smaller, and maybe even better.
Just 13 months ago, Citigroup’s chief executive, Vikram Pandit, was facing the unthinkable. After bailouts worth $45 billion (around Rs2 trillion), the US government had become the largest shareholder of a bank that was once among the biggest on the planet. Citigroup’s shares were selling at barely $1 each, having fallen from about $20 a year earlier and $50 a year before that.
Recovering giant: Citigroup chief Vikram Pandit has reduced the bank’s balance sheet to $1.86 trillion, down about 21% from its pre-crisis peak. Andrew Harrer/Bloomberg
There was even talk of nationalization, a move that would have wiped out shareholders and cost Pandit his job and his legacy.
Fittingly, New York magazine called Pandit the “Most Powerless Powerful Man on Wall Street”.
Today, Pandit is still at the helm, and through a series of small but important moves, he is quietly asserting his influence. Piece by piece, he is shedding complex businesses such as the insurance and retail brokerage units, shrinking the bank’s balance sheet and stabilizing its finances.
Slowly, Citigroup is breaking with its troubled past. Indeed, when the Financial Inquiry Crisis Commission begins hearings this week on Citigroup's near collapse, the panel will focus not on Pandit but on his predecessors: the former chief executive Charles Prince III and Robert Rubin, an influential board member and adviser.
Pandit, who is accepting only $1 a year in pay until his bank is consistently profitable, still would not make anyone’s short list of powerful Wall Street executives. But his stock is rising steadily along with that of Citigroup, which climbed 2% on Monday to close at $4.26.
Some of Pandit’s most trusted advisers notice a new bounce in his step and say he is more energetic at meetings.
“Vikram is looking and sounding a lot more confident and secure,” said one top lieutenant. “He has a smile on his face. He sees the day when he is going to earn more than a $1 a year.”
That day, of course, may still be months away. With unemployment still high, losses tied to Citigroup’s mortgage and credit card businesses have continued to climb. New financial rules, still being determined in Washington, could dampen profits further.
Even so, with the markets and the economy overall on the rebound, Citigroup could beat Wall Street’s break-even consensus estimate and turn an operating profit for the first quarter. It reports on 19 April.
What is more, the government will soon begin selling off its 27% stake to private investors—welcome news to taxpayers who stand to turn a multibillion-dollar profit.
“He inherited a huge hole and is doing the best he can,” said Charles Peabody, a longtime banking analyst at Portales Partners in New York. “But he has had to mortgage the future earnings power of the bank to repair the balance sheet.”
“That is what I am having a hard time envisioning—when will that earnings momentum emerge?” he added.
That question has been posed from the day Citigroup was forged by the blockbuster merger of Citicorp and the Travelers Group in 1998. At the time, Sanford Weill, its co-chairman and founder, vowed that the bank would become an earnings juggernaut with operations all over the globe.
Weill promoted the idea of a financial services supermarket that could offer customers “one-stop shopping” among businesses as varied as retail banking, credit card lending, investment banking and insurance. The poor performance of one business or region could be offset by stronger results in others, helping to reduce risk.
But those benefits never materialized. Instead, the bank’s vast size and complexity made it difficult to manage—and all of its businesses were devastated at once by the financial crisis.
Today, Pandit is peeling off pieces of the financial conglomerate and slowly but surely turning it back into a global bank modelled after the original Citicorp. “We are breaking it up,” he told the Congressional Oversight Panel last month.
Pandit is hesitant to boast about his successes, a humility that many long-time colleagues attribute to his Indian heritage. (He would not be interviewed so close to the bank’s earnings announcement.)
But his results are starting to speak for themselves.
Indeed, Pandit has substantially shrunk Citigroup’s giant balance sheet. It now stands at $1.86 trillion, down about $500 billion, or 21%, from its pre-crisis peak.
Much of that reduction has come from Citi Holdings, a unit set up in early 2009 that contains the businesses and assets that Pandit hopes to sell. Even in a buyer’s market, he has reduced its size to $447 billion, from $662 billion last year—without having to sell at steep discounts.
Part of the shrinkage has come from the normal churn of residential mortgages and riskier private-label credit cards, which together make up about 60% of Citi Holdings. Another chunk has come from the sale of billions of dollars of steeply marked-down subprime mortgage bonds, giant buyout loans and other assets—often at a profit.
Pandit has also divested the bank of 30 or so businesses as varied as the prized Smith Barney brokerage unit and an investment in a Japanese ski resort.
Pandit has even begun convincing regulators that he is making progress. Although tensions remain between Citigroup and Federal Deposit Insurance Corp., some of the bank’s other regulators recently raised their regulatory rating on the bank’s management, according to people briefed on the situation.
Even so, Pandit and the board have a long slog ahead. In the near term, Citigroup must contend with tougher oversight from Washington, including new credit card regulations and new accounting rules that will require the bank to bring tens of billions of dollars of off-balance-sheet assets back onto its books.
There will also be more red ink. For example, Citigroup has already marked down some of its commercial real estate holdings to 94 cents on the dollar, and more markdowns are certain.
Over all, he must set a course for growth even as he shrinks the company. And with nearly 28 billion shares outstanding—a side effect of the government’s extraordinary intervention—it will remain difficult to move the stock price higher.
This may be Pandit’s most vexing problem yet—and one that could take another few years to get his arms around.
©2010/THE NEW YORK TIMES
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First Published: Tue, Apr 06 2010. 11 47 PM IST