New York: New York-based Citigroup Inc.’s plan to profit from growth in foreign markets may put chief executive officer (CEO) Vikram Pandit at odds with the US government’s stated interest in curbing risk and stoking the domestic economy with loans.
Pandit, 52, said in a 15 June speech in Detroit that Citigroup is looking for gains away from credit creation and the US consumer by harnessing globalization. The treasury department and Federal Reserve cited market stability and the need for credit flows to households and businesses as reasons for injecting $45 billion (around Rs2.2 trillion) of bailout funds last year into the bank.
The treasury is poised to become Citigroup’s biggest shareholder in September with a 34% stake under a pending preferred-stock conversion, so Pandit may have a hard time selling his plan. “With a stock below $3 and analysts forecasting the bank will post a second quarter operating loss later this week, it probably isn’t the time to focus overseas,” said Matt McCormick, a money manager at Bahl and Gaynor Inc. in Cincinnati.
It sounds great on paper to have foreign operations and revenue streams, said McCormick, a banking industry specialist whose firm oversees $2.2 billion and doesn’t own Citigroup shares. But the average American is going to look at this and say, “Why in the world aren’t we focused on something that’s going to benefit the US taxpayer directly?”
Under stress: Citigroup’s CEO Vikram Pandit said in a 15 June speech in Detroit that the bank is looking for gains away from credit creation and the US consumer by harnessing globalization. Daniel Acker / Bloomberg
‘Earn your way’
Pandit, a former hedge fund manager who took over in December 2007 following the ouster of Charles O. Chuck Prince, had said in an interview with PBS’s Charlie Rose in November that Citigroup will emerge from the financial crisis as a high-end retail bank serving clients that need its globality.
He said in the Detroit speech that he expects slow US economic growth in coming years because Americans are saving more and borrowing less. That means Citigroup must use profits from its global banking network, especially in emerging markets, to restore its health, he said. “As every businessperson knows, the best way to repay debt is to earn your way out of it,” Pandit said.
Pandit’s focus on emerging markets might not sit well with Federal Deposit Insurance Corp. (FDIC) chairman Sheila Bair, who has questioned Pandit’s leadership and wants the bank to reduce risks by selling off businesses, including some overseas, said people familiar with the matter who declined to be identified because Bair’s views are private. The bank should target global units that, while not big cash producers, still might fetch attractive prices, one of the people said.
Citigroup relies on FDIC to support at least $60 billion of debt under a government programme set up last year to help banks refinance their obligations, according to the firm’s financial statements. FDIC also guarantees much of the bank’s $298 billion of US deposits.
Pandit replaced chief financial officer Edward Ned Kelly, 56, and shifted him to a strategy role last week after FDIC told Citigroup’s board it was concerned he lacked the proper qualifications, a person briefed on the matter said. Pandit had chosen Kelly, a former CEO of Mercantile Bankshares Corp., for the post four months earlier.
“At the end of the day, the US will be the main governing body of what’s going to happen to Citi,” said Alan Villalon, a senior research analyst at FAF Advisors Inc., the money management arm of Minneapolis-based US Bancorp, which oversees $89 billion, including 2.4 million Citigroup shares. Pandit’s still trying to wear the happy face.
Pandit and Kelly declined interview requests. Stephen Cohen, a spokesman for Citigroup, declined to comment, as did the FDIC’s Andrew Gray.
Deutsche Bank, UBS
Josef Ackermann, CEO of Frankfurt-based Deutsche Bank AG, said in a May interview he resisted accepting a bailout from the German government to avoid having to retrench. “If taxpayers feel they own your company, they will understandably ask for different setups and say, ‘You should lend more money to us here in the domestic market instead of growing internationally’,” Ackermann said.
Switzerland’s banking regulator is pushing its banks to increase domestic lending. Those include Zurich-based UBS AG, which received a government injection of 6 billion francs ($5.5 billion).
“Any interest the US may have in supporting the bank’s global business ambitions is outweighed by the risk that the strategy might backfire and the impact that it could have on taxpayers and financial markets,” said Simon Johnson, a former chief economist for the International Monetary Fund.
Emerging market risks
Citigroup was weakened by loan losses in the 1980s following sovereign debt defaults in Latin America. Citigroup predecessor Citicorp reported $2.2 billion of losses in Argentina after the country defaulted on debts and devalued its currency. “The company is a beast that nobody seems to know how to control and going back 30 years has repeatedly been at the forefront of massive losses around the world,” said Johnson, now a professor of entrepreneurship at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts. “If I build a company that has great benefits to the country but also great potential, or actual costs, those things have to be weighed.”
Citigroup executives believe being in many countries helps reduce the risks from any one, said a person familiar with the bank’s strategy.
Argentina to Zambia
Pandit has shrunk a balance sheet that ballooned to $2.4 trillion by 23% and has sold 23 businesses, including units in Germany and Japan, since he took over.
The bank has 309,000 employees in at least 100 countries from Argentina to Zambia, including consumer banks in Mexico, Poland and South Korea acquired earlier this decade for a combined $16 billion under former CEOs Prince and Sanford Sandy Weill.
Businesses outside the US and Canada accounted for 74% of the bank’s revenue last year, up from 53% in 2007, as most of its trading losses came in the US. Deposits outside the US accounted for 61% of the $762.7 billion total as of 31 March, according to the bank’s financial statements. Write-downs on mortgage bonds and losses on consumer loans have left Citigroup with $36 billion of net losses since the fourth quarter of 2007. Its shares fell to $2.59 on 10 July in New York Stock Exchange composite trading from a peak of $56.41 on 27 December 2006. They have lost 61% this year.
Second quarter results
Pandit shifted non-bank consumer finance and brokerage units that he intends to sell, or wind down, to a new division called Citi Holdings in January. Also included is a trove of $301 billion of troubled assets that caused the bulk of the writedowns over the past year.
The remaining businesses, grouped under the name Citicorp, got about two-thirds of their $60.6 billion in total revenue from outside the US and Canada last year, the bank said in a 10 July regulatory filing.
Citigroup, scheduled to report second quarter results on 17 July, may post an operating loss of $1.4 billion, or 30 cents a share, according to the average estimate of 15 analysts surveyed by Bloomberg. Those figures exclude an after-tax gain of about $6.6 billion from selling a majority of the Smith Barney brokerage unit to New York-based Morgan Stanley in May. Analysts don’t expect a quick turnaround. The bank may have a loss of $1.63 billion in the third quarter and $773 million in the fourth, according to the Bloomberg survey.
Support of Geithner
Citigroup can’t afford to repay its bailout funds partly because it was ordered to bolster its capital base by the Fed in May. Other financial industry peers, including JPMorgan Chase and Co., Goldman Sachsand Morgan Stanley, all based in New York, paid back the government last month. Bank of America Corp. in Charlotte, North Carolina, and San Francisco-based Wells Fargo and Co., also unable to repay bailout funds, haven’t had to cede an equity stake to the treasury.
Pandit survived the showdown with Bair because he retains the support of other regulators and government officials, including treasury secretary Timothy Geithner and comptroller of the currency John Dugan, people briefed on their views say.
Geithner believes that Pandit should be given more time for his turnaround strategy to work and that there may be no one else capable and willing to step into the role, according to people familiar with his thinking. Replacing him might also lead to departures among Pandit’s deputies, potentially destabilizing the bank’s management, the people said.
Andrew Williams, a treasury spokesman, declined to comment, citing a practice of not discussing specific financial institutions.
A native of Nagpur, India, who became a US citizen after moving to the US at the age of 16 to attend New York’s Columbia University, Pandit used the 15 June speech at a business conference sponsored by the Detroit Economic Club to articulate his vision for remaking Citigroup as a viable enterprise.
“About 2,500 of the world’s 3,000 biggest companies are Citigroup clients, and the bank moves $3-9 trillion of cash each day on its global network,” Pandit said in the speech. That compares with a daily average of $1.46 trillion at the New York-based Clearing House Interbank Payments System, an international banking cooperative that handles cross-border wire transfers.
“Holding the bank’s network together may dovetail with the US government’s geopolitical interests,” said Noel Lateef, president of the foreign policy association, a New York-based non-profit group that promotes awareness of international issues. The group’s board members include William Rhodes, a Citigroup vice-chairman who met with Chinese Premier Wen Jiabao in April 2008 to discuss changes in the yuan’s exchange rate.
“Citigroup, notwithstanding its recent issues, has good business practices that translate well or that can be exported,” Lateef, a former chairman of Bowery Savings Bank in New York, said in an interview. That’s important in terms of promoting US business interests and encouraging global economic interdependence.
Procter and Gamble Co. (P&G), the world’s largest consumer products company, does business with Citigroup in 72 countries, according to the Cincinnati-based company’s assistant treasurer, Douglas Gerstle.
Citi is one of P&G’s most important banking relationships, Gerstle wrote in an email. “Citi’s breadth of capability and extensive global presence has made it an important financial partner to P&G as we execute our global business strategies.”
Johnson, the former IMF economist, said large US corporations could find alternatives, such as opening accounts at local banks, if Citigroup’s one-stop shop of payment, cash-management and capital raising services were no longer available.
“These multinationals have their own sophisticated treasury operations,” said Johnson. “Maybe there’s some modest convenience factor, but I’ve never seen evidence that this is what enables a company to be global.”
The firm’s primary banking subsidiary, Citibank NA, depends on its international operations for funding, Moody’s Investors Service said in a 6 July report. While most foreign currency deposits are used to fund loans in the host country, Citigroup’s overseas network also collects dollar deposits, according to the report. Some of those deposits are used to fund US consumer lending, Moody’s said.
The bank also gets deposits from its Global Transaction Services business, which handles payments on behalf of corporate treasurers, Moody’s said.
It’s a two-way street: Citigroup probably would have to step in to support its overseas units if they collapsed or fell short of capital, according to a 1 April report by Fitch Ratings.
“If one of these banks in one of the emerging markets had severe asset-quality problems and had to be recapitalized, or took some trading risks and lost money on that, then the parent would, we believe, step in and offer support,” said Joseph Scott, an analyst at Fitch Ratings in New York. If Citi decided not to support a specific branch or unit, then news of that would quickly spread and depositors in other jurisdictions would become nervous and perhaps pull their funds.
Citigroup had to inject $800 million into its 223-branch South Korean subsidiary, Citibank Korea Inc., in December to boost capital.
The Seoul-based unit’s first quarter net income fell 22% from a year earlier to 116.3 billion won ($90.7 million), as loan loss provisions at least tripled, according to a 8 May statement.
Bank Handlowy SA, Citigroup’s 75%-owned Polish unit, suspended its annual dividend on 18 June after the country’s banking supervisor demanded that lenders retain profits to replenish capital amid the worst economic slowdown in almost a decade. First quarter net income fell 74% from a year earlier to 46.2 million zloty ($14.4 million).
Bank Handlowy’s market value tumbled to 6.4 billion zloty as of 10 July, down 51% since 2007-end. Citigroup has denied speculation over the past year that it might sell the Korean and Polish units.
As Pandit reviewed Citigroup’s worldwide operations in early 2008, he was so convinced of the promise of emerging markets that he decided to sell the company’s consumer banking unit in Germany, according to people familiar with the matter. He saw the unit as mature and slow-growing and wanted to shift capital to faster-growing emerging markets.
Ajay Banga, the Citigroup executive then overseeing the company’s international consumer banking operations, protested, arguing that the German unit produced steady profits of about $500 million a year, the people said.
Pandit agreed to sell the business to France’s Credit Mutuel Group last July. When the sale closed in December for €5.2 billion ($6.6 billion), Pandit said in a statement that Citigroup would book a $4 billion after-tax gain and reallocate capital to the best growth opportunities.
Banga, 49, left last month to become president of credit- card network MasterCard Inc.
FAF’s Villalon says Pandit is right that economic growth is likely to be higher outside the US. What’s more, the onslaught of new banking regulations may make business more lucrative in countries not as heavily regulated, he said.
“Unfortunately, you’re dealing with governments that are unstable, and you’re dealing with an economic base that is still in its infant stages,” he said. “Just ask some bond guys who invest in those countries and have all been burned.”
Whether Pandit can hold Citigroup’s global network together remains an open question, according to Richard X. Bove, an analyst at Rochdale Securities in Lutz, Florida, who has a buy rating on the company’s stock.
“If Citigroup needs capital, and it has to raise money, it’s going to have to sell the things it really likes,” Bove said.
Bomi Lim in Seoul, Pawel Kozlowski in Warsaw, Takahiko Hyuga in Tokyo, Elena Logutenkova in Zurich, Jacqueline Simmons in Paris, Aaron Kirchfeld in Frankfurt and Robert Schmidt in Washington contributed to this story.