Vikram Pandit wants to be remembered for pulling off one of the most complex mergers ever. No, the Citigroup Inc. boss isn’t going on a spending spree. He’s simply hoping finally to reap the benefits of the 1998 tie-up that created the unwieldy megabank.
That, at least, seemed to be his message at the firm’s investor day on Friday. At times the event sounded like a twist on the old Monty Python joke: Aside from those isolated business silos, the high-cost base, low returns on too many assets, poor risk management and an ineffective culture, what did previous Citi executives ever do that wasn’t good for shareholders?
Chief executive Pandit hopes to do better. He has already started trying to bring order to the sprawl, hiring or promoting new business heads and risk managers, and paying executives in part on the success of his plan. He has pledged to shed some $500 billion (Rs20.7 trillion) of non-core, stressed and insufficiently lucrative assets.
He is also looking for cost cuts—currently an estimated $15 billion a year. In a traditional merger, that would be worth some $90 billion, once taxed and put on a multiple of 10. That’s not much more than half of what investors have lost holding Citi stock for the last 12 months, but it would be a start.
The trouble is, Pandit needs time—three years for the cost savings, perhaps five for the asset sales. That may be too long for shareholders who have endured at best flat stock prices for years. But he has suggested how to measure his progress.
In a couple of years, he expects Citi to earn perhaps $20 billion a year and churn out a return on equity of 16% or more. Optimistic investors might just reserve judgement until then. But it will be a tough task: a Citi break-up may be inevitable in the end. Pandit will need to show clear progress towards his goals, and soon, to keep sceptical investors on side.