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Citi: A Whole New Playbook


Two months after Charles "Chuck" Prince was named chief executive of Citigroup (C) in July, 2003, investment bankers came calling. Would Prince be interested in selling one of the last vestiges of Travelers Group, the business merged with Citicorp in 1998 to form Citigroup in a $72 billion deal -- at the time the largest merger in U.S. history?

The answer, predictably, was no. Prince wasn't due to move into the CEO suite until December and was not about to start dismantling the empire that took his longtime patron and boss, Sanford I. "Sandy" Weill, 18 years to build. Under Weill, Citigroup and its predecessors were voracious acquirers, and Prince was along for the whole ride. "I remember very fondly the days when, every two or three years, we would change the name of the company -- Commercial Credit, Primerica, Travelers," Prince told BusinessWeek. "That was the force that got us here. But the days of doing big consolidating transactions that completely transformed the company are behind us."

Now Prince is stamping his own forceful imprint on the nation's largest bank. This time around, it was Prince calling the investment bankers -- to sell Citigroup's Travelers Life & Annuity unit and all of Citigroup's international insurance businesses, except the Mexican unit -- for $11.5 billion to insurance giant MetLife Inc. (MET) on Jan. 31. In Prince's view, those businesses sucked up the bank's valuable capital and exposed it to interest-rate risk and big earnings swings. By shedding them, he freed up $6 billion of capital and made a $2 billion gain on the sale.

What's more, he took a large step in moving Citigroup away from its original goal of becoming a one-stop financial shop that produces all its own insurance and banking services. In a similar move, American Express Co. (AXP) announced on Feb. 1 that it would spin off its brokerage and money-management unit to shareholders later in the year to focus on its card and payments business. The initial hope of many financial companies that welding brokerage, insurance, and retail banking businesses would create sales synergies just didn't pan out. "The trend now is toward specialization," says Jeffrey Schuman, an analyst with investment bank Keefe, Bruyette & Woods Inc.

At Citi, nothing now remains of the Traveler's deal but the ubiquitous red umbrella -- the badge of integrity that Weill coveted as he built his financial-services powerhouse from scratch. Prince is no less ambitious, but his playbook is entirely different. The 55-year-old former general counsel wants to redirect capital to higher-growth and higher-return businesses, streamline, and be "the most respected company in the world." He aims to build on Citi's vast scale with small, targeted investments that play to its strengths while selling businesses that have become deadweights. And he acts decisively when the bank's credibility is at stake. On Oct. 19, he fired three top executives blamed for the regulatory failures that got Citi kicked out of private banking in Japan. "These are conscious, strategic decisions," says Prince.

BACK TO BASICS

Citi is not the first to reverse its stance on the insurance business after promoting it as a cross-selling miracle. General Electric Co. (GE) sold its life and mortgage insurance unit -- Genworth Financial Inc. (GNW) -- in a $2.83 billion initial public offering last May. (Under Weill, Citigroup had already spun off its Travelers Property Casualty Corp. insurance business in an initial public offering in 2001.) "This life and annuity business just doesn't produce the returns for the risk," says David Anthony, an insurance analyst with Argus Research. "So the solution is to give it to someone who does the business full-time." MetLife's acquisition of Citi's life and annuity business, in fact, makes it the largest individual life insurer in the U.S.

But selling Citi's remaining stake in Travelers also reflects Prince's larger vision to get back to basics. On his watch, Citi has dumped CitiCapital's equipment-leasing business and sold its Electronic Financial Services unit, which in part provided benefits payments and prepaid cards for government employees. Citi also sold its 20% stake in the Saudi Samba Financial Group for about $760 million and reduced its stake in Japan's Nikko Cordial Corp. to 12% from 21%.

What's Prince going to do with the $8 billion he sprung loose in the Travelers deal? In a Jan. 31 conference with analysts, he said he might buy back shares or increase the dividend. Most analysts figure he'll also be in the market for niche acquisitions. He's always on the lookout for well-run banks in growing markets such as Texas and Florida. And though he might buy a large bank if the price were right, don't expect the sort of megadeal that reprises the Weill days any time soon. "The deals would now have to be so large that there would be excessive execution risk," Prince told BusinessWeek.

POWERFUL ENGINE

Instead, Prince is focused on smaller acquisitions that fill specific needs. In the past 12 months, he has purchased Knight Trading Group's derivatives activities (to tap into a hot growth market) and ABN Amro's securities-clearing business to bolster Citi's back-office services. Citi also paid $1.25 billion for Washington Mutual Finance Corp., a unit that provides consumer and secured real estate loans, among other products. Says Glenn Schorr, a financial-services analyst with UBS (UBS): "They're doing bolt-on transactions that make more sense, add to earnings, and won't change their stripes."

Prince will also continue to plow money into consumer banking all over the world. It's the main engine of Citi's growth, generating more than 60% of its profits. And while Prince opened 70 consumer-finance offices and 14 retail bank branches in the U.S. last year, his real focus is in faster-growing international markets. Citi's consumer bank added 8.6 million new retail bank accounts in 2004, almost all of them international. At the same time it opened 203 international branches, increasing the number to 3,253. And its overseas credit-card business added 5 million new card accounts, vs. flat growth in the U.S.

The sales machine is running at full bore in other parts of Prince's Citi. New-money flows to its Smith Barney (C) brokerage in the fourth quarter were the strongest in 11 quarters, at $10 billion, and private bank assets under management increased 24%. Also, in the fourth quarter the company achieved a No. 1 global rank in underwriting investment-grade and high-yield debt as well as equities, according to Thomson Financial (TOC).

Despite Prince's best efforts, Citigroup's stock has hovered below $50 for a year. His tenure has been marked by one public-relations disaster after another, with regulatory scandals erupting in Britain and Japan. Prince is also grappling with a $48 billion annual expense base that needs serious paring. Expenses, in fact, exceeded revenues in seven of Citi's nine units. Sallie L. Krawcheck, Citi's chief financial officer, says that's due in part to the cost of upgrading technology in the investment bank, opening retail branches, and training Smith Barney brokers. It's also based on sky-high legal expenses from run-ins with regulators and investors, which the bank is "managing aggressively," she says.

Indeed, regulatory misfires have had a huge impact on the bottom line. The bank reported record profits for the past two years, but in 2004 net income fell 5% to $17 billion because of the $4.95 billion aftertax charge Prince took for settling charges over WorldCom and legal reserves related to Enron. In both cases, regulators alleged that the bank misled investors with inaccurate research.

Binge-and-purge transactions at large companies are often a byproduct of a dynamic market. "It's too easy to say that Sandy built it up and Chuck took it down," says UBS's Schorr. "This is a company that's adapting to a changing environment. If Sandy were running the ship, he'd be doing the same thing." Maybe so. The iconic red umbrella may be all that's left of the dealmaking era that created the Citi empire. But Prince's ambition to capitalize on its powerful brand is as strong as ever.

Corrections and Clarifications

"Citi: a whole new playbook" (Finance, Feb. 14) should have said that expense growth exceeded revenue growth in seven of Citigroup's nine units.

By Mara Der Hovanesian in New York


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