The bank, which already earns more than half its profits in developing nations, sees an "explosion in trade and capital flows"
Vikram S. Pandit steered Citigroup (C) through the financial crisis with the help of a $45 billion taxpayer-funded bailout. Now he's embarked on a perilous course, staking the bank's future on emerging markets. As rising inflation threatens growth in developing countries, Pandit's plan to become the world's "largest emerging-markets financial services company" makes Citigroup more vulnerable to decline in those economies than any other U.S. bank, says David Konrad, an analyst at Keefe Bruyette & Woods (KBW) in New York.
The bank's shares have fallen 13 percent since touching a 16-month high on Jan. 14, in part because of the "potential slowdown in emerging economies," Richard Bove of Rochedale Securities in Lutz, Fla., wrote in a Mar. 2 analyst's note.
Making Citigroup the leader in emerging markets would be a lasting legacy for Pandit, 54, who was born in Nagpur, India. After becoming chief executive officer of the third-largest U.S. bank in December 2007, he presided over two years of losses related to subprime mortgages while shares plummeted 90 percent. Pandit began selling off Citigroup's unwanted businesses and troubled assets and managed to turn things around. In 2010 the bank reported net income of $10.6 billion, its first profit since the crisis. Shares rose 43 percent, and the U.S. Treasury, which held a 27 percent stake, largely exited. "He's greatly exceeded my expectations and greatly exceeded the market's expectations," says David Knutson, a senior analyst at Legal & General Investment Management America, which oversees $18.5 billion, including $85.3 million of Citigroup bonds.
For Pandit, who declined to be interviewed, the opportunities in developing markets outweigh the risks. He acknowledged in a speech in New York in February that many emerging economies are "operating at or near capacity, and there are risks of overheating." In the same talk, he added that the bank still plans to invest in "the rise of the emerging-market consumer and the explosion in trade and capital flows."
On Mar. 9, Pandit said Citigroup now earns more than half its profit from developing countries. The bank increased assets in Latin America and Asia by 16 percent, to more than $470 billion, last year, adding customers in countries such as Brazil, Mexico, and India. The only units that increased profit last year over 2009 were the regional consumer-banking units in Asia and Latin America, where net income more than doubled, to $4 billion, on increased lending.
A test of Pandit's strategy may come in Brazil, Latin America's largest economy, which expanded 7.5 percent last year and where policymakers recently moved to avert a credit bubble. Through its CrediCard subsidiary, Citigroup now controls between "7 percent or 8 percent" of the credit-card market in Brazil, Manuel Medina-Mora, Americas consumer-banking chief, said in December. That same month, facing the highest levels of inflation in five years, the Brazilian central bank took measures to slow consumer lending.
In September 2008, Pandit tried to land the faltering Wachovia but lost out to Wells Fargo (WFC). In the weeks after the deal, as the global credit crisis worsened, Citigroup shares plummeted and customers began withdrawing deposits. The government, which had already provided Citigroup with $25 billion, arranged for an additional $20 billion bailout in November 2008. Some investors began to doubt Pandit's ability to manage the bank. "I felt like it was an institution that lacked thoughtful leadership and direction," Knutson says.
In January 2009, with the bank reporting its worst-ever annual results, Pandit announced he was splitting Citigroup into two divisions. One would be used to hold more than $600 billion of troubled assets. The other, Citicorp, would focus on core operations such as consumer banking, trading, and investment banking—areas where the company has a strong presence outside the U.S. "They left the idea of being the next JPMorgan Chase (JPM) or Wells Fargo with the Wachovia situation," says Knutson. "They were relying on their preeminence in Latin America, Asia, and the Middle East." In June 2009, Pandit predicted that Citigroup would become the "largest emerging-markets financial-services company."
The expansion in emerging markets is taking place while the bank is subject to a memorandum of understanding (MOU) with one of its regulators, the Office of the Comptroller of the Currency. In an MOU, a bank commits to remedying a problem identified by a regulator. In place since June 2008, the MOU relates to "risk-management weaknesses," according to the Financial Crisis Inquiry Commission Report released in January. "They've had risk-management mishaps," says Mike Mayo, an analyst at Crédit Agricole in New York. "We're not convinced the culture has changed enough to prevent similar mishaps from occurring."
"Since Vikram Pandit became CEO, Citi has added significant resources and talent to the risk-management team and has revamped its risk structure and processes," says Shannon Bell, a spokeswoman for the bank. "We believe we have the right risk-management processes, procedures, and culture in place to manage growth plans around the world." And Pandit shows no signs of changing course. In a Mar. 10 letter to shareholders, he wrote that capturing a greater share of emerging-market business is a "key execution priority" for this year.
The bottom line: Citigroup now earns more than half its profit in emerging markets. Pandit wants to invest even further.