Not only is Citigroupgetting stronger, but it’s the only US bankwith the global footprint big enough to take on the likes of global giants like HSBCin emerging markets, says Citigroupchief executive Vikram Panditin a sit down interview with Fox Business.
And Pandit is so convinced about Citi’s turnaround, he says the government has said it “should be out by the end of year” from its ownership in the bank via TARP. That message comes as Citi is set to report a tough quarterly report before the opening bell tomorrow.
Consensus estimates show Citi posting a nickel a share profit on $22.2 billion in revenues, down about 90% from a profit of 49 cents a share on $29.97 billion in revenues in the same quarter a year ago, and down from the 15 cents per diluted share on revenues of $25.4 billion in the first quarter.
Is the Crisis Over at Citigroup?
The question for investors and taxpayers is this: Is the crisis over at Citi, a crisis that turned Citi into a black hole from which no earnings, much less dividends, could escape? A crisis that has Pandit fighting to pull Citi out of its fourth near death experience since the early ‘80s, a humiliating plunge that saw what was once the world’s largest bank suffer a colossal drop in market value below that of consumer discretionary stocks such as Pepsicoor Home Depot?
Despite the lower second quarter EPS estimates, “the core earnings power of the company is strong,” Pandit says. The stock is up 64% from its 52-week low, and a barometer showing the danger zone Citi had waded into is calming down. One-year swap spreads on Citi’s own debt have tightened while other banks have widened—in fact, Citi’s spreads are lower than those on GoldmanSachs and Morgan Stanley.
The government still owns 18% of Citigroup’s shares, though down from 37% at the peak of the crisis when Citi avoided insolvency with an historic, massive rescue from the US government, a $45 billion TARPinjection and a $306 billion backstop to its damaged balance sheet.
Taxpayers Profit From Citi Rescue
But the Citi rescue turned out to be a sweet deal for taxpayers, as overall the government already earned more than $9 billion on its Citi rescue, in the form of stock returns, fees from debt guarantees, and interest and dividends on the government’s investment in Citi’s trust preferreds. The fact that the US taxpayer has earned money on the Citi bailoutshows Citi got caught in a liquidity bear trap just like other banks--and it also shows the lesson of buying low.
Reality Check that Bounced
Reality check: Five of the biggest bankruptcies this country has ever seen occurred in this financial crisis: Lehman Bros., Washington Mutual, General Motors, CIT (all bigger than the bankruptcies of Enron, Conseco), and Chrysler, Thornburg Mortgage (bigger than Texaco). All ten of the U.S’s biggest bankruptcies, including WorldCom, Enron, Conseco, and Pacific Gas & Electric, happened within the past decade.
However, Citi is still dangerously overexposed to a debt-drenched US consumer, and the bank’s earnings performance is a barometer of the US economy. “The overall US economic recovery will take time,” says Pandit. “Substantial turnaround in the overall economywon’t come around until 2012,” during which time consumers and businesses may continue to snap their collective wallets shut.
Meantime, what hangs in the balance is the country’s third largest bank by assets, the jobs of its 265,000 employees, and America’s dominance of the banking industry. Citi has suffered about $48.4 billion in losses and $57.4 billion in write-downs since the crisis began. From its $55 a share peak in 2007, Citi is priced like a fast food menu item, at $4, it’s about the cost of two bags of fries, because of dilution, because it has 30 billion shares outstanding versus six billion shares in ‘07, due to the rescue.
Beaten Up Book Value
Citi’s price to book value ratios is still a beaten up 0.81, book value being the measure offsetting its assets and liabilities. That means Citi is trading at just around 80% of its book value, which is down around where smaller regional players trade, which is around half of book value. When a bank trades at half of book value, investors are saying a bank’s assets are worth somewhere near half of what a bank says they are. Citi’s performance here is worse than JPMorgan Chase, Morgan Stanleyand GoldmanSachs, though better than Bank of America.
Which indicates Wall Streetsees swollen steam pipes at Citi loaded with bad assets still veined through Citi’s operations, threatening near term thrombosis. However, Pandit has unplugged them by, for example, stopping the bank’s old cultural approach, to rev up earnings with things like fake paper securities and financial engineering. Government ownership is still a cloud over Citi’s stock as shareholders fear that the company will be run more on Washington rationale than on its own business logic.
Pandit’s strategy has its stock trading back toward tangible book, although it likely won’t start earning a premium until the government stake has been sold. Cutting Back a Balance Sheet the Size of France Pandit and his team have moved with alacrity to repair the damaged Citigroup. In two years, he’s overseen Citi break up into a good bank (Citicorp) bad bank (Citi Holdings) structure, that has Citi asset stripping the equivalent of the size of GECapital in hopes of raising cash to liquefy its balance sheet. Pandit says: “We got our balance sheet down from $2.2 trillion to $1.9 trillion.”
Citi has also moved beyond the dark days when analysts felt it had to sell even the family silver to stay solvent due to the fact that Citi raised “significant new capital,” and “reduced the amount and riskiness of assets,” according to Pandit’s internal Powerpoint presentation for employees. Citi’s Tier 1 capital, a measure of strength, rose to 11.7% of risk weighted assets, from 7.7% in the first quarter of 2008. But it’s a relentless focus on unifying and streamlining the bank that has Citi potentially out of intensive care and in the recovery room.
For one, Citi had a run rate of $65 billion in annual operating expenses, which was unsustainable. Cutting the Fat Marbled Through the Operation Pandit says: “expenses have been slashed,” dramatically so, from $69 billion at the end of ‘08 to $48 billion at the end of ‘09. “Costs are getting under control,” says Pandit.
Pandit essentially cut the fat marbled through Citi by paring back headcount to 265,000 from 372,000, and he says in his PowerPoint that Citi has “improved risk management” and “added strong leadership.” Citi is still struggling with $154 billion in damaged and noncore assets, including residential and commercial loans, that it wants to unload, but that’s down from about $200 billion in the summer of 2009.
And Citi still has an eyewatering $960 billion off balance sheet, but it says its maximum exposure to losses here are about $56 billion.
Gunning for Global Growth
The message from Pandit is clear. He’s gunning for global growth, and he says Citi is better positioned than JPMorgan Chaseand Bank of America. “We are in over 140 countries, we are well positioned,” Pandit says, adding, Citicorpis in 50% of the emerging and developed markets, we are the only US bankwith that global presence.
No other US bankhas our global footprint. We are the only US bankthat can go up against other global banks in those markets,” such as HSBC” Pandit says, with retail banking, trading desks, global transaction services, and securities businesses.
Hanging Up Citi
New regulatory standards are hanging up Citi as they are for all the banks. “We are all waiting on Basel III regulations,” which will tighten capital and other requirements. “Until the regulations are clear, it’s hard to contemplate stock buybacks, issuing new dividends, or buying businesses,” Pandit says.
Inheriting a Catastrophe
It’s well understood now that Pandit inherited a catastrophe concocted by former empire builder Sandy Weill, who took Citi on a white knuckled ride of acquisitions that left the Citigroupcareening around in a hospital gown. Weill’s strategy left Citi in the government’s emergency room with a hard-to-value balance sheet the size of France’s economy, a balance sheet bigger than the UK economythat was as transparent as bucket molasses, but with weak earnings power.
Citi under Weill had focused on mindlessly buying companies, on revving up revenue growthwith all sorts of earnings created not on solid organic growth but on a loose confederation of businesses held together with baling wire and glue. Weill’s vision was a one-stop shopping model for customers, a global financial supermall strategy whereby Citi could cross sell products to customers, a strategy Citi revved up after the abolition in 1999 of Glass Steagall, a Depressionera law which walled off investment banks and insurers from commercial banks. Consumer business had become product pushes at Citi.
“I believe you have to run consumer business by being focused on the customer,” Pandit says. “It takes times to right size” the business model.
Pandit adds: “The supermarket strategy is not a strategy. You can’t be all things to all people, you end up being good to no one. The portfolio/conglomerate approach distracts from creating value. Plus we end up with no uniform culture. And you have to have a clear strategy to know how to compete. You have to know what you’re good at. We know how to do banking well. We are very good at being a bank. We are both global and innovative. The biggest problem was we had lost the focus of keeping our best people, good people will drive revenues.”
How It Happened
Here’s what happened. In April 1998 Weill’s Travelers Grouphad merged with Citi in a $76 billion deal, and to help lobby for the end of the Glass-Steagall Act, where banking and insurance as well as securities businesses had been kept separate, Weill and former Citi head John S. Reed recruited ex-President Gerald Ford and former Treasury SecretaryRobert Rubin to the Board. Glass Steagall fell within two years, and Weill hung on his office a wood etching of him engraved with the words "The Shatterer of Glass-Steagall.”
But Weill’s approach had Citi had been running on a buying and selling model, a private equity kind of model where it would buy and sell lots of companies and strip out costs, to keep costs low and then rev up earnings—essentially creating earnings by momentum buying. By the time former CEOChuck Prince took over, regulators had had enough of Citi buying and selling companies. Prince tried to clarify the business, but the problem was, Citi had taken out so many costs via firing top managers that there was no growth.
And Weill’s willy nilly strategy left Citigroupoperating with zero cohesiveness, a vision for the bank which former executive John Reed has since dinged as flawed and where management executionwas fraught with errors.
Citi had become too siloed under Weill, “we had silos within in silos,” Pandit says, adding, “For example, we had 50 different chief technology officers, but not one technology standard for the whole company. It was like having 50 different types of airplanes for one airline company. We also had 11 different deposit systems in the U.S., but we are only in 10 major cities."
Another example, Citigroup’s regional offices for Asia is headquartered in Hong Kong, but it had many different head offices for Asia, one for regional banks, one credit cards, for investment banking, and global transaction services. “Now the regions have CEOs, so we have better client coverage and we’re getting rid of redundancies. We also had three different bidding systems for Treasury auctions down on Wall Street, from Smith Barney, Citi and Salomon,” when Citi only needed one. You can see what Pandit is up against. And why time will only work to his benefit.