Friday, November 7, 2008

Struggling Citi bids farewell to No. 1 spot

One year ago this week, the board of a struggling Citigroup Inc. ousted chief executive Charles Prince in hopes of turning the bank around.

Twelve months and $68 billion in mortgage-related losses later, Citi shares have lost 65% of their value, and the company has so many troubled assets that its days as a leader in U.S. finance appear to be over.

What was once the world's biggest bank has slipped to a position as America's fourth-largest by market value, ahead of Minneapolis-based U.S. Bancorp.

Today, Citi CEO Vikram Pandit is furiously trying to right his ship by cutting costs, jettisoning risky assets and selling nonessentials.

Working against him is the sinking economy, which is exposing Citi to titanic losses on everything from credit cards to office-building loans. Adding to the company's pain, healthier rivals Bank of America and JPMorgan Chase are expanding aggressively, in part filling the void left by Citi's retreat.

“Citi no longer matters,” says Bill Smith, head of Smith Asset Management, a shareholder in and longtime critic of the bank. “It's a black hole.”

The numbers are grim: Citigroup has racked up $20 billion in net losses over the past year, while J.P. Morgan and BofA have generated net income of $8 billion and $6 billion, respectively.

Similarly, Citi sat binding its wounds as J.P. Morgan grabbed Bear Stearns and Washington Mutual at fire-sale prices and BofA captured Merrill Lynch. Citi's one attempt at vulture investing — a low-ball bid for the failing Wachovia — was blown out of the water by the healthier Wells Fargo.

Even after massive write-downs, the bank still has $138 billion of “problem assets,” according to brokerage firm Fox-Pitt Kelton, compared with JPMorgan's $32 billion. Credit losses and nonperforming assets continue to rise, which suggests a continuation of the past year's pattern of painful write-downs and costly capital injections.

“If Citi didn't have the government backing it, I'd say the stock is a short even at these depressed levels,” says Whitney Tilson, co-founder of hedge fund T2 Partners.

Working in Citi's favor is that the subprime mortgage fiasco appears to have bottomed out. But the company faces rapidly growing losses in just about everything else, including in its $200 billion credit card portfolio. The industry's largest such portfolio, it is deteriorating faster than the ones at Citi's peers. Charge-offs in the North American portfolio are expected to reach 7.9% next year, according to Goldman Sachs research. Problems are also spreading into commercial real estate, where Citi has $42 billion of exposure.

On top of running the bank, Mr. Pandit and company devote a lot of their time to performing financial triage.

“I wish I could wave a magic wand and make our legacy positions go away,” says Chief Financial Officer Gary Crittenden. “But we control only the things we can control. Unemployment, the economy — those are things we have no control over.”

Citi does enjoy unequaled leadership abroad. Last year, it made about half its revenue in overseas markets, including Poland, Japan and Brazil. With $25 billion in federal bailout money safely in its coffers, the company will also get another chance to snap up an even weaker rival or two on the cheap.

The company received the ultimate compliment when Wall Street's dominant power, Goldman Sachs, recently approached Citi about a merger. Mr. Crittenden plans to plow his federal funds into such promising businesses as transaction services, consumer banking and wealth management.

Such steps would mark a welcome contrast to Citi's recent retreats. The bank has even scaled back its basic lending business. In the third quarter, its corporate loan portfolio shrunk by 15% year-over-year. J.P. Morgan fattened its commercial loan book by 18% and BofA by 23% in the same period.

“What's needed is a little prudent courage,” says Michael Peterson, an analyst at Pzena Investment Management, which holds 42 million Citigroup shares. “Citi has an opportunity to write profitable business.”

But that is hard to do amid Citi's contraction. Almost 23,000 people have been sacked this year — 6% of its total workforce — and investors estimate another 30,000 need to go.

Additionally, Mr. Pandit is shedding assets, including the banking business founded in Germany in 1926. Next to go could be Primerica. Mr. Crittenden will say only that Citi wants to dispose of $350 billion in assets over the next couple of years. Perhaps the biggest change at Citi is adjusting to life as an also-ran.

“Getting to the No. 1 or 2 slot is something that can only be thought about in good times,” says Peter Kovalski, a portfolio manager at Alpine Woods Investments, which owns Citi shares. “It's all about survival now.”

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