Citigroup as Barometer and Business Model
In their picking and choosing among banking companies, and especially in their backing of Citigroup, stock market investors are making a forecast for the national economy and indicating the kind of long-term vision they admire in a company.
Citigroup, the financial-services conglomerate that was formed in the 1998 merger of Citicorp and Travelers Group, had almost $10 billion in net income last year from worldwide banking, insurance, investment banking and brokerage operations, and the largest credit card business in the United States.
Its stock has risen 63% in the last year, says analyst Ron Mandle of the Sanford C. Bernstein research firm in New York, “because it has a worldwide consumer business that other banks don’t have.”
Other large banking companies have consumer businesses and international operations too. Yet they have not impressed investors lately. Bank of America stock has fallen nearly 30% in the last year despite higher earnings. Bank One and First Union have been hit by declines of more than 40%.
Banks recognized for their global operations, such as Chase Manhattan and J.P. Morgan, have fared better with investors, but still don’t get the respect paid to Citigroup. Why not?
A couple of reasons. One is that today’s Bank of America, the result of the 1998 acquisition of the old California bank by Charlotte, N.C.-based NationsBank, is an example of an outdated consolidation model. The idea behind the B of A acquisition--and behind other bank mergers such as Columbus, Ohio-based Bank One with First Chicago and Charlotte-based First Union with Philadelphia’s Core States Financial--was that pushing banks together and cutting costs by laying off employees and closing branches would lead to a new, lean profit machine.
But mergers produced problems: Cost cutting angered and drove away customers, and the combinations did not create companies with “sustainable” growth in revenues and profits, analysts say.
Often, too, acquired banks have more problems than the acquirers bargain for, says Robert Smith, who was the chairman of Security Pacific Bank when BofA acquired it in 1992 and is author of “Dead Bank Walking,” a new book on that buyout.
Furthermore, investors today see problems ahead for domestic banks because the Federal Reserve, after seven years of U.S. economic expansion, has been tightening credit. As borrowers encounter difficulties, banks will see more loan losses. So investors are shying away from most bank stocks.
But Citigroup, so far, stands apart. Why? Several reasons, but the main one is investor confidence in its leadership and vision.
In the next five years or so, that confidence rests with co-Chairman Sanford Weill, the skilled financier who in the last decade melded Travelers and Aetna insurance, Salomon Bros. investment banking, Smith Barney brokerage and several other firms into a financial services giant. Wall Street trusts Weill, now 67, to keep bringing in earnings gains, says banking analyst David Hilder of Morgan Stanley.
And next to Weill there is co-Chairman John Reed, who has led Citicorp--the U.S.’ largest banking organization--since 1984 and played a key role in the decades before that in building its consumer banking franchises in 57 countries and in introducing the computer power that enables the business to function.
Reed, now 60, was the protege of Walter Wriston, who led Citi from 1967 to ’84. Wriston, now 80 and retired, foresaw what he called “the digitization of money”--the swift flows of electronic money transfers around the world--which has since reached $1 trillion a day.
To Wriston and Reed, however, global business didn’t mean focusing on multinational corporate accounts, but on the rise in all countries of middle-class consumers, with needs for checking accounts, credit cards, mortgages and investments.
“Citi didn’t just acquire other companies. It used intellectual power to think concepts through, then created new lines of business,” says an admiring banker.
And it persevered. Wriston and Reed took huge losses in some years of the 1970s and ‘80s to computerize operations and build up the consumer businesses. It took losses in overseas markets in the 1980s, but it stayed around to build up its business when other U.S. banks--and banks of other countries--retreated to their home bases.
Perseverance paid off. Consumer operations in Latin America and the Asia Pacific region will contribute most of Citigroup’s income growth in the next four years, predicts analyst Mandle.
In fact, Citigroup today, with capabilities in insurance and investment management, is no longer compared to other banks but to firms equally ambitious in global finance. In insurance and investment of the world’s growing retirement savings, those firms include American International Group, Allianz Insurance of Germany, Axa Insurance Group of France. Also Merrill Lynch and American Express, Deutsche Bank and the investment banking firms Morgan Stanley and Goldman Sachs.
To better compete in the European corporate restructuring market, Citigroup last week bid $2.2 billion to acquire Schroders, a London-based investment bank.
And last year Citi made a high-profile appointment when it hired former U.S. Treasury Secretary Robert Rubin--who once headed Goldman Sachs--to be chairman of its executive committee. Rubin, now 61, clearly will be part of the transition to new leadership and new business for Citi.
But Citigroup is now a giant organization, with about 174,000 employees and more than $60 billion in annual revenues from at least half a dozen major financial businesses. In the future, can it be as innovative, adaptive and combative as Citicorp and Travelers were in the years of their ascendance?
That’s a good question, of course. In one new area of finance--online, or e-banking--Citigroup is paying its dues. Last year it recorded a $172-million net loss in e-banking, in which it has invested $400 million to date.
Will the company succeed in Internet business? Perhaps. The only thing one can predict for certain is that it will invest a lot more money and effort, and that it will persevere. And, after all, that’s really what investors have always liked about Citi--and evidently like about it today.
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Divided Sentiments
Citigroup’s stock price rose sharply last year as the prices of most bank stocks declined or made small gains at best. The divide reflected investor enthusiasm for Citi’s global spread and investor fears of rising interest rates’ effect on domestic banks.
How Other Banking Companies Fared
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Company Ticker symbol 1/21/99 price 1/21/00 price J.P. Morgan JPM $105.61 $117.63 Wells Fargo WFC 36.78 36.62 Chase Manhattan CMB 80.38 72.94 Bank of America BAC 62.84 47.08 First Union FTU 56.80 32.81 Bank One ONE 53.36 29.38
Company % change J.P. Morgan +11.4% Wells Fargo --0.4 Chase Manhattan --9.2 Bank of America --27.3 First Union --42.2 Bank One --44.9
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Source: Bridge News
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How Citigroup Makes Money
Citigroup, the result of the 1998 merger of Citicorp and Travelers Group--a finance conglomerate that includes Travelers life insurance, Aetna property insurance and Salomon Smith Barney investment banking and brokerage-- is spread in many directions, functionally and geographically. The company’s five main lines of business and how much they contributed to 1999 net income:
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Source: Company reports
