Citigroup slips in retail banking

The U.S. is in the middle of a retail banking war, but Citigroup Inc., one of the biggest American banks, has fallen behind.

Take the corner of 23rd Street and 6th Avenue in New York.

On the northeast corner is a branch of Chase, with new wood paneling and sleek neon lighting. Half a block away is a North Fork branch, with bold colors, gentle lighting and zebra-skin-patterned chairs in a waiting area.

On the northwest corner is a Citibank, with bland, neutral carpet, harsh lighting and an institutional feel.

Citigroup competitors led by Bank of America Corp. and JPMorgan Chase & Co. have built, bought and refurbished branches to attract retail deposits away from regional banks such as North Fork Bank, a unit of Capital One Financial Corp.

Although Citigroup has tripled its number of branches in recent years, it is still behind, analysts say. Its branches are often not as attractive, and perhaps more important, it just doesn’t have as many: about 972 in the U.S., about one-sixth the number Bank of America has.

“They underinvested for too long,” said Helene Ocampo, a financial services analyst at Sentinel Asset Management in Montpelier, Vt.

“Citigroup needs a far better network than they have now,” she said.

That underinvestment is a legacy of former Chief Executive Sanford Weill, a Wall Street legend who expanded aggressively in investment banking, insurance and other areas instead of focusing on branches.

Charles Prince, who succeeded Weill in 2003, acknowledges that the branch network needs work. And he sees a solution, which he hopes also will help bolster New York-based Citigroup’s consumer revenue: turning its Smith Barney brokerages into surrogate banks that gather deposits and offer more banking products. Banks will in turn offer more brokerage products.

“We want to offer one-stop service,” said Steven Freiberg, CEO of Citigroup’s North American consumer operations, in an interview this month.

Getting customers to embrace that idea is one reason Citigroup announced Feb. 13 that it was re-branding itself as Citi and using that name for more of its businesses.

But integrating banking and brokerage is a tricky process, Ocampo said.

“Brokerage and banking products are very different, and it can be hard to sell both in the same place,” she said.

Invigorating the U.S. retail banking business is just one of the challenges facing Prince, after a year in which costs grew faster than revenue and profit.

Prince wants to boost revenue growth from the entire consumer division and from international customers, while keeping a lid on expense growth.

The company’s shares reflect its difficulties. Between the end of 2003 and 2006, they rose 15%, while Bank of America gained 33% and JPMorgan Chase 32%.

Analysts said it might take at least another year before Prince’s efforts start to take hold.

“Citigroup shares are an investment that has required more patience than you typically have,” said Mark Batty, a financial services analyst at PNC Wealth Management in Philadelphia.

The bank’s strong brand name and foreign operations, and a dividend yield of more than 4%, help compensate for the waiting, Batty said.

U.S. commercial banks built about 4,600 branches in the last three years, a 6% increase that raised the total to 81,319, according to the Federal Deposit Insurance Corp.

Citigroup grew faster, increasing its branch network 25% over two years and tripling it over five years.

But its 972 branches as of Dec. 31 are dwarfed by Bank of America’s 5,747 and even by the 1,156 branches at Fifth Third Bancorp Inc., whose asset base is barely one-twentieth as big.

Citigroup’s U.S. deposit base also is much smaller. The bank had about $233.6 billion of domestic interest- and noninterest-bearing deposits at the end of 2006. That compares with $598.3 billion at Bank of America and $470.6 billion at JPMorgan Chase.

Deposit funding is crucial for banks’ lending margins. Banks can obtain deposit money cheaply by offering low-yielding checking accounts, for example, instead of paying more to borrow in the corporate bond market.

Citigroup is working to boost its deposit base. In the second half of 2007, it will broaden a pilot program that built branches targeting Citi Smith Barney customers in Boston and Philadelphia, as it tries to boost the number of products it sells to brokerage clients and to put financial advisors in every Citibank branch in the U.S.

That process requires Citigroup to build computer systems that can handle both businesses, a process that has taken more than a year.

Technology should help streamline a process for which many ingredients are in place. Smith Barney branches already offer some bank products to clients. And Citibank branches have had their own separate group of brokers for years.

Citigroup plans to re-brand these advisors as Citi Smith Barney representatives and give them better access to data about the bank and brokerage assets of its customers.