THE PORTFOLIO MANAGER at one of the world’s largest institutional investors, which owns big slugs of Citi’s stock and bonds, momentarily interrupts his analysis of the bank that has been among the worst hit by the crisis. "I saw Vikram Pandit at the airport the other day," he says. So he’s doing a round of investor meetings, Euromoney assumes. "No, Vikram was just standing on line... at USAir."
How the mighty are fallen. The chief executive of once the world’s mightiest bank, whose senior executives had the run of a fleet of corporate jets to take them fishing or hastily transport forgotten laser pens, now queues up to fly cattle class on the twice-bankrupt US airline that regularly ranks last in customer satisfaction surveys. Well, good for him, suggests Euromoney.
"I don’t think he has much of a choice," the fund manager says.
It might be as well for Pandit that the investor was hurrying for his own flight that day. If he could have asked the Citi chief executive one question, it would have been this. "Is he just letting the air out of the balloon slowly and is Citi basically in run-off? That’s what it looks like. Parts of it may be doing well, but is it likely to continue to exist for much longer in anything like its present form? The challenge for Citi has been either to create a new model and manage it much differently and better than in the past... or just to break it up completely."
Pandit is given very little credit, it seems, for managing a turnaround at Citi, even though there is plenty of evidence that this is now well on track, after $45 billion of markdowns and losses and $50 billion in capital raised.
Pandit, while waiting for his seat row number to be called, could have told the fund manager that he is doing both things. He split the firm in two at the start of this year. Citi Holdings contains businesses deemed no longer essential to the bank’s future and held for rundown or sale. These include the special asset pool of problem exposures, many now aggressively marked down; the remnants of the Smith Barney brokerage, now held in a joint venture with Morgan Stanley; the CitiFinancial consumer loan business; North American private label credit cards that Citi manages for third-party stores; and Primerica Financial Services, which sells insurance as well as CitiFinancial products and which last month filed for an initial public offering.
From their peak in the third quarter of 2008, assets in Citi Holdings have come down by 20%, from $775 billion to $617 billion.
Set against this, and still overshadowed rather by all the problem businesses and assets, are the keepers, held now in a unit called Citicorp. These comprise regional consumer and commercial banking, where Citi is particularly strong outside the US; credit cards branded under its own name; and what is now called the Institutional Clients Group, which includes the global markets and investment bank and Citi’s industry-leading global transaction services (GTS) group.
Some investors appear to have noticed that the changes are having an effect. In November, it was reported that leading hedge fund manager John Paulson had sold out of his holdings of Goldman Sachs and switched into Citi stock.
From mindshare to market share
Ensuring that these Institutional Clients Group businesses are managed differently and better than in the past is the responsibility of John Havens, chief executive of ICG and a former colleague of Pandit’s from their days at Morgan Stanley.
It’s immediately clear that the people running the global investment bank now see themselves operating an entirely new business model, even if they struggle to express this profound change in anything other than clichés.
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"Mindshare will create market share, not the other way around. We’ve gone from a firm focused on being the biggest to one focused on being the best. This organization will no longer base itself on revenue but rather on net income"
John Havens, Citi |
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They tell Euromoney that they want to be very good at providing more select products and services for fewer clients, rather than, as in the past, doing everything for everyone and not worrying if they did so in a mediocre way. "Mindshare will create market share," says Havens, "not the other way around. We’ve gone from a firm focused on being the biggest to one focused on being the best. This organization will no longer base itself on revenue but rather on net income. We are focused less on client acquisition, more on client relationship management and on the quality of relationships rather than the number." And he just can’t help himself from uttering the most redundant cliché of all. "This is now a much more client-centric firm." So, that’s Citi and everyone else on the Street as well, then.
But behind all the clichés, something radical has been happening and competitors that have grown used to dismissing Citi – "we just don’t see them at all anymore," one head of equity capital markets tells Euromoney two hours before the meeting with Havens – might be well advised to watch out.
The firm has drastically cut staff – total ICG headcount is down from 31,000 to 22,700, but turnover has been much higher at from 30% to 40% in many businesses. It has also cut the number of corporate and institutional clients with which it seeks to do business. These have been cut from more than 20,000 to closer to 4,000 and the firm has segmented those left on the list carefully into what it calls platinum, core, opportunistic and run-down. It is much more thoughtful and disciplined in its allocation of capital to doing business with them.
Financial sponsors, for example, to which it used to provide leveraged loans and lines of credit to support other activities, are no longer even referred to as clients. They are now relegated to mere counterparties.
