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AmericasMarch 5 2007

CITI’S BIG SHAKE UP

Citigroup president and CEO Chuck Prince could enter the history books if he succeeds in the radical restructure he is planning for the world’s largest bank. Brian Caplen reports.
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Quietly and without too much fanfare, Citigroup president and CEO Chuck Prince is embarking on a radical restructuring of the bank that could yet give him a top place in US corporate history alongside such luminaries as Jack Welch and Lee Iacocca.

While the press and the analysts are concerned with the comings and goings of high-level executives, an indifferent share price performance and problems in Japan, Mr Prince is focused on a radical restructuring that, given Citi’s position as the world’s largest bank and one of the US’s leading corporations, could stand alongside the biggest corporate overhauls ever seen.

His plans include stripping out several layers of management worldwide, and knocking together the middle and back offices across the mainstay US consumer business and placing it on a common technology platform. The bank that is infamous for its huge product silos, and the inevitable internal miscommunications that result, is eventually going to operate as an integrated joined-up whole – that is if Mr Prince can realise his vision.

“Historically, the US consumer business ran as separate silos, whether it was with advertising, which is a small thing, or technology, which is a big thing,” said Mr Prince in an interview with The Banker at the World Economic Forum annual meeting in Davos, Switzerland, in January. “We are bringing it together so that it’s no longer a silo-based business, it’s a one Citi kind of business.

Avoiding distractions

In reference to recent criticisms of his leadership style, Mr Prince says: “It’s important not to be distracted. Leading a company of this size needs enormous focus. It’s important to have short, medium and long-term plans and not to be diverted from those plans by temporary noise.”

The noise that Mr Prince refers to was at fever pitch as he held back-to-back meetings with CEOs and heads of state at Davos. The previous weekend, he had forced out from the bank Todd Thompson, boss of wealth management, for excessive spending that was alleged to have included installing a wood-burning fire in his penthouse Times Square office – dubbed by Citi insiders as the “Todd Mahal” – and $5m sponsorship of a new television programme that was set to be hosted (but will no longer be) by CNBC’s anchor Maria Bartiromo. Before Mr Thompson’s departure some analysts had identified him as a future CEO.

On the critical Thursday of the high-powered networking event in the Swiss alps, the Wall Street Journal ran a two-page feature on the hiatus, complete with photos of Mr Prince, Ms Bartiromo and actor Robert Redford, who was also linked to the TV programme. It reported in great detail on the friendship between financial reporter Ms Bartiromo, known due to her journalistic interests as the “money honey”, and Mr Thompson. CNBC spokespeople defended Ms Bartiromo and said that she had not violated any of the channel’s ethical standards.

The noise continued into the weekend with the Financial Times running a profile of Mr Prince in its Saturday edition under the headline “A troubleshooter under fire”. The article stated that opinion was divided over whether Mr Prince’s tough actions had strengthened his position or left him looking vulnerable. In moving highly regarded CFO Sallie Krawcheck to wealth management to replace the departing Mr Thompson, Citi was suddenly in the market for a new CFO, leading to criticisms that the management talent at the top of the bank had grown too thin under Mr Prince. The WSJ quoted one Citi shareholder, Jerry Nemiroff, as saying: “He is certainly not the right person for the job. You can see the results.”

Amid all this hullabaloo, Mr Prince sat down to talk about his business plans with The Banker in a small, plain meeting room on the fourth floor of the Davos congress centre. “We have three big jobs in 2007,” he said. “Job one is to grow the US consumer business [34% of the total revenue]… job two is to diversify [further] away from the US. As the world’s most global financial institution, we should not have 40% of our business in one market. But I want to diversify away from the US, not by shrinking US consumer but by growing the other part. And job three is to make structural changes to the company so we lower our expense base and make the company run better.”

Enormous task

Mr Prince’s ability to communicate free from MBA management speak, and boil down the strategy of a huge multinational institution to “three big jobs” may lead commentators to underestimate the enormity of what is being attempted. In 2006, the bank’s costs rose by 15% while revenues increased by only 7%, and the quality of earnings was not considered high because of the benign, and presumably temporary, credit environment as well as their enhancement by one-off tax benefits.

To get revenues up, Mr Prince has to grow the US consumer business, which advanced a paltry 2% in 2006 and, because it operates in a mature and highly competitive market, this provides him with a huge challenge. The other side of the equation is cutting costs, and Mr Prince has made it clear that he is not talking about magazine subscriptions and black cars but about a full-scale restructuring.

Restructuring a company the scale of Citigroup is equivalent to reorganising an entire small country, which is perhaps why analysts have missed the potential upside in what is proposed as well as the huge risks involved. Reassigning or removing middle management is fraught with difficulties and invites the possibility of a considerable backlash while much of the proposed change is also bound up with large-scale IT projects, an area that has seen some spectacular failures over the past few years within both governments and corporations.

Only by appreciating the scale and complexity of Citigroup can observers realise that success could promote Mr Prince to the hall of corporate fame (and forever take him out of the shadow of his predecessor Sandy Weill, who built the current Citigroup through a series of daring acquisitions), whereas failure will prove to his critics that he was indeed ‘just a lawyer filling in until the real operating people take over’, as some critics have described him.

Consider, for example, that Citigroup’s annual revenues are $90bn, making it a little smaller than New Zealand but about three times the size of either Uruguay or Luxembourg. With 330,000 employees it has more people than Iceland, and its 200 million customer accounts mean that roughly one in 32 of the world’s population has a Citi account (accepting that some have more than one, which skews the figures). Citi has offices in more than 100 countries and could operate its own mini-United Nations if it wanted to. As critically, it is a universal bank spread across all major aspects of the banking business from corporate and investment banking to consumer finance, retail and credit cards to wealth management and alternative investments. In 2006, it was top or near the top of the league tables in debt underwriting, mergers and acquisitions and equities at the same time as it was the US’s third largest issuer of credit cards (it once held first position).

Small wonder that after a period of break-neck growth under Mr Weill (that brought together the franchises of the Travellers insurance group, the investment bank Salomon Brothers and the brokerage Smith Barney), Mr Prince inherited a sprawling empire with vast disconnects and an ethics issue related to the investigations of investment banks by then New York attorney general Eliot Spitzer. Mr Spitzer criticised the banks for failing to separate their research for investors from their corporate advisory and underwriting business. By the time Mr Prince took over the CEO role in October 2003, the matter had been settled and the research function reorganised but, all the same, he felt it necessary to make one of his first moves the introduction of The Five Point Plan to lay down basic principles for doing business.

Strategy transition

Mr Prince, who controversially – at least to non-US observers – took on the president or chairman’s mantle in 2006, also switched the strategy from growth by large-scale acquisition to a combination of organic growth and bolt-on acquisitions. It is this transition in strategy that has caused earnings growth to slow and led to frustration among shareholders who are accustomed to massive upsizing of the operation.

“The reality is that we are going through a transition from a business that was largely driven by acquisition to one that is largely driven by organic growth,” he says. “For a long time, most of the growth was driven by acquisitions and then for two reasons – one long term and one short term – that model didn’t work any more.

“The long-term reason, that is still with us today, is that it was too successful. We got so big that it’s no longer possible to increase our size through acquisition. We have $90bn of revenue and $21bn of profit so even to grow by 10% through acquisition would be impossible. The numbers are just too big.

“When I first took over, I joked that the only way we could do it was if we bought Canada. There aren’t enough big things to buy. We would have to buy so many different things and the execution risk would just carry on getting worse the more we bought.”

Given this background, there was no choice but to take the organic growth route and to develop marketing and product design skills that were lacking in large parts of Citigroup because of the previous overriding emphasis on large acquisitions.

The other reason for Mr Prince’s new strategy was that the US regulatory authorities prohibited Citi from undertaking transformational acquisitions for nearly two years until the middle of last year. That meant focusing inwards and taking on board the fact that the US consumer business was not growing.

“If 40% of your business isn’t growing, you are not a growth company. And I have said this very publicly: if we can’t get our US consumer business to grow, Citi is not a growth company. It’s as simple as that.” Mr Prince says that he is “cautiously optimistic” that the US consumer business has turned the corner but he is not yet declaring victory.

Expense czar in post

To really motor ahead, there has to be a radical restructuring. In December, Robert Druskin, who chairs corporate and investment banking (CIB), was appointed chief operating officer – a post left void since Robert Willumstad quit in July 2005 – with a mandate to cut costs. Already he has been dubbed the ‘expense czar’.

At an investors’ day at the end of January at New York’s landmark Waldorf Astoria hotel, Mr Prince declared that he and Mr Druskin go back “about 100 years together” and work so closely that they have a habit of finishing each other’s sentences.

As examples of the type of major structural issues that Mr Druskin will be looking at, Mr Prince cites management layers in CIB and product silos in US consumer banking.

On the corporate side, he explains, there is a headquarters staff at his office at 399 Park Avenue, New York, and another one down the road in Greenwich Street, another layer in Hong Kong and London and still further layers in the countries. “You finally get to someone who is dealing with the customer and that poor soul has to carry around with him or her all these headquarters’ people.”

While not being drawn on the number of jobs that could be taken out or the size of the cost reduction – Bloomberg quoted an anonymous Citi executive as putting it at about $1bn – Mr Prince says: “This is not incremental, this is structural. It has to be big enough to have an impact. We are going to have to think about how we staff the place. That means we are going to put people closer to the client.” In early February, the bank announced a reshuffle in fixed income, placing more than half of 21 top executives outside of the US.

On the consumer side, Mr Druskin will look at the silo problem. “Outside of the US we tend to run in an integrated way but inside the US, for historical reasons, it’s run as product silos,” says Mr Prince. “Each of these huge businesses [credit cards, consumer finance, retail, mortgages] is fully staffed as if it were a separate company. It has a fully staffed middle and back office. Why do we need separate back and middle offices for consumer facing products in the same country?”

Technology rationalisation

Bringing some of these US businesses together on the same technology platform is another huge challenge. In some cases, there is no common technology in a single product yet alone between products. The aim is to have one in place for credit cards by the end of the year, for consumer finance in 2008, for retail banking in 2009 and a common consumer facing platform by the end of 2010. Citi and Smith Barney platforms will be connected by the end of the second quarter.

In response to a question at the investors’ day, Mr Prince said that the US businesses were so large that the only way to grow was through cross-selling and better service, but currently the technology platform ruled that out.

“We are going to say to our Smith Barney customers [when the technology is in place]: ‘You already have your investment account with us, would you like to have a cheque account with us, would you like to have your mortgage with us? We’ll do all the work to transfer it, and if you do that we’ll give you American Airlines’ or somebody’s rewards points across all our products. If you have three products and go to four you get the magic number that means you never have to call the 1-800 number again. You go right to a live operator’.”

Business graduation

Other ways of graduating the business are by expanding the credit card area into the corporate and leisure areas, expanding distribution through such ventures as branding ATMs in 7-Eleven stores, expanding the product set sold through consumer finance branches and leveraging call centres to sell as well as provide service.

The best prospects for the consumer business are internationally, and 1236 branches have been opened in the past two years – that’s a rate of two a day – with 951 openings outside the US and 285 inside the US.

However, in 2006 the international consumer finance business was hit by problems and scaled back in Japan when the government capped interest rates. In 2005, Japanese consumer finance – as opposed to general consumer business – accounted for almost 80% of Citi’s international consumer finance net income so it was a major blow. “If you can’t make money with 20% interest rates, something is wrong,” commented one analyst.

But, in fighting form, Citi announced in January that it planned to double its retail branches, grow corporate banking and was setting up a holding company to unify its operations in Japan. And, since it got back the freedom to acquire, it has been busy internationally, leading a consortium to buy 85% of Guangdong Development Bank in China, taking a 20% stake in Turkey’s Akbank, buying Grupo Cuscatlán and Financiero Uno in Central America, and wealth adviser Quilter and internet bank Egg in the UK. In the US, Citi bought the ABN AMRO Mortgage Group.

The Guangdong acquisition raised eyebrows because it is a development bank in poor condition, but Mr Prince highlights the deal as the kind of long-range planning that the bank must do if it is to negotiate the current transition successfully. He accepts that it will require a lot of work and a long-term approach to make it successful.

“Look at us today. In our securities business, we are playing catch-up because we are not sufficiently strong in commodities, but if we had made a commitment to commodities 10 years ago, instead of making $100m, we would be making $2bn. We didn’t do that. We missed that 10 years ago. China is an example of something I am not going to miss.

“I want our investors, our clients and our employees to look back and say ‘Prince was smart, he made a good investment here’.”

They may also say that eventually about restructuring and sorting out the technology, too. But for now analysts focused on the next quarter are going to make life difficult for Mr Prince. Only when Harvard Business School professors get round to their examination– and providing that it works – can Mr Prince expect to receive his just recognition.

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TABLES:Citigroup’s approach to growth2006 Financial Recap

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