After Pandit, a smaller Citi could get smaller yet

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But the appeal of the one-stop shop, though not dead, has lost its luster since the financial crisis. Many banks, Citi included, were so sprawling, they didn’t even know the risks they had assumed.

As the housing market imploded, Citi lost $32 billion in 2008, according to FactSet, a financial data provider. Nearing collapse, the bank took $45 billion in government money.

The government converted $25 billion into an ownership stake, which it sold in December 2010 for a $12 billion profit. Citigroup had repaid the other $20 billion in December 2009.

In a conference call late Tuesday with analysts who admitted they were puzzled by Pandit’s sudden departure, O’Neill would say only that the CEO submitted his resignation and the board accepted.

The New York Times and The Wall Street Journal reported that Pandit was essentially ousted by the board after the shareholder vote on his pay, the failure to pass the Fed’s standards for raising the dividend, and a writedown of Citigroup’s stake in a joint venture with Morgan Stanley.

O’Neill gave few details about how the bank may change after Pandit. But he did note that it will be “extraordinarily focused on our expense level.”

Some analysts speculated the bank may place less emphasis on Wall Street trading and helping companies sell stocks and bonds to the public, the so-called investment banking in which Pandit had expertise. The business is volatile, with blockbuster profits occasionally followed by big losses.

Instead, the focus could shift to commercial banking, what Daniel Alpert, managing partner of Westwood Capital, calls the “dull and boring” businesses of lending to companies and consumers.

Dick Bove, a bank analyst at Rochdale Securities, thinks Citi will not only emphasize commercial banking, but will shift focus more overseas where the bank faces fewer rivals and could charge higher interest rates.

“If you look at domestic commercial banking, you have lower interest rates, you have higher losses, you have regulation and a high degree of competition,” he said. “If you go overseas, you don’t have any of those. You have tremendous growth.”

Citi manages 200 million accounts with customers in 160 countries.

Corbat also spoke to analysts on the conference call but, as was the case with O’Neill, gave little indication how Citi might change. Corbat has worked at Citi and its predecessors since he graduated from Harvard in 1983.

Pandit’s resignation came a day after the bank announced what many analysts had hailed as terrific earnings for the third quarter.

“It feels very abrupt to us,” one analyst, Mike Mayo of CLSA, said on the conference call. “We’re all scratching our heads, and thinking, ‘What just happened?’”

O’Neill replied, “What happened is Vikram submitted his resignation.”

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