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For Citi, This Prince Is a Charm

By Amey Stone Charles Prince, better known as "Chuck," was seen as a surprising choice for chief executive when he took the reins of Citigroup (C) from long-time CEO Sandy Weill in late 2003. After all, before his promotion, Prince was most often cited in the press as the organizer of Weill's annual "surprise" birthday parties.

Prince was a staid, hard-working, legal guy -- a loyal lieutenant to the legendary risk-taker Weill. At the start of Prince's tenure, it seemed that Weill would remain in control of the Citgroup empire behind the scenes, an idea many investors liked.

Fast forward a little over a year, and not only is Prince firmly in charge but it's clear that investors are happy that he's exerting his authority at the world's largest financial-services company. The stock, which closed at $48.56 on Jan. 27, is up about $6, or 12%, in the past three months, since Prince's definitive moves to change the culture of the bank. Prince had a tough act to follow, not just in the rollicking and ruthless Weill, but also in Weill's predecessors at the bank: the brainy John Reed, and fabled Walter Wriston, one of banking's greatest innovators, who died on Jan. 19 at age 85.

"WET NOODLE." "When Chuck took over, it disappointed me terribly," says Dick Bove, an analyst at Punk, Ziegel & Co. who has covered banking for 25 years. "He was not the kind of charismatic individual that has run Citibank before. I though he was a wet noodle." Now Bove has changed his mind. "I believe that noncharismatic Prince is going to be a more positive force at Citigroup than the other three charismatic CEOs going back to the 1960s."

Prince's calm-but-firm management style has proven to be just what Citigroup needs as the bank tries to tone down its aggressive, profit-driven culture while recovering from a slew of regulatory snarls and alleged ethical lapses. Prince's mandate from Day One has been to clear up the legal problems, and he has spent big bucks doing so. Yet, to some extent, as soon as he puts out one fire, another one seemingly flares nearby.

Last September, Citigroup was permanently banned from the private-banking business in Japan following a scandal regarding its dealings there. But Prince proved he could be tough and decisive, announcing in October the departure of three top executives who had oversight over those operations (BW Online, 10/20/04, "Citi: No Doubt About Who's in Charge").

Prince is currently dealing with a bond-trading scandal that erupted in London last August. On Jan. 24, German regulators announced they had found evidence of market manipulation. Charges against individuals involved in the trades may be filed.

NOW A TOP PICK. Despite these setbacks, the mammoth company is maintaining growth momentum. On Jan. 21, Citigroup reported that net income grew to $5.32 billion in the fourth quarter, a 12% increase over the same period in 2003. For the full 2004, it made a $17 billion profit, or $3.26 a share, despite taking a jaw-dropping $4.95 billion aftertax charge (95 cents a share) for settling a class action related to failed telecom WorldCom (MCIP) and increasing reserves to pay for other legal settlements.

Following the earnings announcement, Merill Lynch upgraded Citi's stock from neutral to buy, adding it to the firm's list of top picks. Analyst Guy Moszkowski emphasized its consistent 20% return on equity and "excellent capital discipline." With a 3.7% dividend yield (thanks to a 10% dividend hike announced with earnings) and a price-earnings ratio of 11 times the 2005 earnings, "we find the stock very attractively valued," Moszkowski wrote in a Jan. 21 research note.

Moszkowski told investors he felt comfortable upgrading the stock, despite the continued legal risk, because of Prince's attention to ethics and corporate governance. Prince is going beyond issuing orders from the corporate suite. He's also meeting personally with as many of Citi's employees as he can -- 35,000 in the fourth quarter alone. Moszkowski explained is his research note: "We think the likelihood of future transactions posing serious reputational risk on any great scale is now much lower."

DEAL DIET. When Prince says he has a goal of turning Citigroup into "the most respected global financial services company," (a statement in the earnings release), it's more than just puffery. His biggest challenge is improving the bank's standing. If he can, it should translate into a higher p-e for the stock, says Bove.

Prince has his hands full transforming Citigroup. But his methodical approach appears to be right for the post-Weill era. Not long after taking the helm, Prince announced that Citigroup, which was built into a massive dealmaking machine by Weill, wouldn't do any more epic mergers until it had rationalized all the companies acquired in prior years. "Prince is working his way slowly through each division, selling off the low-performing divisions and focusing on the stuff that's really good," says Bove. "It's going to take three to five years, but he's doing it."

What Prince may have lacked in glitz and chutzpah when he got the top job at Citi, he's quickly making up for with solid blocking and tackling. And investors may find bigger benefits in that unglamorous but productive strategy. Stone is a senior writer for BusinessWeek Online in New York

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