After three years of grappling with angry regulators, sagging morale, stumbling financial results, and a stock stuck in neutral, Citigroup chief executive Charles O. Prince is ready to roll. He's revving up the world's largest financial company with a new growth plan.
The recent spate of high-level departures is a sign of the changing times. Prince is populating the bank's upper echelons with what he calls the "next generation of leaders," people ready to implement his vision for Citi. Now out of the long shadow cast by his predecessor, Sanford I. Weill, Prince is clearly moving away from a strategy that relied heavily on huge acquisitions for growth.
In an interview with BusinessWeek, Prince says he has renounced big deals until at least the end of next year or early 2007 -- a full year after the Federal Reserve's ban on Citi making any major acquisitions was expected to end. "I think that people have concerns that we are going to be forced to do a big deal and have all kinds of acquisition risk," he says. "If we can go as little as five or six quarters consecutively without headline issues, with good solid organic growth without having to do a big complicated deal, [then] we will see an important change in the sentiment about the stock." Citi shares are down 10.6% so far this year.
Prince's new growth strategy has four prongs: Invest heavily in the consumer businesses, capitalize on fast-growing international markets, build up the corporate investment bank, and restore Citi's battered reputation. "Everything we do should fit under one of those headings," he said.
The key to making Prince's plan work is restructuring consumer banking, Citi's most valuable real estate. Last year, it generated $47 billion in revenues and $12 billion in earnings, or about 55% of the bank's profits and more than either Wal-Mart Inc. or Microsoft. Yet its credit cards are losing market share, and consumer finance is lagging behind peers. Citi has about a third as many branches as Bank of America Corp., which is running a much smoother retail business.
As Prince sees it, Citi needs to reorganize the company from selling just products, and focus more on service, as do BofA and fast-growing upstarts such as Commerce Bancorp Inc. (CBH) of Cherry Hill, N.J. He says he'll spend big to develop Citi's brands by upping advertising budgets and by launching a richer rewards program so that the more Citi products customers use, the greater discounts or perks they get. And he'll also build branches from scratch, though acquisitions of small banks are also likely. Citi has only a 3.6% share of U.S. deposits, while BofA's 10% is at a Fed-imposed ceiling.
His plan to overhaul consumer banking put Prince on a collision course with Marjorie Magner, a 20-year vet of the bank, who announced on Aug. 23 that she would resign as head of the global consumer group and leave. Prince is splitting her bailiwick in two. He promoted longtimers Ajay Banga, 45, and Steven Freiberg, 48, as co-heads of the consumer group. Freiberg, CEO of Citi Cards, will oversee North America. Banga, president of retail banking, will run the group's international operations. Magner didn't respond to several requests for comment.
In Prince's view, foreign markets with plenty of growth potential need a different approach than mature U.S. and Canada markets. His top priorities are to invest more in retail banking in emerging markets like Poland, Turkey, and India, at least double Citi's credit-card volume worldwide, mostly in Southeast Asia and Latin America, and sell more investment products in Europe.
Prince is also busy streamlining the sprawling Citi empire. In recent months he has cut six operating units to four and sold off Citi's asset management and Travelers insurance units. To expedite strategic decisions he has created a 30-person operating committee, half the size of the management committee he inherited from Weill. And he's overhauling Citi's investment bank. Prince has made three acquisitions for undisclosed sums to beef up electronic trading for institutional clients, built a new distressed-debt group, and given equity and derivatives trading new technology and manpower.
Meantime, the clean-up of Citi's past transgressions continues. In June, the bank agreed to pay a total of more than $2.2 billion to settle allegations that it had overcharged mutual fund investors discounted fees, as well as a class action over its lending to Enron. Prince's campaign to improve the bank's "values, priorities, and internal controls" in order to wipe out any holdover rogue instincts from the old Citi culture is in full swing.
Some like what they see so far. "[Prince] is not making foolish acquisitions, and he seems to be very genuine about meeting the commitments he has to the Street," says James K. Schmidt, co-manager of the $2.3 billion John Hancock (FRBFX) Regional Bank Fund, which owns 1.3 million Citi shares.
Still, the recent hemorrhaging of top executives has made some on Wall Street nervous. In mid-July, Citi's No. 2, Robert Willumstad, resigned after 20 years at the bank. Even Weill got into an embarrassing imbroglio with Citi's board over an apparent effort to quit as chairman before next April's annual meeting as planned. He was mulling leaving earlier to launch a $5 billion private-equity fund. "Many of the original visionaries of Citi as we know it today are leaving," says research analyst David Hendler of CreditSights. "There was never any indication that these people were unhappy."
Prince insists that the management changes are not part of an orchestrated plot to oust the Weill regime. "There is kind of a natural evolutionary process where at some point if people have been here a long time, they go off and do something else," he says. "That's healthy for an organization."
Despite Prince's ambitious plans for the bank, he still believes in the concept of a one-stop-shopping bank that Weill pioneered. While the debate over the viability of that model rages on, Eugene Ludwig, a former comptroller of the currency, says there's more of a case for it than against. "It's hard to argue with the power and diversity of the Citi or JPMorgan Chase (JPM) or BofA balance sheet," he says. "You can make a lot of mistakes when you have that kind of powerful capital base be- hind you."
Since he became CEO, Prince has had Citi's huge clout at his disposal. But he has been too preoccupied with crisis management to use it. As those problems begin to ebb, the market is eager to see how well he can deploy Citi's power now that he's his own man.
By Mara Der Hovanesian in New York