By Mara Der Hovanesian
It took CEOs with a big vision and a brash personality to build the banking empires that today are Citigroup (C ), Bank of America (BAC ), and Wachovia (WB ). Sandy Weill, Hugh McColl, and Edward E. Crutchfield Jr., respectively, built those banks over more than a decade of rampant acquisitions and savvy dealmaking.
"In each case, you had a dominant figure whose primary focus was building very large companies," says analyst Richard Bove of Punk, Ziegel & Co. "In each case, neither had interest in execution of operating strategies. What they wanted from their businesses were free cash flows so they could go out and make more acquisitions."
That era has ended, and a new and very different one is under way. To survive, the successors of these legendary leaders are running the nation's largest banks with less fanfare and more attention to discipline and detail. It's a back-to-basics strategy that has everybody weeding through what's on the books and figuring out what to keep and what to sell.
This new generation of bank CEOs -- Citi's Charles "Chuck" Prince, Kenneth Lewis of BoA, and G. Kennedy Thompson of Wachovia -- say they hope to create their legacies around running better businesses and improving corporate culture.
They're focusing more on expanding businesses -- such as credit cards and retail banking -- rather than holding steadfastly to the classic supermarket model that seeks to provide all products to all customers. "These new guys have a lot of chess pieces on the board that have to work strategically and efficiently together," says analyst David Hendler of New York researcher CreditSights. "Today, as a CEO, you are valued more as an operational guy than as an M&A guy."
This is especially true of Citi. Its stock hasn't gotten any traction for years, hovering mostly below $50 after skyrocketing under the early days of Weill. The future, according to the company, is in cleaning up its act and also going more global.
Though it's already an international powerhouse, many say Citi's best prospects are in fast-growth markets. Betsy Graseck, an analyst with Morgan Stanley, pegs the stock at $56 per share. She sees the most opportunity in five key markets -- Brazil, China, India, Korea, and Mexico -- which she says represents a "significant high return on invested capital...which could add more than $4 in value per share." But it can't be business as usual in these overseas markets.
And Prince or his rivals Lewis and Thompson will still do a deal if the right opportunity presents itself. Case in point: The market was abuzz with talk on June 13 that both Wachovia and Bank of America are in the market for Wall Street firm Morgan Stanley (MWD ), beset with internal management problems the past year or so (see BW Online, 6/13/05, "Morgan Stanley CEO Purcell to Retire"). What the banks might want is Morgan's Discover card, brokerage, and investment-banking businesses.
Lewis also has his sights set on building a more global franchise at Bank of America. And Citi clearly intends to become a larger national presence in retail banking (although it's temporarily restricted from doing large-scale deals by regulators concerned that the bank has gotten too big and out of control).
In this new era, CEOs cut away at businesses they don't like, fire people associated with the old boss, and plot new strategies for future organic growth that isn't dependent on acquisitions, says Bove. In Citi's case, Sanford I. Bernstein & Co. analyst Howard Mason says the bank has become a "capital-allocation story. It's all about how they deploy their capital in order to maximize their organic earnings growth," he says. "They've got a much more disciplined process for doing that now."
For the first year as Citigroup's chief executive, for example, Prince kept a low, behind-the-scenes profile. How could you blame him? Weill was a larger-than-life figure who, as chairman, kept an office nearby and whose presence was still very much a part of the day-to-day picture. By Mara Der Hovanesian
Yet the world's largest financial outfit and most profitable public company took huge hits to its reputation as scandals erupted all over the world. Last summer, the British Financial Services Authority launched a formal investigation into improper bond trading. In the fall, Japan's Finance Ministry banned Citi from participating in its government bond auctions and the Financial Services Agency closed its private bank in the country (see BW, 2/14/05, "Damage Control in Japan").
Prince says he's eager to get these and other scandals behind him. In the first quarter, he launched a plan to improve the bank's "values, priorities, and internal controls" in an attempt to clean up the cowboy image that has plagued Citi for years. Plus, he has stepped up legal settlements to get the bank's name out of the headlines: On June 1, Citi agreed to pay $208 million to settle regulators' claims it pocketed fees that should have been passed on to its mutual funds. The settlement with the Securities & Exchange Commission ends part of a probe that Citigroup disclosed in 2003.
Ten days later, Citi agreed to pay $2 billion to a group of investors to settle a class action regarding Enron and the bank's alleged complicity with the failed energy giant's financial shenanigans. Citi, which faced charges that it helped Enron hide debts worth billions of dollars, said it would tap the $6.7 billion in legal reserves it had stashed away last year. Part of that was used for a $2.58 billion payout last year for an investors' class action regarding failed telecom giant WorldCom.
SHOPPING FOR STABILITY.
Though pending cases regarding Parmalat, an Italian dairy-foods giant, and cable provider Adelphia Communications (ADELQ ) are still unresolved, analysts are getting comfortable with the legal outlook: "It seems that the lion's share of the pain should be in the bag," according to CreditSights' Hendler, who met with Citi executives on the same day of the settlement. "That's not to say that more ghosts of Enron/WorldCom past could not emerge, but partly due to Prince's aggressive settlement strategy, the more damaging claims have for the most part been resolved."
Prince is also busily reassessing the bank's different lines of business. In July, Citi will complete the sale of its Travelers Life & Annuity unit to MetLife (MET ) for $11.5 billion. Speculation is that Citi will also consider shedding its mutual-fund unit and focus on building its asset-management and wealth businesses through its brokerage, Smith Barney.
Prince has said that he would rather invest money in stable businesses where he can reap the benefits of scale. And indeed, on June 2, Citi announced it would buy $6.6 billion in the credit-card receivables portfolios of Federated (FD ) and May (MAY ) department stores, following the merger of the two retailers.
Going forward, Prince will have to ensure that his lieutenants are above reproach. He still has to convince some that he's able to run a financial concern as large as Citigroup better without incident. It won't be easy.
On June 6, Citi said tapes containing sensitive information on some 3.9 million customers had been lost by UPS (UPS ) while enroute to a credit bureau. Wachovia and BofA made similar announcements in May when the two banks said financial records allegedly were stolen by bank employees seeking to profit on a black market for personal data.
Still, investors may be more willing to recognize that the financial giant deserves a higher multiple if Prince can execute his strategy, put Citi's legal problems behind it, and use its global heft to prosper in this new era.
Der Hovanesian is Finance & Banking editor for BusinessWeek in New York
Edited by Beth Belton