Thinking Locally At Citigroup

The global giant is an also-ran at home. How Steven Freiberg plans to change that

Like politics, all banking is local -- even for mighty Citigroup (C ). While Citi's $1.5 trillion in assets make it the world's second biggest bank, U.S. retail operations are hurting. Basically, Citi is being left in the dust by aggressive and expansion-minded rivals. Its 3.4% share of nationwide deposits is just over one-third of the acquisitive Bank of America Corp.'s (BAC ) 9.8% share, for example. Last year, that widening gap pushed Citi out of the catbird seat it has occupied for years as the world's largest bank as measured by deposits. And its revenues of about $15 billion from U.S. retail banking were flat in the first half, while BofA raked in a record $14 billion, up 23%.

Citi's domestic problems run deep. Most of its 34 million customers buy fewer products or services, such as a credit card, mortgage, or checking account, than clients at rivals like BofA or Wells Fargo & Co., (WFC ) which makes Citi less profitable. It's a lowly seventh in the giant mortgage and home-equity business, about one-third the size of market leader Washington Mutual (WM ). Citi's retail bank is limited in geographic reach, and U.S. credit-card account growth has stagnated. The result: a global institution that is essentially a New York bank at home, with 60% of its deposits coming from the region -- and one with a reputation for "below average" customer service, according to financial consultants A.T. Kearney. Says Merrill Lynch & Co. (MER ) bank analyst Guy Moszkowski: "They are very clearly getting upstaged in the U.S. If they don't find a way to grow faster, or if the business shrinks because of competition, that's a big problem."

The task of kicking up growth falls to Steven J. Freiberg. In August, Chief Executive Charles O. Prince picked him to head Citi's retail banking operations in the U.S. and Canada, newly carved out from the global bank. In the old days, Citi would have bought growth with a few big deals. But Freiberg doesn't have that option. The Federal Reserve, leery of Citi's series of worldwide regulatory run-ins since 2002, has banned the bank from making major acquisitions for now. "If we're going to grow, we can't rely mainly on the old acquisition model anymore. We are taking a much more focused view of organic growth," says Freiberg.

As he sees it, Citi has plenty of customers. He mainly needs them to buy more stuff. So Freiberg's first big push is to mine the bank's 120 million credit-card customers -- along with 18 million new ones annually -- for more business. If he can sell at least one bank product to one in 20 of them, he says, he can double the retail bank's profits. Also, Freiberg wants to step up marketing to professionals such as doctors and lawyers, as well as to small-business owners and CitiGold bank customers. These so-called mass affluent clients with at least $100,000 in assets are a potential goldmine. He figures that every new product they buy, say an auto loan or a mortgage, yields 12 times the profits of the first sale simply because the cost of recruiting new customers is so high.

Slow growth in deposits may crimp Freiberg's ambitions. Citi ranks seventh, behind BofA, Wachovia (WB ), JPMorgan Chase (JPM ), and Washington Mutual, in retail deposit growth for the last 12 months, according to SNL Financial in Charlottesville, Va.

This matters because deposits are the launch pad for more lucrative customer relationships. At BofA, which has the largest market share, more than half of its customers buy more than one product. Only one in five do so at Citi, according to Prudential Securities Inc. (PRU ) bank analyst Michael Mayo. Because the bank has underinvested in recruiting and training, customer service -- and so deposit growth -- has suffered. "Retail banking economics are overwhelmingly dominated by deposits," says James M. McCormick, president of First Manhattan Consulting Group in New York.


Freiberg has been in tight spots before. When he joined Citi's credit-card group in 1997, most Americans were charging up a storm on bank cards, but Citi's business had plunged 25% in a year. A 25-year Citi vet who often lands turnaround assignments, Freiberg slashed costs and built new models to manage credit risk. He kicked sales into gear with direct mail, pre-approved credit cards -- a marketing tactic pioneered by his group that now is standard industry practice. He also built the largest U.S. private-label card business by acquiring the portfolios of Federated Department Stores (FD ), Sears (SHLD ), and Home Depot (HD ). Last year, cards earned $4 billion, nearly a quarter of Citi's total profits and 10 times more than when Freiberg arrived.

Just six weeks into his new job, Freiberg has already made some big changes. He has restructured the group and created three positions to run distribution, technology, and franchise management. Ray Quinlan, a former executive vice-president at Citigroup Mergers & Acquisitions, now heads retail distribution. His mission: to weld Citi's 130,000 Primerica brokers, 2,200 consumer finance offices, and 884 retail bank branches into a cohesive sales operation. One of Citi's big problems has been that sales and support staff have been organized around products rather than customers. "It's pretty clear that Citi's various consumer businesses in the U.S. have not been integrated in a management or information sense," says Bear Stearns & Co. (BSC ) bank analyst David Hilder.


In the future, high-end customers will be more cosseted. The effort will be based on an existing rewards program, the ThankYou Network, that lets card and bank customers accumulate points to redeem for purchases at merchants such as Home Depot or Bed Bath & Beyond Inc. Freiberg plans to use technology to track these loyal customers and ply them with discounts and other incentives to buy extra Citi products and services. He's also introducing new cards. On Oct. 17, Citi planned to launch the annual- and late-fee-free Simplicity Card.

Freiberg's effort to attract and retain customers will extend to Citi retail and consumer finance branches as well. By the end of the year, Citi will have built 23 new branches, vs. just 22 in the prior seven years. Still, Freiberg must quicken his pace. Chase, for one, will have built 150 new branches nationwide by yearend. Citi will also have to train branch staff to develop stronger ties to customers. At Wells Fargo, which has done this for years, some 40% of all retail sales come through one of its 25,000 tellers. Wells says that helps it sell an industry leading average of four products to each customer. Says SNL Financial analyst Eric Reinford: "Citi is still playing catch-up to the retail boom of the 2000s that everyone else has been cashing in on."

The timing of Freiberg's push is tricky. Citi may be investing big in retail just as U.S. consumers' spending habits shift. The mortgage business is cooling, and many are burdened by credit-card debt. In any case, what's happening is a radical change for Citi. By creating Freiberg's position and splitting off domestic banking, Prince broke with Sanford I. Weill's centralized strategy of treating Citi's consumer operations as a global enterprise. While the consumer business overseas is growing at a fast clip, Prince saw that North American retail banking was a separate challenge. As he handed over Citi's lackluster domestic retail operations to Freiberg, Prince tried to brace him for the worst, warning: "Yours is the harder job."

By Mara Der Hovanesian in New York

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