Three years on, Citi CEO under pressure to deliver

NEW YORK: While Citigroup chief executive Charles Prince spent much of his first three years unwinding a tangle of ethics problems, the heat is now on the former lawyer to show he can get the largest US bank to grow faster. October 1 marks the third anniversary of Prince succeeding Wall Street legend Sanford “Sandy” Weill as Citigroup CEO.

Yet some investors see little to celebrate, as Prince faces pressure to cut costs, improve US consumer results, and bolster an underperforming stock. “I have been very close to throwing in the towel several times,” said Ralph Cole, a portfolio manager at Ferguson, Wellman Capital Management in Portland, Oregon, which owns about 600,000 Citigroup shares. “Prince has cleaned up regulatory issues and done a good job on ethics. What he hasn’t delivered is growth, growth, growth.”

Citigroup’s profit missed Wall Street estimates in four of the past five quarters, and the New York-based bank’s largest individual shareholder, Saudi Prince Alwaleed bin Talal, has demanded “draconian” steps to cut costs. Britain’s HSBC Holdings now tops Citigroup as the world’s largest bank by assets. Bank of America is close to replacing it as the largest by market value, and BofA’s profit excluding items past quarter topped Citigroup’s for the first time. Citigroup was unavailable to comment for this article.

Prince has overhauled top management and rejected Weill’s financial ‘supermarket’ approach to Citigroup, instead expanding faster-growing units such as the investment bank while shedding insurance and asset management. He also paid more than $5bn in legal bills over such matters as biased equity research and Citigroup’s work for Enron Corp and WorldCom. Citigroup still faces lawsuits over the collapse of Italy’s Parmalat and probes over accounting in Argentina and alleged Australia insider trading.

While Prince has raised Citigroup’s dividend by 40%, the stock through Monday is up just 10% since he took over. That trails gains of 35-37% at Bank of America, JPMorgan Chase & Co and Wachovia Corp, which are also boosting earnings faster. The Philadelphia KBW Bank Index is up 29% since Prince took over. Among the index’s 24 members, only Fifth Third Bancorp and Washington Mutual have risen less than Citigroup. Citigroup trades at 10.9 times expected ’07 profit, about the same as Bank of America and Wachovia, and below JPMorgan and Wells Fargo & Co. “At the current price level, it’s reasonable for investors to expect they can make some money if the execution is even moderately successful,” said money manager Michael Holland of Holland & Co in New York.

Acquisitions are again possible, after Prince’s efforts to improve led the Federal Reserve in April to lift a year-long ban on big purchases. Yet, Citigroup is large enough that most acquisitions would be too small to make a big difference. And Prince has said spending now to generate organic growth later is the way to go. He said he wants revenue to grow at a mid- to high- single-digit clip and earnings to grow faster. Yet from January to June, revenue rose 7%, while expenses rose 17%. “A substantial portion of our revenues is under pressure from the outside environment,” Prince told analysts on a July 17 conference call.

The US consumer unit, including branch banking, credit cards, and consumer and small business loans, is a major focus. Factors including margin pressure helped push first-half revenue down 4% to $14.83bn.

Citigroup has added several billion dollars of deposits through high-yielding online accounts. The bank may open 100 US branches this year. But that would give Citigroup only about 1,000, fewer than each of the next eight smaller US banks. Bank of America has nearly 5,800. “We are not where we want to be in terms of growth,” Prince said on the call. “It is a couple of years (of) investment spending before we get up on the curve.”

Prince has faced calls from some investors that Citigroup be broken up further, or at least find a new direction. “He needs to show operating momentum,” said Cole from Ferguson, Wellman. “If it doesn’t happen, we’ll just sell the stock, but others may demand his ouster.”

Yet, Holland expects Citigroup’s board, which comprised largely Weill-era holdovers, to give Prince more time. “The board has shown patience,” he said. “Those calling for an early exit are probably doing so with hollow voices.”