By Martin Tillier
The shock announcement this morning that Vikram Pandit, the CEO of Citigroup (C), is ‘stepping down’ has caught everybody by surprise. The simultaneous departure of John Havens, the company’s widely respected President and COO and Pandit ally, makes this smell like an internal coup. The appointment, effective immediately, of Michael Corbat, formerly head of Europe, Middle East and Africa, only re-enforces that perception. I would expect more details to emerge over time, but until then I believe that the news should be looked at in the context of a sector struggling for an identity.
Citigroup was a pioneer in the post Glass-Steagall era. Throughout the 1990s and early 2000s, Sandy Weill built a financial conglomerate that set the tone for others, such as Bank of America (BAC), Morgan Stanley (MS) and AIG (AIG) to follow. Following the crisis, it seemed that Citigroup, under Pandit’s leadership, was taking a different direction. They shed some lines of business, most notably the brokerage arm, Smith Barney, which was sold to Morgan Stanley, and became increasingly reliant on their international presence.
A return to profitability in 2010 and solid third quarter earnings released yesterday would indicate that the strategy was working. As you can see from the VectorVest chart below, however, the stock continued to languish.
The problem is that, in order to build a solid, resilient business for the future, Citigroup had to shrink in order to grow later, and the market is not fond of shrinkage. This is the same problem that has beset Bank of America. They have gone in almost the opposite direction to Citigroup in many ways, shedding overseas assets and concentrating on domestic lines of business, but shrinkage is shrinkage.
Herein lies the problem. The market, accustomed to exponential growth in the sector, is punishing long-term plans for smaller, but more stable companies. Should it emerge that Pandit was pushed, rather than jumped, there could be worrying consequences. Other management teams could well conclude that continuing to do “God’s work," as Goldman Sachs (GS) has done, is the better path, at least for their job security, and begin to repeat the mistakes of the past.
Growth is a great thing, but pursuing short term growth and profit from a rickety base is dangerous. The mega financial firms are still recovering from a financial crisis of historic proportions and anything that increases pressure to take on more risk by chasing short term returns must be seen as a bad thing. Unfortunately I see this morning’s news as just that. It re-enforces my conviction that, for now, the sector is best left alone.