Citigroup (C): The Future Ahead after Vikram Pandit
By Ed Liston
In a move that surprised most analysts, Citigroup (C) announced that the bank's CEO Mr. Vikram Pandit has resigned effective immediately. The surprise announcement "raises tremendous questions" according to Michael Jones, CIO, Riverfront Investment Group. He went on to add that "It will be a headwind for the financial sector specifically if this proves that there's another major financial hiccup at a money-center bank."
There was surprise over Pandit's resignation as the news of his resignation came only a day after the Wall Street gave a thumbs-up to Citi when its third quarter profits beat street expectations. What Adam Sarhan, the chief executive of Sarhan Capital in New York, found even more "shocking" and a question that needs to be answered is "why they didn't announce it with the earnings."
Vikram Pandit has been Citigroup's chief executive since December 2007. His success story is one of a many about immigrant executives who have been leading large American institutions. His departure, however, raises many questions, answers to which are not forthcoming yet.
Vikram Pandit - A Quick Profile
• India born, age 55
• BS/MS in electrical engineering from Columbia School of Engineering and Applied Science, 1976-77
• MBA, PhD (Finance) Columbia Business School, 1986; thesis entitled "Asset prices in a heterogeneous consumer economy," a research that examines the properties of asset prices in a multi-consumer, dynamic economy under uncertainty.
• Joined Morgan Stanley (MS) as an associate in 1983, worked with the company for the next two decades in various capacities, including Chief Operating Officer of Institutional Securities, a Division of Morgan Stanley and President of Institutional Securities. In September, 2000, he became Co-President of Institutional Securities, a subsidiary of Morgan Stanley.
• Founded Old Lane, a hedge fund, with John Havens, 2006.
• Old Lane purchased by Citigroup for $800 million; Pandit joins Citigroup management.
• Worked as chairman and CEO of Citi Alternative Investments and subsequently of Citi's Institutional Clients Group. On December 11, 2007, became the Citigroup's new CEO replacing interim CEO Sir Winfried Bischoff.
Career at Citigroup
In November 2007, Chuck Prince had resigned due to unexpectedly bad third-quarter results, primarily due to losses related to collateralized debt obligation and mortgage-backed securities, what eventually came to be known as the subprime crisis. Mr. Pandit had the support of the then interim chairman of Citigroup, Robert Rubin, the effective successor to Chuck Prince. In the years that followed, here is what the company looked like:
Citi accepted $45 billion in Troubled Asset Relief Program (TARP) funds in 2009, as a consequence to which Mr. Pandit testified in front of the U.S. House Financial Services Committee that he will take a salary of only $1 and no bonus until Citigroup returns to profitability. This was in response to the intense criticism from lawmakers regarding bonus payments and corporate expenses especially when they were getting billions from the government for reviving the economy - something that President Obama called "shameful" and the "height of irresponsibility."
His resignation on Tuesday is a sudden ending of his "turbulent chapter at Citigroup."
Citigroup after Pandit's Resignation
According to a news report, Mr. Pandit may leave with a rich exit package. According to the most recent annual proxy filing by Citigroup, he is not eligible for a pre-negotiated severance pay, commonly known as a golden parachute.
However, Mr. Pandit's sudden resignation has led to speculations about the future of USA's third largest bank and financial services giant. Speculations apart, it seems evident that Citigroup is "going to be a lot smaller." Analysts are predicting that the odds are in favor of "more cost cutting, more shrinking and more focus on boring, traditional banking, like making loans."
During his tenure as CEO, Vikram Pandit cut businesses and jobs (from 375,000 to 262,000). From the largest bank in the U.S., Citibank (Citigroup is its parent company), with assets of $1.9 trillion, is now the third largest, lagging behind JPMorgan Chase (JPM) ($2.3 trillion) and Bank of America (BAC) ($2.1 trillion). Besides, Michael Corbat, the new CEO named by Citigroup, is not well known and analysts do not have any idea as to the direction in which he will take the company.
However, as of now, it all seems stable as the stock market has not reacted negatively to the news of the resignation and the stock is up by 2.20% at last check.
The Future Ahead For Citigroup
As the chart above shows, Citigroup has a long way to go before it can attain a height where it was before 2007.
The chairman of Citigroup, Michael E. O'Neill, is someone who is not willing to cede too much power to CEOs. His career has been marked by rehabilitating banks usually by downsizing them and sticking to their core businesses. He is known for immersing himself in the project he undertakes. However, he admits that he does "not have a one-size-fits-all approach." He will have to think of a new strategy because Citigroup is much larger than the banks he has headed before.
While it is yet to be seen which approach Mr. O'Neill takes, the moot point is that the focus has to be on Citibank's core expertise. The bank needs to prune out sectors where it is losing money -focus on performers and outperformers and shed flab (underperformers).
The bank also needs to be more open and forthcoming about its operations and income to its shareholders. Here is a list of what it has to do in the coming months:
• Focus on international lending businesses that are consistent outperformers.
• Prune or sell off Citi Holdings assets; this segment has assets worth $171 billion and is a major underperformer.
• Citigroup's regulatory capital ratios must be improved.
• Shrink its investment banking division, a regular underachiever since the 2007 crisis. Segment has $903 billion assets.
• More disclosures to shareholders, especially related to profit from capital in investment banking division.
In a nutshell, the bank needs to shrink a lot more than it already has. Its main focus needs to be on cost cutting and focus on what Daniel Alpert, managing partner of Westwood Capital, calls the "dull and boring" businesses of lending to companies and consumers.
Mr. Pandit was instrumental in saving the bank from government ownership. The strong quarterly earnings report is another signal that the bank is on its way to recovery. It is now up to Mr. O'Neill and his CEO Michael Corbat to guide the Citi and return it to its lost glory.
The duo form a pair of sorts. O'Neill has the reputation of a person who can resort to stringent measures. When he was head of Bank of Hawaii, he shut down 50% of its branches. Michael Corbat's work as Director of Citi Holdings in one of his previous positions gave him experience with this sort of corporate thinning the fat. If the two can work well together, the bank may see better days.