Financial markets are often cruel and unforgiving. A perfect example is the shocking performance of Citigroup’s share price. In the middle of a roaring bull market, it’s languishing at around $45, almost exactly where it was trading five years ago. It is impossible to bump into a Citi banker without a complaint about the insipid performance.
So should we feel sorry for Citi’s long-term shareholders? Some would argue that the market is right to require a calamity premium. Citi has suffered more than its fair share of mishaps in recent years. But do they justify its shares continuing to trade sideways? Only once since 2001 has it broken above $50 (in the spring of 2004). And yet it has been a long time since Citi found itself in the headlines for the wrong reasons. Surely the markets can learn to forgive and forget.
It has been said before that Citi’s sheer scale is a problem. There’s so much operational and legal risk that investors are wary. Remember Citi’s market cap is about $235 billion. It is everywhere, and in a world where quick responses to opportunities and risks is essential, a 33-strong management operating committee might get in the way.
Comparisons are startling. Take a monoline investment bank like Goldman Sachs, whose share price over the same period is up 40%; or Lehman Brothers, whose stock has doubled in price in the past five years. Then there’s Deutsche Bank, whose share price has risen 40%. The fact is, investors like businesses that are easy to understand. All of these rivals are regarded as nimble, fleet-footed and smart operations. But is it fair to suggest that Citi isn’t smart? With 20% return on equity it must be doing something right.
The problem is that Citigroup lacks the clarity of vision that banks like Goldman, Lehman or Deutsche have. A clear strategy and domination in one sector is what investors reward.
From April 18 Chuck Prince will be both chairman and CEO of Citigroup. What he might need to do is to tear down the massive edifice that Sandy Weill built. Any Citi banker old enough to have answered the phone with a curt “Salomon” will tell you how getting Citibank’s corporate client list transformed their business. The synergies are completely apparent. But what, exactly, are the synergies between the consumer business and corporate and investment banking (CIB)?
It’s possible that Prince might consider M&A but what gap needs filling? Apart from continuing to moan to journalists and analysts about the poor valuations, how about taking all the consumer businesses and separating them from CIB and wealth management? Presently these two businesses would be worth $150 billion and $85 billion respectively. But who is to say that investors wouldn’t re-rate valuations upwards when it’s easier to understand what they really represent?