Citigroup is in the midst of some large-scale organizational changes, so the move to separate the credit card unit from the rest of consumer banking may not seem to be such a big deal.
But this change could be a precursor to a sale or public offering. Citi has a very solid card business and it may be forced to sell some crown jewels if writedowns continue. Like many forced sales, any disposal of the credit card operations would take place at or near the worst point in the cycle, when both earnings and multiples would be low.
From Bloomberg:
Citigroup Inc., battling to restore credibility after a record loss, will set up an independent credit-card unit and overhaul consumer banking along geographical lines, two people with direct knowledge of the plan said.
Steven Freiberg, the current co-head of consumer banking, will run the card unit, the people said, asking not to be identified before an announcement that may come as early as today. The rest of the consumer group, mainly bank branches and non-bank lending, will be led by five regional heads, the people said….
Profit at Citigroup’s consumer unit fell 35 percent last year to $7.87 billion as rising delinquencies on mortgages and auto loans forced the bank to set aside more reserves for losses.
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Citi news: At this point it looks like the bank is marginally overcapitalized. As it points out in its annual report, “To be ‘well capitalized’ under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 Capital Ratio of at least 6%, a Total Capital Ratio of at least 10%, and a Leverage Ratio of at least 3%.” According to that report, it has a Tier 1 ratio of 7.12%, a total capital ratio of 10.7%, and a leverage ratio of 4.03%.
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Yves
Think Citi’s card business has languished over the last few years. Sounds like they’re dressing it up for a trade sale. Unfortunately, the ‘reorg’ (within Citi this used to be called ‘The Wheel’) has all the markings of
‘deck chair rearrangement on the Titanic’.
CrocodileChuck
CrocodileChuck,
I have no doubt you are correct. My impression is that Citi hasn’t managed that business aggressively, which may turn out to be a blessing in disguise (ie, they may not be quite as heavily exposed to bad credits). But they also may not have managed the cost side well, particularly, as indicated in the announcement, it was part of retail banking with funny overhead allocations (big banks have an enormously hard time understanding their economics. It’s a full employment act for consultants, that is, when the banks can afford them).
As a customer I have noticed 1. Their service reps are better than other card issuers (which of course can be turned around, that means they haven’t outsourced to India enough), 2. They are the only card issuer (save Amex, where I am also already a customer and which has higher credit requirements than other issuers) that doesn’t stuff up my mailbox with offers for new cards with special intro rates. So my only evidence is anecdotal, but maybe they didn’t go as crazy on signing up everyone and anyone as the other issuers.
Yves
As a management consultant working in retail banking, I concur 100% with your point on overhead cost allocation!
Keep up the great work-we all owe you for your focus, bandwidth and critical analysis: Thank you!
CrocodileChuck