Citi Mulls Sale of $400 Billion of Assets

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I’m in danger of sticking my neck out, but is it possible that Virkram Pandit, Citi’s CEO, is doing a good job?

It’s way too early to make a call. The markets and stock watcher have the attention span of a fruit fly, when corporate successes are built slowly, and the less fanfare, the greater the odds of good outcomes.

I was prepared to dismiss Pandit, who was clearly a battlefield promotion, relatively new to Citi, and with experience that could be argued to be less relevant than it seemed. Yes, he had headed much of the institutional side of Morgan Stanley (investment banking, fixed income, and alternative investments), but he was running a well managed (by Wall Street standards) operation during a bullish period. He didn’t have any experience in some of Citis’ major operations, such as retail, insurance, credit cards, nor had he ever run anything approaching Citi’s scale. And that’s before getting to the not-trivial detail that he inherited an organization in crisis.

From the outside, Pandit appears to be moving methodically but with sufficient speed to tackle the megabank’s problems. I like some of his calls, admittedly because they conform with my prejudices; time will tell whether they were astute or not.

The first was that Pandit called on Hewlett Packard, rather than a consulting firm or PR powerhouse, or corporate fixer, to get advice on how to deal with demands to break up the bank (aside: Citi issued a denial, but the wording implies that Citi did not pay fees to HP). While Citi is clearly too unweildy and some aggressive pruning is in order, Wall Street goes overboard with the idea of separating companies into tidy pure plays or hiving pieces off that can be sold easily. For instance, I have serious reservations about the idea of selling Citi’s credit card business. At this point in the cycle, it would fetch a terrible price. Conversely, customer profitability in retail banking correlates with how many products they decide to buy, and the best time to make the cross-sell is when they open an account. A card business thus makes sense as part of a retail banking operation.

Second is that Pandit appears set to announce plans to exit non-core businesses. Of course, the proof is in the pudding of how “non-core” is defined, and asset sales were expected to help the financial giant strengthen its damaged equity base.

So nothing exceptional from Pandit so far, but the absence of apparent major errors is encouraging. The real test is going to be whether he has the foresight and skill not only to repair the firm’s financials, but to make progress in the far more difficult task of shifting the bank’s culture and incentives.

Also note the complete absence of Robert Rubin. I cynically assume that the wily former risk arb sees only downside in getting involved in the “fix Citi” program. But he has also argued for asset sales, more aggressive that what Pandit appears to have on offer. So there may be more complicated reasons for Rubin’s exceedingly low profile.

From the Financial Times:

Citigroup will on Friday identify as much as $400bn in non-core assets that could be sold as part of plans to reduce costs and restore profit growth to double-digit rates, according to people close to the situation.

At a long-awaited meeting with Wall Street analysts, Vikram Pandit, Citi’s chief executive, also plans to confirm his pledge, first disclosed in the Financial Times, to cut Citi’s cost base of over $60bn by about 20 per cent.

Despite his desire to prune Citi’s balance sheet aggressively, Mr Pandit will use the meeting to rebuff calls for a break-up of the company, say sources familiar with his thinking. They say he will defend Citi’s “universal banking model” combining consumer and wholesale banking.

Mr Pandit is likely to say that about 20 per cent of Citi’s $2,000bn-plus balance sheet consists of “legacy” assets – entire businesses or trading positions outside its core businesses in commercial, consumer and investment banking.

The sale of the assets is likely to take years, and some of the non-core holdings may never be sold, according to people close to the situation. Nevertheless, Mr Pandit’s decision to classify such a large portion of the balance sheet as non-core highlights his determination to root out underperforming businesses.

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  1. a

    “So there may be more complicated reasons for Rubin’s exceedingly low profile. “

    I think it’s pretty clear. Rubin thinks he’s entitled to a huge paycheck without taking responsibility for anything. A fine example of the corruption in capitalism.

  2. Richard Kline

    Citi would be nuts to sell their entire credit card business, but hiving off some of their card lines might make sense while improving their own brand identity. Citi must, must, must shed assets; of course prices will be bad, but they are capital dead, to me, and have to get the core outfit down to the level of capital they can actually raise while the public authorities are keeping them alive. Rubin is deeply compromised by the last few years, and loathed by many now at Citi for his ‘above it all except the check’ posture. He may or may not have useful advice, but his name being attached to any policy will only lower the value of the latter. Hey, maybe _that’ts_ the way to be wily, now: hide behind the curtains while whispering in the ear.

  3. Anonymous

    Don’t these near-weekly capital raisings look a bit – distressed?

    All converging on Citigroup’s balance sheet:
    – further writedowns from Alt-A, consumer credit, CRE, LBOs; possible extra kick from monoline implosion still out there somewhere.
    – VIEs?
    – credit line drawdowns by companies.

    No wonder they’d like to shrink their balance sheet: but can they possibly do it in time?

    49 1/2

  4. Peripheral Visionary

    Reducing the size of the company is probably the right move, but announcing a massive across-the-board asset sale probably was not. It looks desperate, and even if Citi is desperate they should not be *looking* desperate, as that fairly invites lowball bids on assets. Asset sales should be announced one at a time, preferably after buyers have been lining up. But when people see a huge figure like $500B, their first reaction will be to ask where the buyers are going to come from.

    And I could be mistaken, but isn’t Citi still clinging to the dividend? That alone raises serious questions about priorities.

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