Citigroup's Not Dead Yet

My Foolish colleague Emil Lee recently echoed some of the conventional criticism that has been leveled at Citigroup's (NYSE: C  ) business strategy, and he also offered some advice about how the suffering bank could right itself. Allow me to share my thoughts about the ailing bank.

Credit crisis
Citigroup's damaged balance sheet gives the impression that the bank is at a competitive disadvantage relative to other financial-services companies. However, the credit crisis that has triggered writedowns at Citigroup is a system-wide event. Most major financial-services companies have had to warn of problem loans and securities on their balance sheets. Friday's announcement from Wachovia (NYSE: WB  ) , stating that the company will recognize losses in its loan portfolio and provision for additional losses, is just the latest fallout from a troubled industry.

The bad news is likely to continue for the financial-services sector in general and for Citigroup in particular. Based on available information, however, Citigroup appears well-capitalized, with the capacity to absorb additional writedowns before its Tier 1 capital ratio falls below the 6% threshold that would alarm regulators. Accordingly, seeking a cash infusion from a white-knight investor is a bad idea that would unnecessarily dilute the stake of current shareholders.

The idea that Citigroup will cut its dividend also seems a little premature. Non-cash charges were responsible for most of the decline in Citigroup's third-quarter earnings. As a result, the bank's free cash flow should continue to safely cover its dividend to shareholders.

Don't break it up ...
While the "financial supermarket" strategy now pursued by Citigroup might not work, breaking up the bank might be easier said than done. The combination of Citigroup's global consumer unit, wealth management division, and investment bank hardly resembles the awkward strategic and cultural fit of 20 years ago, when the department store Sears brought together Allstate, Dean Witter, and Coldwell Banker.

While I think it's unlikely that a retail customer would visit a Citibank branch in search of M&A advice, I do appreciate the realistic synergies that are possible. For example, Citigroup's commercial bank could provide funding to an investment banking customer, and the company's Smith Barney brokerage unit could sell stocks to one of the consumer unit's retail banking customers. Such effective cross-selling has distinguished the recent performance of Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) .

Foolish farewell
Citigroup's shares will undoubtedly remain under pressure while the market waits for a resolution to this credit crisis. Nevertheless, anxious shareholders might benefit from a different perspective on Citigroup's relative condition. The bank's $2.4 trillion balance sheet is well-equipped to handle the pain that is being inflicted on most of the financial-services sector. Moreover, Citigroup's extensive international operations offer long-term growth opportunities that its rivals can't match.

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