It didn't work for Genghis Khan, Napoleon, or the Third Reich, and now it's not working for Citigroup
So after a decade of trying to become a supermarket financial center with its hands in everything from investment banking in San Francisco to cash management in Sri Lanka, it's time for Citigroup to give up its journey and break itself apart.
Participant of everything, leader of nothing
It all started back in 1998, when Travelers Corp. merged with banking giant Citicorp to form a financial behemoth containing everything from checking accounts and car insurance to investment banking and derivatives trading. If you could monetize it, Citi wanted a piece of it.
But that grandiose strategy didn't materialize as planned. Conglomerates of all types can run into problems when one segment doesn't complement the others. For example, Altria Group
As it stands, Citi can be dissected into three parts: wealth management, consumer banking, and markets and investment banking. This isn't the entire business, but it represents the major working parts.
Here's the net income of those three divisions for the past three years:
Division |
2007 |
2006 |
2005 |
Prospects |
---|---|---|---|---|
Wealth management |
$2 billion |
$1.4 billion |
$1.2 billion |
Good |
Consumer banking |
$7.9 billion |
$12.0 billion |
$10.9 billion |
Respectable |
Markets and investment banking |
($5.2 billion) |
$7.1 billion |
$6.9 billion |
Teardrops on my pillowcase |
How much could it sell these divisions for?
I don't know. The market for bank assets right now is about as robust as the market for wool sweaters in the desert. The average net income over the past three years for the divisions comes out to $1.5 billion, $10.2 billion, and $2.9 billion, respectively. Assuming you could get 10 times the average of three years net income, you come up with a number around $146 billion, or about 37% higher than Citi is currently trading for. Yes, I do realize this is the mother of all back-of-the-envelope calculations that excludes factors such as pending writedowns, but stay with me here.
Looking at the divisions above, it's clear that Citi has some terrible assets (markets and investment banking) and some fantastic ones as well. Wealth management, for example, is a growing segment that continues to propel banks such as Bank of America
How so? Well, take Citi's recent quarterly earnings. Losses came in at $2.5 billion, with pre-tax writeoffs of $7.2 billion. What percentage of the writeoffs was related to wealth management? None. Zilch. Nonetheless, wealth management still has to be attached to the 60% share-price decline Citi has endured in the past year. Yes, financial services in general are grisly right now, but the ugliest parts are contained to certain areas. Remove the golden children from the problem areas, and some parts are actually quite good.
Huge conglomerates prosper in only a few exceptional cases. Berkshire Hathaway
Foolish bottom line
A Citigroup breakup isn't very likely, especially during this sour market. CFO Gary Crittenden recently stated, "We really don't have any intention to split up the various elements of the banks, and so it's just not an issue that we're focused on at all." If by "we" he means shareholders looking to maximize value, I'd say he's a bit mistaken.
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