The annual investor/analyst day that Citigroup (NYSE:C) hosted last week felt much more significant than any periodic review of the bank's financial results. The tone and scope of CEO Charles Prince's presentation seemed a reaction to investors' increasingly strident criticism of his performance. Prince acknowledged shareholders' growing frustration with the stock's price and tried to win their support for a comprehensive, multi-year strategy to restore reliable earnings growth. Of course, the thorough discussion of Citigroup's operating results and goals may have inevitably reminded investors of the enormous -- perhaps impossible -- challenge of effectively managing an organization of unmatched geographic breadth and operational complexity.

Year-to-date performance
Citigroup's stock has underperformed its financial services peers for the past six years. Recent criticism has focused on the bank's slow revenue growth, and on several occasions Prince expressed his disappointment over the bank's failure to meet his goal of revenue growth rates in the low double digits or high single digits. Through the third quarter, Citigroup has increased revenue by just 5% while operating expenses have increased by 13%.

To some extent, the bank's results may be less bleak than they first appear. For example, non-interest revenue actually grew by a solid 9%, but the overall revenue number was hurt by the negative effect that the generally flat yield curve has had on net interest income this year. The discouraging revenue and operating expense numbers have had a muted effect on a strong bottom line. Lower credit costs allowed Citigroup to generate 9% growth in income from continuing operations, and stock buybacks helped it increase EPS by 13% to $3.22 in the first nine months. This respectable bottom-line result, however, does not chase away concerns that Citigroup may be too big and complex to achieve meaningful growth in its top-line number.

New focus and operating approach
According to Prince, a consequence of Citigroup's growth by acquisition is that the company's multiple business units lack the cohesion needed to work together effectively. Prince believes that the integration among the businesses can be improved so that customers will see one face of Citigroup, regardless of whether their point of access is a Smith Barney brokerage office, a Citibank retail branch, or any other Citigroup outlet. Concurrent with improving the capacity to offer all customers a full range of products, Prince wants to streamline the bank's often redundant back-office structure in order to reduce expenses.

Prince expects both organic expansion and acquisitions to contribute to Citigroup's growth. Most acquisitions will occur overseas, which would reflect the company's increasing emphasis on international operations. (Prince rejected the idea that Citigroup would undertake a significant domestic acquisition while valuations of financial services companies are so high.) Nearly half of Citigroup's net income now comes from international operations (compared with roughly 7% for Bank of America (NYSE:BAC) and 30% for JPMorgan Chase (NYSE:JPM)); Prince expects the bank will soon earn the majority of its income from overseas. To realize this structural shift in the way the company manages its operations and the way it determines its growth, Prince outlined a five-year plan.

That plan has already been underway for a year, and Prince eagerly pointed to some initial signs. This year, Citigroup opened more than 1,000 new retail and consumer finance branches, with about 70% of those openings in emerging markets. The company has been locating Smith Barney brokers in Citibank branches to improve customers' access to all the company's products. Prince sees technology as key to the success of these initiatives, so the bank is updating its technology platform so that sales personnel will have the tools needed to further develop customer relationships and to support the sale of a broader range of products.

Prince last week named Robert Druskin, who had led the corporate and investment bank unit, as the company's new chief operating officer, with a mandate to eliminate redundant operations. Druskin will be expected to continue structural reforms, such as the consolidation of 52 data centers into 43 that took place this year.

Satisfying investors
Many investors believe that Citigroup is just too big to generate a superior rate of sustainable growth, and a growing chorus is calling for the separation of Citigroup's retail banking, investment banking, and brokerage operations. By adjusting the way the bank allocates its capital resources, Prince believes he can produce short-term improvements in returns on invested capital that will appease critics until long-term growth initiatives can be proven successful. But returning capital to investors through dividends and share buybacks seems at odds with the spending requirements associated with the bank's five-year plan.

Prince believes that stronger revenue growth is already in the pipeline. Investments made to acquire new credit card accounts and to open new branches can take years to show a payoff, but increasing customer activity suggests that Citigroup is on track to generate strong growth from those investments. International markets promise more vibrant opportunities for growth than the relatively mature U.S. market can deliver, and this year's 20% increase in net income from international operations would seem to validate Citigroup's international focus.

Prince may nevertheless continue to face investors' skepticism, especially if sustaining recent growth trends depends on better integrating Citigroup's diverse businesses. Prince insists that Citigroup's initiatives are not about cross-selling products, but his message of better integration harkens to the financial supermarket model that has always been so difficult for companies to execute successfully. It is far from certain that Prince's five-year plan will produce a different outcome.

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