Citi Isn't Proof of Financial Supermarket Viability

Let’s be honest, Citi (C) has some serious problems it has to fix. I’ve touched on many of them on this blog. But Citi’s failure is hardly an indictment of the “one stop” business model. It stands to reason that Citi is the example of how one cannot merely staple businesses together, allocate capital according to best returns for shareholders, and hope that a finance company can be run like a portfolio (ala G.E.(GE)).

One need only look at two competitors (and I’m sure Jamie Dimon thinks about this right before he lulls himself to sleep)–JP Morgan Chase (JPM) and Citi. JP Morgan Chase has had a recent history of successful integrations, merging of businesses, stable leadership, and a cohesive corporate culture. No one at JPM sits around wondering how they can squeeze out the “other guys.”

If you’re a Chase person you’re not trying to get all the JP Morgan people fired. Citi, on the other hand, has had management change after management change–each one is followed by an exodus of top, experienced executives. Guess what happens when one cobbles together a management team of people who are holdovers, new guard, and new hires… Citi! Guess what happens when no one takes the time to integrate businesses that have redundant product lines and systems, but rather let them operate all on their own… Citi!

In fact, one could be forgiven for thinking that standalone institutions are the business model in peril. Merrill (MER), Lehman (LEHMQ.PK), and Bear, all pillars in the stand-alone investment bank community have disappeared from the landscape. Goldman (GS) and Morgan Stanley (MS), the two remaining firms that were stand-alone investment banks six months ago, now include consumer banking in their business lines–much closer to the business mix of Citibank plus Salomon Brothers. Indeed, I would argue Citi’s investment bank performed like the lower tier of standalone investment banks, and the mere existence of the consumer bank and deposit base “added in” allowed it to survive.

My theory is further bolstered by what Citi hopes to become and why. CitiCorp (Citi Corp.? Citicorp?) is essentially a bank, an investment bank, and a brokerage all put together… And it’s half the size of Citi today. If that doesn’t say, 'we got the execution wrong but the model correct' then I don’t know what does.

Oh, and don’t use BofA (BAC) as a counter example… It was doing just fine on its own before swallowing Stan O’Neil’s mess whole (although the Ken Lewis negotiating tactics didn’t help). Further, Wachovia and Washington Mutual are examples for the opposite side of the equation–banks hoping to make money through capital markets operations and doing it poorly. Think of their problems as having evolved from having singularly focused, very poorly run investment banks attached to them.

The basic point: We’ve seen two financial supermarkets emerge here in the U.S. Both are still alive, and one is still profitable (The WSJ news alert shouldn’t have been “J.P. Morgan Chase’s Net Income Falls 76%” it should have been “J.P. Morgan Chase’s Net Income is Positive!”). The other’s problems are widely acknowledged as being cultural and borne of historical shortsightedness. Declaring the business model dead now would be silly.

Comments

[AyaDaddy91:]

What metrics do you use to support that Citi’s investment bank performed like the lower tier of standalone investment banks? In league tables, Citi usually appeared in the top 3 ... We know the cost base was high and there was tremendous inefficiency, and clearly Citi benefited from the consumer bank's deposit base and credit rating advantage. I agree that in general reputationally, Goldman, MS, Lehman were higher.

We can posit that US financial supermarkets were a response to the need to compete against European universal banks, and were allowed to exist when in 1999 regulators repealed the Glass-Steagall provisions which prohibited bank holding companies from owning other financial companies. The arguments at the time were diversification and lowered risk to securities, which of course were waylaid by risky securities and leverage. Does the model work, and where? Europe's pain is as acute, and maybe more so in their major banking center - London, than in the US. Clearly JPM will survive, but how do you think will they drive revenue and return to shareholders.
Much of this will probably be driven by combined regulatory response, which will impact both revenue opportunities and cost of capital. Will we end up with a new cadre of only 3-5 major players?

Jan 29 09:39 AM