Citi Management Shake-Up: Upcoming Divestiture of Commercial Banking Division?

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Includes: BAC, C, GS, MS
by: Daniel M. Harrison

Citigroup’s (NYSE:C) spate of recent management changes may indicate that chief executive Vikram Pandit is gearing up to spin-off the firm’s commercial and mortgage-related banking divisions, and focus instead on traditional investment banking activities.

Monday, Citi announced that it was shifting around senior bankers in its emerging market operations, with the appointments of Stephen Bird and Shirish Apte as Asia Pacific chief executives, and World Bank managing director Shengman Zhang as the region’s chairman. To many, the appointments signaled an increasing focus for the firm in the white-hot emerging market investment banking business.

Yesterday, Citi announced its most radical personnel shift since the beginning of the financial crisis. The bank is replacing chief financial officer Edward Kelly, who assumed the role only as recently as March. Kelly’s replacement will be John Gerspach, previously the bank’s chief accounting officer.

Subsidiary Citibank will get a new chief executive officer, too, in the form of Eugene McQuade, who was formerly chief executive of the plagued FleetBoston Financial.

Such radical shifts in management are probably in part to do with Federal Deposit Insurance Corporation chairwoman Sheila Bair’s criticism of Vikram Pandit’s inexperience for the role of chief executive of one the nation’s largest banks. But they may also signal a move towards consolidating Citi’s business focus on investment banking activities, an area in which Pandit has more expertise.

Since the beginning of the year, Citi has been hiring top investment bankers in order to beef up its commission-generating businesses so that it can better compete with rivals such as Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC), and Goldman Sachs (NYSE:GS).

Many say that part of Pandit’s problem in effectively managing Citigroup is that it is such a large, unwieldy mishmash of banking focuses, ranging from consumer finance to sales and trading to mergers and acquisitions. The argument follows that Citi’s best bet for the future will thus eventually be to split the bank into two different firms with diverging focuses: one concentrated on investment banking and the other on commercial banking.

The commercial banking division could either be sold off to a competitor, or more likely spun off in an IPO in which the newly-slimmed down investment bank would hold a passive investment stake.

“What [ex-chief executive] Sandy Weill put together here was an unmanageable organization that is too big to function or for any CEO to get his arms around,” Paul Mendelsohn, chief investment strategist at Virginia-based Windham Financial and a Citigroup shareholder, told BNET Finance. “At some point in time, when you can get your hands around what this thing is really worth, it will need to be broken up in some format and made manageable again.”