Citigroup has once again resorted to restructuring – this time, however, by shedding off its decade-old strategy...

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Citigroup has once again resorted to restructuring – this time, however, by shedding off its decade-old strategy of becoming a financial supermarket and splitting into two. But will it be of any help? MANISH K. PANDEY analyses...

Some companies have it in them, some don’t. We are talking about the ability to rewrite history. That’s what Citigroup did some ten years ago when it decided to provide investment advice along with traditional banking. Unfortunately however, Citigroup is now going through the painful process of giving up that strategy in a not-so-historic way.

As cost cutting measures and pink slips are failing to provide the bank with much needed succour, CEO Vikram Pandit seems to be at his wits’ end looking for a saving grace. And interestingly, but not surprisingly, he has realigned Citigroup’s current dealings into two separate businesses – Citicorp and Citi Holdings. Raison d’être: to free up capital and save the group from the collapse – may be his last attempt to make Citigroup stand on its feet!

With Citicorp, Pandit now plans to focus on leveraging the competitive advantages of the group’s global banking business and through Citi Holdings – which will be made up of brokerage and retail asset management (including Smith Barney, Nikko Cordial Securities, Nikko Asset Management and Primerica Financial Services), local consumer finance (including CitiFinancial and CitiMortgage in the US, and consumer finance operations across the globe) and a special asset pool – he wants to keep an eye on group’s riskier assets and hard-to-manage ventures. “With lower risk and a streamlined set of businesses, we expect Citicorp to be a high-return and high-growth business. And with Citi Holdings, we will tighten our focus on risk management and credit quality for businesses with strong market positions but that are not central to our core franchise,” avers Pandit. In fact, Pandit has also agreed to give up control of the Smith Barney brokerage to Morgan Stanley and even plans to sell the CitiFinancial consumer-lending unit and Tokyo-based Nikko Asset Management, once the hive off process is complete.

Certainly by doing so he can now strive to further reduce operating costs and allow Citigroup to sell or spin off any of Citi Holdings assets to raise cash but then is it actually going to be profitable is the question that is doing the rounds in many minds. “There are certainly ‘good bank’ and ‘bad bank’ components in Citigroup’s balance sheet, and our assumption is that with a role for the government, Citi can find a profitable path. But without treasury involvement, the path will be more dicey,” Mike Englund, Chief Economist, US-based Action Economies tells 4Ps B&M. No doubt the new move is a sort of back to basics – to focus on the pure banking by shedding off the idea of creating a financial supermarket – but then it doesn’t change Citi’s business model at all. The move only separates the business on paper with Citi’s current problems lying intact.

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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