Prince Charming

In the midst of a heavy multi-year turnaround strategy, Citigroup has successfully expanded its global presence in a number of critical overseas markets and reported an 18 percent jump in profits in Q2.

“We want to be a company that is not satisfied with the status quo, is thoughtful and forward looking, and is willing to take managed risks”

But will it be enough to subdue shareholder cynicism and get back in Wall Street’s good books? Leslie Knudson caught up with Chairman and CEO Charles Prince to find out why his charm offensive is paying dividends.

Filling the chief executive’s chair at the world’s largest financial institution was never going to be an easy task, but with second-quarter earnings up 18 percent and having secured a number of key stakes in tight markets like Japan and China, early 2007 indicators suggest Citigroup CEO Charles Prince is doing something right.

Admittedly, it’s been an uphill battle so far. The firm’s healthy acquisition activity and rise in profits haven’t yet been enough to convince Wall Street, and even back-to-back quarters of strong performance have been met with shareholder apathy. A $700 million hit to its credit business stemming from a crash in the subprime mortgage market will do little to ease the pressure, but despite these and other challenges, Prince’s mission to win back consumer confidence is slowly gathering positive momentum. With predictions that performance will outlast the market turbulence, Citi could even be handily placed to position itself for resurgence as the market shakes itself out.

Citi’s rebuilding efforts
The main focus for Citi will be reworking the balance between revenues and expenses to generate greater shareholder value, and streamlining expenses to generate capital. After shedding roughly eight percent of its workforce earlier this spring, Citi is looking to become a leaner, stronger organization and is pushing organic growth along with targeted acquisitions to do so.

So far so good. Prince is optimistic about Citi’s progression this year, after generating positive operating leverage in the first half of 2007. US consumer revenues grew four percent, earnings outside of the US grew 26 percent and Citi is already ahead of its structural expense initiative. With the most recent earnings report in late July indicating an 18 percent rise in profits, Citi has put up another solid quarter.

“We aspire to be the best and most respected global financial services company, not merely the biggest based on assets or other measures,” says Prince. “It’s why we’re engaged in a very extensive, very transparent, multiyear effort to rebuild Citigroup – to open branches, to build deposits, to rebuild and connect technology systems, and to re-weight the company to a greater international earnings mix.”

His aim is to drive organic growth by attracting new customers, deepening existing customer relationships with a broader set of products and services, and improving the firm’s technology platform to drive both revenue and expense improvement. “Citigroup has unique competitive advantages – most global presence, broadest distribution, most valuable brand, and unmatched scale, efficiency and product breadth – that generate compelling opportunities for growth,” he continues. “Of course, there is no short cut to get where we want to be as a company, but these initiatives, combined with expense discipline and targeted acquisitions, will drive long-term value for this organization. I’m confident we will continue to make progress and generate shareholder value.”

His strategy has already helped to lift the sagging US consumer business unit, one of the key cornerstones of Citi’s turnaround strategy. Optimism continues for the unit amid positive results garnered from the early part of the year. “US consumer loans and deposits grew at a double-digit pace,” Prince reports. “Revenues continue to increase and expenses grew a moderate three percent in the second quarter even though we opened another 24 branches during this period.”

The progress comes from executing on a number of key initiatives, the first being its efforts to broaden its product offerings by targeting faster growing segments within credit cards and bringing new products through its consumer finance network. Citi is also expanding its footprint to better connect with customers through new partnerships and distribution channels, such as: expanding its ATM network through 7-Eleven branches, implementing Smith Barney offices in retail banks and launching its Citibank Direct channel, which raked in almost $14 billion in deposits by the end of the second quarter. Lastly, Citi is working on connecting all of its product businesses through technology.

Expanding its global reach
Along with organic growth, Citi has completed a number of targeted acquisitions in emerging markets to reach new customers. While its US consumer unit is slowly building itself back up, Citi’s real bread and butter is coming from its efforts overseas. Strategic acquisitions in key markets (including China, Turkey, India, UK, Japan and Central America) have left Citi well positioned to capitalize on future growth. “In 2006, we opened just under 1200 Citibank and CitiFinancial branches globally – more than three a day on average – with some 70 percent outside the US,” Prince says. “In addition, our markets and banking business and wealth management business have continued to grow around the world.”

Since the second quarter of 2006, Citi has completed more than a dozen transactions, most of which fall outside the US. With its eye on greater international revenue, Citi has its sights set on rebalancing its earnings to eventually take in 60 percent international and 40 percent US – a sharp jump from this year’s second quarter earnings mix that was closer to 50/50.

Citi is already well on its way to reaching that target with a veritable shopping list of key transactions completed in fertile markets. In Central America, Citi acquired Grupo Uno, a prominent credit card company, and Grupo Cuscatlan, a regional bank, and also entered into a key partnership with the holding company controlling Banco de Chile. In the UK, it acquired the world’s largest online bank with its purchase of Egg, and acquired Quilter to leverage its wealth management capabilities. The company also scored in China by becoming Taiwan’s largest international bank, after acquiring Bank of Overseas Chinese, and securing greater ownership in another major bank, Guangdong Development Bank.

The list goes on, with even more ownership stakes secured in Turkey, Japan and India – through Akbank, one of Turkey’s leading banks, Japan’s Nikko Cordial, a long-time joint venture partner, and India’s second largest mortgage lender, HDFC Ltd. Prince plans to continue stamping Citi across the globe. “All of these transactions position us to increase our ownership stakes in the future, while also providing valuable product and distribution arrangements now. We will continue to pursue a strategy of diversifying our investments and deploying capital towards the faster growing regions of the world.”

As Prince continues to expand Citi’s operations around the world, he’s firmly focused on connecting the company’s diverse business units in different and better ways, breaking down silos and transferring expertise across the company. “A great example is our ongoing pilot that moved Smith Barney into Citibank branches in Boston and Philadelphia,” he explains. “By bringing these businesses together, we can now offer clients a broader range of products, advice and service all in one branch. In addition, we're now offering banking services in our consumer finance business and we’ve started offering mortgage originations and commercial lending through Smith Barney.”

The initial results are encouraging, and as part of this effort Prince is also working to simplify and better integrate Citi’s technology – he expects $2 billion in technology efficiency saves over the next several years. “About 60 percent of that will come from infrastructure,” he says. “One of our key initiatives is to reduce the number of data centers to about a dozen or so by 2010, down from 52 in 2005. In addition, we’re working to better leverage our call center capabilities to not only provide great service, but to also offer new products and services to clients. And our structural expense review will change the way we operate and help us become a leaner, stronger and more agile organization, aligning our expenses with our revenue growth and enhancing our ability to continue to grow.”

Utilizing next generation technology and breeding a culture of innovation have kept Citi at the forefront of banking innovation – exactly where Prince wants to be. “I look to promote a culture of innovation across Citi, from our trading floors to branch offices to corporate functions, to find new and better ways to serve our clients and add value for Citi’s shareholders,” Prince says. “We want to be a company that is not satisfied with the status quo, is thoughtful and forward looking, and is willing to take managed risks and make long-term investments to grow and strengthen the franchise.”

The new Citi
As part of its rebuilding effort, Citi has also been involved in updating its image. Already one of the most recognized brands in the global financial services arena, Citi is now united under its red arc to symbolize one unified brand. “For the first time in our history, we are now presenting a single brand to our clients – Citi with the red arc,” Prince remarks. “This change reflects a larger, ongoing effort to unify the company with common values, frameworks and metrics so that we can better serve our clients.”

While the red arc will be used consistently across the business in all its advertising and marketing communications, red’s not the only color that will be associated with Citi. Part of its image overhaul has involved a new focus on environmental responsibility and a commitment to ‘going green’. Leading Wall Street with a whopping $50 billion commitment to climate control over a 10-year period, Citi will be capitalizing on the ‘green is good for business’ mantra that other big corporations – such as GE and IBM – are currently spouting.

“We recognize that our clients want to do business with a company that is serious about dealing with climate change and other environmental issues,” Prince explains. “In addition, there is huge growth in those companies focused on being more environmentally focused and in the alternative energy arena; we’re working with many of these companies now, and expect to do even more in the future to drive innovation and change.”

Citi is no stranger to environmentally friendly moves. The company was one of the institutions responsible for developing the Equator Principles, a doctrine of best practices for assessing and mitigating social and environmental risks in finance, and the firm’s ongoing commitment is evidence of today’s growing corporate trend of incorporating ‘green’ as a critical and necessary part of business decisions. While Wall Street is known for a different kind of green, the rest of the industry is still lagging behind Citi and its level of commitment.

Prince is particularly proud of Citi’s environmental responsiveness in addressing the needs of the planet alongside the needs of its clients. “As a company, we are committed to delivering shareholder value, coupled with our commitment as concerned citizens of the world, to address the environmental and social issues that lie outside the traditional scope of Citi,” he says. “This is why we’re especially proud to be included once again in the Dow Jones Sustainability World Index and the FTSE4Good Index for 2007 in recognition of Citi’s work related to sustainable growth and corporate responsibility. We want to be known not only for delivering success to our clients, but also for responding to the needs of people, communities and the planet.”

The single red arc, a renewed green consciousness, a multitude of targeted acquisitions to rake in international revenue, the latest in banking technology and profits slowly but steadily creeping up – all suggest Citi is remodeling itself into a unified, global, environmentally responsible powerhouse. The true test now is whether these efforts will be enough to impress Wall Street, and whether Prince will get his wish to watch the share price surge under his reign.