Citibank’s Branch Expansion Strategy: No Miracle Leads to Reality Check

Implications: Citibank announced that it will cut back on its branch expansion strategy and may sell some recently opened branches due to high costs and/or poor results.  Any future expansion initiatives are likely to be limited to larger markets. What are the implications for Citibank's future in retail banking? How can Citibank overcome its limitations in retail banking?

Analysis: By mashing its retail bank and Smith Barney brokerage unit together in a pilot program, Citigroup hoped that the units would generate fresh revenues and profits for both Citibank and Smith Barney. Boston was considered the key market to validate this "new frontier" strategy. Mixing bankers and brokers was not a new strategy, but Citigroup had never committed, until 2007, to make the effort a strategic one. After one year, the results are starting to crystallize - there is no miracle in the making.

Now, its poor financial health and decimated earning capacity leave Citigroup with no choice but to dramatically scale back its hopes and plans for expanding Citibank's retail bank network.

1. This condition is the result of two conscious (and arguably poor) decisions by prior CEOs that have hamstrung Citibank with a marginal national retail branch network.

* Citibank did not believe that brick and mortar branching was critical to future growth in retail banking. Instead, an expectation that high tech channel alternatives, such as online banking, telephone banking, and ATMs would sustain expansion at a far lower cost.

* Citibank did not participate actively in the M & A game as did the other big US retail bank franchises (e.g., Bank of America, JP Morgan Chase, Wachovia, Wells Fargo, US Bancorp).

2. A handful of regional banks (e.g., Umpqua Bank, Hudson City Bank, Commerce Bank) have demonstrated an ability to launch new branches and rapidly expand the customer and deposit bases. These initiatives are costly, ranging between $2 - $5 million per location depending on real estate costs, branch size, customized interiors, etc. which are designed to achieve the bank's customer experience objectives. Rapid growth also requires competitive pricing for deposits and loans, which while profitable, usually cuts into normal net interest margins.

3. Citibank's US retail banking destiny will remain as a second tier player on a national level. Its 1000+ offices are concentrated in California (a distant #4) and the Metro NY-NJ-CT market (#4 in NY State). The only other state with over 100 branches is Texas and there Citibank ranks #12. It has limited presence in Illinois, Florida, Nevada, and the Metro DC market. With no market leading retail bank franchise, Citibank is hemmed in by competitors. A meaningful M & A deal is the only way out of this box, and is not likely to be feasible until its financial condition and profitability become competitive again.

4. Another option, albeit an unlikely one, would be to carve out and divest its retail bank branch network (at a profit) and pursue a private banking strategy by adding banking services to its Smith Barney franchise for mass affluent clients and sustaining Citibank's private banking operation.