Summary
Citigroup, still suffering from credit related losses, is now planning to spin its Smith Barney unit into a joint venture with Morgan Stanley. Other Citigroup business units are rumored to be on the block for divestiture. Government regulators appear to be forcing this action to happen sooner rather than later. Can Citigroup succeed at breaking up its financial supermarket? Is this the end of the financial supermarket model for all big banks?
Analysis
Citigroup is an aggregation of companies across several lines of business that have never been integrated into an effective financial supermarket. While one can debate the wisdom of assembling the parts that make up Citigroup, the reality today is that the company has been poorly managed over the years and the risks undertaken clearly were not understood. Now that the US government has invested $45 billion in preferred capital and provided guarantees on hundreds of billions in its investment portfolio, the time has come to unbundle Citigroup instead of hanging on to the supermarket dream and hoping for happy days.
Citigroup has now crossed the threshold from playing out the supermarket strategy into a corporate restructuring that will require a hard rationalization of its various parts. Smith Barney is the first piece to go. Other parts that do not fit into a bank's traditional footprint are Primerica (mass market financial advisers) and Citifinancial (below prime consumer lending). Citi's international banking franchises may also be carved up.
1. The Smith Barney - Morgan Stanley joint venture looks good on paper and creates a profitable and capital enhancing transaction for Citigroup. Now that the deal is in the market, Citi needs to get it done sooner rather than later. 3Q2009 is a long time to wait, for everyone. The odds of this deal actually creating the market leading wealth management broker-based business are not really that high.
2. Carving off the other pieces should not affect Citibank's US banking franchise. However, the US franchise is not particularly strong as an integrated bank because of the product silo business model that Citibank has followed, unlike Wells Fargo and US Bank in particular. Citibank will be challenged everywhere it competes with these two banks, plus B of A and JP Morgan Chase. One common challenge for all of these other big players is that their own deal integration plates are full. Achieving near zero defect integrations will be a key metric for the winners.
3. Internationally, Citigroup will end up smaller than its current footprint. Latin America is a key piece of its franchise and other competitors (e.g., BBVA) will either want it or will be aggressive in trying to pick off its customers.
4. Citigroup never really had a decent chance of succeeding as a financial supermarket because the management teams that assembled its parts and ran the company did not understand what it takes to be successful as an integrated financial supermarket. Breaking up will not be that hard to do, but doing it well (meaning what is left of Citigroup will be very competitive) will be very difficult.
5. The financial supermarket model is not necessarily dead. A careful examination of what Wells Fargo, US Bank, Charles Schwab, and USAA are doing is evidence that a customer centric business model that is more focused on serving as many customer financial needs as feasible can work. This model applies, with variations on the mix of products, for consumers, small business, middle market and large corporate clients.
