October 18, 2012 (TSR) – The incredible shrinking bank may have to shrink more. In the hours after surprise announcement that Citigroup CEO Vikram Pandit was stepping down, speculation was rife, and facts scant, about what lay ahead for the nation’s third-largest bank.
Pandit left after a series of embarrassments and missteps that apparently unsettled Citigroup’s board, including a “no” vote from shareholders on his pay package and a ruling from the Federal Reserve that the bank was not strong enough to raise its stock dividend.
Under his successor, one possibility given high odds by financial analysts is a strategy of more cost-cutting, more shrinking and more focus on boring, traditional banking, like making loans.
“It’s going to get a lot smaller,” said Gerard Cassidy, a long-time banking analyst at RBC Capital Markets. “You’ve got to shrink to make big money.”
In the nearly five years since Pandit took over as CEO, he shed businesses and cut jobs. Staff fell from 375,000 when he took over to 262,000.
Once the nation’s largest bank, Citi is now the third-largest, with $1.9 trillion in assets. It trails JPMorgan Chase, with $2.3 trillion, and Bank of America, with $2.1 trillion.
Citi’s new CEO is Michael Corbat, 52. He had been the CEO of Citigroup’s Europe, Middle East and Africa division. He also ran Citi Holdings, which contains assets that Citi wants to sell.
Because Corbat isn’t widely known, analysts Tuesday were not sure how he might change the direction of the company.
For clues, some are looking to someone more well-known: the man thought to be behind Pandit’s departure, Citi Chairman Michael O’Neill. O’Neill became chairman in March, when Richard Parsons left after three years.
O’Neill was elected CEO of Barclays, the British bank, in 1999 but had to give up the job immediately because of heart problems. He joined Citi’s board in March 2009. O’Neill had also been CEO of Bank of Hawaii Corp., where he was a big cost-cutter.
“When he ran Bank of Hawaii, he shut down up to 50 percent of its branches. It’s a startling number,” said Cassidy. He added that at Citi, “if the branch banking businesses doesn’t make sense in parts of the United States, (he’ll) get rid of it.”
Tom Brown, founder of hedge fund Second Curve Capital, agreed. “O’Neill downsized tremendously, and that’s what I think you’ll see here,” he said.
For years, the goal in banking was to get bigger, spreading expenses over more and more customers and offering a smorgasbord of services. This was the vision of Sandy Weill, the former Citi CEO who built the bank through several deals.
But the appeal of the one-stop shop, though not dead, has lost its luster since the financial crisis. Many banks, Citi included, were so sprawling, they didn’t even know the risks they had assumed.
As the housing market imploded, Citi lost $32 billion in 2008, according to FactSet, a financial data provider. Nearing collapse, the bank took $45 billion in government money.
The government converted $25 billion into an ownership stake, which it sold in December 2010 for a $12 billion profit. Citigroup had repaid the other $20 billion in December 2009.
In a conference call late Tuesday with analysts who admitted they were puzzled by Pandit’s sudden departure, O’Neill would say only that the CEO submitted his resignation and the board accepted.
The New York Times and The Wall Street Journal reported that Pandit was essentially ousted by the board after the shareholder vote on his pay, the failure to pass the Fed’s standards for raising the dividend, and a writedown of Citigroup’s stake in a joint venture with Morgan Stanley.
O’Neill gave few details about how the bank may change after Pandit. But he did note that it will be “extraordinarily focused on our expense level.”
Some analysts speculated the bank may place less emphasis on Wall Street trading and helping companies sell stocks and bonds to the public, the so-called investment banking in which Pandit had expertise. The business is volatile, with blockbuster profits occasionally followed by big losses.
Instead, the focus could shift to commercial banking, what Daniel Alpert, managing partner of Westwood Capital, calls the “dull and boring” businesses of lending to companies and consumers.
Dick Bove, a bank analyst at Rochdale Securities, thinks Citi will not only emphasize commercial banking, but will shift focus more overseas where the bank faces fewer rivals and could charge higher interest rates.
“If you look at domestic commercial banking, you have lower interest rates, you have higher losses, you have regulation and a high degree of competition,” he said. “If you go overseas, you don’t have any of those. You have tremendous growth.”
Citi manages 200 million accounts with customers in 160 countries.
Corbat also spoke to analysts on the conference call but, as was the case with O’Neill, gave little indication how Citi might change. Corbat has worked at Citi and its predecessors since he graduated from Harvard in 1983.
Pandit’s resignation came a day after the bank announced what many analysts had hailed as terrific earnings for the third quarter.
“It feels very abrupt to us,” one analyst, Mike Mayo of CLSA, said on the conference call. “We’re all scratching our heads, and thinking, `What just happened?'”
O’Neill replied, “What happened is Vikram submitted his resignation.”
Pandit is credited with not only slimming the bank, but removing it from government ownership after the bailout and righting its balance sheet after billions in losses on bad mortgage investments made before he took the helm. But he came under criticism for not cutting expenses enough last year.
“You’re in a recovery mode, and the last thing you should do is make investments that retard that,” said Second Curve’s Brown of the bank’s 2011 investments overseas and in branches. “Last year was terrible.” Said Cassidy: “I don’t know if (Pandit) was pushed out or quit, but I don’t think he was following the game plan of O’Neill.”
Vikram Pandit may forgo $33 million as exit voids retention plan
Vikram Pandit, who stepped down on Tuesday as Citigroup’s chief executive officer, stands to forfeit almost $33 million in cash and stock from a retention package unless the board gives him a payout to ease his exit.
Citigroup formulated a plan last year that, based on the firm’s performance so far, would have given Pandit $19 million through a profit-sharing agreement, deferred stock now valued at $9 million and $4.6 million in options, according to the terms of a May 2011 regulatory filing and data compiled by Bloomberg. The plan required Pandit, 55, to be employed at the bank through various payment dates, most of which haven’t been reached. It’s typical for CEOs who resign to forfeit previously negotiated severance and to work out an alternative payout agreement with the board, said Steven Hall, managing director of Steven Hall & Partners, a New York-based executive compensation consulting firm.
Pandit getting nothing would signal that “he stood up and said, ‘I’m resigning,'” Hall said. If he gets a payout, “then the question is, did they give him that in order to smooth the path to his resignation or termination? Or did they look at him and say, ‘You know what, you did a hell of a good job during a very, very rough time, we’d like to do something nice for you,'” Hall said.
Pandit would have had to remain at Citigroup until at least May 17, 2013 to be eligible for payments under the profit-sharing plan, according to the regulatory filing. He was to receive about 0.055% of Citigroup’s cumulative pretax income if it exceeded $12 billion in 2011 and 2012. The company has posted a combined $34.4 billion in pretax profit for 2011 and the first nine months of this year.
While about one-third of 500,000 stock options vested earlier this year, Pandit must forgo the remaining two-thirds currently valued at about $4.6 million, according to the retention plan and data compiled by Bloomberg.
He also will relinquish the $9 million in deferred stock that wouldn’t begin vesting until the end of next year, according to a person familiar with the matter, who requested anonymity because the individual wasn’t authorized to discuss it publicly.
Pandit would have had to satisfy three “non-financial” criteria to receive the award. They include regulatory considerations such as capital levels, talent development and “organizational culture focused on responsible finance”, Citigroup said in the filing. The agreement doesn’t specify whether Pandit needs to be employed by the firm on the vesting date to receive the deferred stock.
Pandit won’t forfeit about $9 million in deferred cash and stock he received as part of his year-end 2011 compensation as long as he doesn’t work for a “significant competitor” in the next three years, according to the firm’s annual proxy filing. If Citigroup doesn’t alter Pandit’s compensation, its shareholders will have paid him about $261 million in the five years since he became CEO, including personal compensation and about $165 million for the 2007 purchase of his Old Lane Partners LP hedge fund in a deal that positioned him to take charge of the company. Pandit shut Old Lane and booked a $202 million writedown soon after he took the post.