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Citi break

14 Oct 2005 By Rob Cox, Jonathan Ford

Chuck Prince is unlikely to announce a break-up of Citigroup when he announces the global banking group’s results on Monday. But maybe Citi’s boss should. It makes a lot of sense. Breaking up Citi may sound like an extreme idea. But big problems demand bold solutions. And Citi has a big problem with its stock market valuation. On a sum-of-the-parts basis, the group may be worth around $56 a share – or some 20% more than the current market price. That’s $50bn of value – about the size of US Bancorp.

This isn’t a new problem. Citi’s price-to-earnings ratio has drifted down to about 10 times from a premium of 18 times when Sandy Weill created it through the 1998 merger of Citicorp and Travelers. Citi blames the discount on a series of scandals in recent years – from Enron and Worldcom to last year’s “knuckleheaded” bond trade that got it into trouble with European financial regulators. Its solution is to clean up its act. That’s what Prince’s so-called “five-point plan” is supposed to achieve.

But the reality is that the scandals are only a symptom of a bigger problem. Weill’s bequest is too big and complex to manage. After all, Prince’s plan looks to be working; the bank has avoided a big snafu for more than a year now. But the rating hasn’t recovered. That’s because the plan is seen to be swaddling the group in bureaucratic red tape and stifling innovation. Put simply, cutting out the hiccups may also mean less growth.

So why keep Citi together? There’s no strong industrial reason to do so. Few investors today would see much benefit in putting a retail brokerage and investment bank under the same roof, for instance. The same could be said for consumer and investment banking. True, there are funding advantages from colossal scale. But these are offset by the complexity problem. What’s more, breaking up the business would hardly result in the creation of a tribe of pygmies. If you carved out the consumer business, that would be worth about $190bn. Wholesale and investment banking would be worth $80bn, and the Smith Barney brokerage about $20bn.

So what’s stopping Citi? Well, it’s a huge step. Prince is a lawyer, and lawyers are innately cautious. But people are beginning to talk about a break-up. And the longer he fails to close the discount, the louder the calls will get.


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