"If Citigroup chooses to clamp down country by country around the world, then basically they are going to see a significant setback in profits," said Richard X. Bove, an analyst at Punk, Ziegel & Co., a New York research firm.
Christopher Blum, an analyst at investment firm Edward Jones, said the new culture could mean Citigroup will no longer show earnings growth in the mid-teens every quarter. But he said the firm's stock price would benefit. "Having the right culture, the right standards and serving your customer is the right thing to do, businesswise," he said.
Charles O. Prince III is Citigroup chief executive.
(File Photo)
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After rising in the first months of his tenure, Citigroup's share price has sagged under Prince's leadership. It closed at $44.12 on Thursday, about 3 percent below where it was at the start of trading on Oct. 1, 2003. The stock trades at a modest 11 times earnings, a level Prince acknowledged was disappointing and needs to change.
But he rejected the notion that in order to stay out of regulatory trouble the firm would have to grow more slowly.
"I don't accept the premise," he said. "When I see our growth rates in our credit card business in Asia, when I see an initiative like the identify theft program on credit cards here, when I see the franchise business we have in fixed income around the world, we don't need to cross the line" to grow at 12 percent.
Prince cited the minuscule contribution the Japanese private bank makes to the firm's bottom line as an example of how acting ethically need not come at the cost of reduced earnings.
He attributed the firm's sagging stock in part to "hangover" from the Wall Street and corporate scandals of the past few years. For instance, he cited Citigroup's decision to take a charge of $4.95 billion against earnings in the second quarter to settle a class-action suit filed by WorldCom shareholders and to increase litigation and settlement reserves for other issues.
"The hangover effect will take a couple of years to get past us," he said.
Prince also said the market continues to believe that Citigroup has to do big deals to grow. After all, former chief executive and current chairman of the board, Sanford I. Weill, built the firm into a global giant by merging his Travelers insurance company with Citicorp and then snapping up such blue-chip businesses as Smith Barney and Salomon Brothers, helping to tear down regulatory barriers along the way.
But if the big-deal days are not over, Prince said, they are at least on hold.
He rejected persistent market rumors that Citigroup would move to acquire a major European bank such as Deutsche Bank AG or Barclays PLC. And he said he was in no hurry to add large numbers of domestic bank branches, as Bank of America Corp., J.P. Morgan Chase & Co. and others have done.
Instead, he said the firm would continue its "string of pearls" approach to branch expansion in key markets, exemplified by its recent acquisition of First American Bank in Texas, hoping to grow from a relatively modest 800 locations to several thousand. "We are not going to wait to harpoon a whale. We will go about building this out on a normal course."
In the meantime, Prince said he is focused on increasing Citigroup's consumer business worldwide, especially in Asia, where economies are booming and incomes are rising rapidly. Prince said he visits China every 60 to 90 days. "I think the emergence of China as an economic power will be one of the signal events of the 21st century," he said. "And we've got to be there."
Both inside and outside Citigroup, many seem willing to give Prince more time to deliver on his promise to restore the firm's reputation while continuing to produce strong results.
"I don't think it's fair to look at Citi in the last year and suggest that [Prince] has failed to meet his objective," said Blum of Edward Jones. "The thing that gives me confidence is that management admits there is a great deal more work to do."
Said one Citigroup insider: "It's going to take more than a year to firmly place your mark on a place. Especially when you spend so much time mopping up from the last three years."
The insider, who spoke on condition of anonymity because most employees are not authorized to speak publicly, said the closing of the Japanese private bank and the rogue bond trade in London are viewed within the firm as remnants of the cowboy culture of Citigroup's past.
