Citigroup Grope

Citigroup Grope

Citigroup Grope

Moneybox
Commentary about business and finance.
Jan. 26 1999 10:29 PM

Citigroup Grope

Normally, when you think of Wall Street, you think of investment banking and proprietary trading as being the route to real money. Commercial banking seems sort of passe now, a vestige of the days when "bankers' hours" didn't mean 7 a.m. to 9 p.m., and when borrowing money at 3 percent and lending it at 5 percent seemed like the route to a pretty comfortable life. The irony, though, is that commercial banking is still a phenomenal business, particularly in an environment where the number of large banks is shrinking and where the kinds of revenue streams traditional banks can rely on is expanding.

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As evidence, look at Citigroup's last quarter. Citigroup, which was formed just a few months ago by the merger of Citicorp and Travelers, has made lots of big promises about being the world's financial supermarket, promises that have, perhaps not surprisingly, proved a little harder to keep than John Reed and Sandy Weill would have hoped. The company's been racked by internal turmoil--epitomized by the dismissal of president Jamie Dimon--and its stock, which was crushed in the August/September sell-off, has languished even as other financial-service stocks have perked up a bit.

But if you take a long-term focus, Citigroup's prospects look exceptionally good, with one notable exception: its investment banking and trading divisions, which include Salomon Smith Barney. Salomon, for instance, had massive losses in the third quarter, and in this most recent quarter earned just $13 million, even as Citibank's Global Relationship Bank--which handles most of Citigroup's global corporate lending--has also struggled.

Citigroup's consumer business, by contrast, is booming, with profits up 20 percent from last year. That consumer business includes credit cards, which were terrifically strong in the U.S., personal insurance, and, of course, that old standby: the branch office. The curious thing, here, of course, is that it's this part of the business that one might assume was not exactly rocket science. But the performance of the consumer divisions is more than just steady. It's actually driving the growth of the company as a whole.

The other thing to keep in mind is that Citigroup's consumer business is this strong even though emerging markets across the world are struggling. I've expressed doubts before about the idea of one-stop financial shopping, and about the assumption that Citigroup's brand name will be an automatic winner abroad. But as emerging markets stabilize, it does seem likely that Citigroup will become an increasingly important player, especially because co-CEO John Reed is committed to those markets.

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Reed, perhaps not surprisingly, often acts as if he'd be happy just to excise Salomon from the company. That's probably a bit too much. But the contrast between the supposedly mundane banking side of Citigroup and the theoretically more enticing trading side is striking. After four or eight or 16 years of a bull market (depending on when you date it), it's easy to forget that profits from trading and even from investment banking are volatile in a way that profits from a real consumer business are not. (Which is one reason why Goldman Sachs may get less of a premium from investors than its numbers would seem to merit.) Citigroup still has a long way to go before the merger can be said to have been a success. After all, presumably Citicorp would have been doing pretty well on its own. But the lineaments of a truly global bank are starting to become discernible.

RANDOM NOTE: Very weird how different the Wall Street Journal and the New York Times' take on yesterday's Supreme Court decision regarding the Baby Bells was. The Journal, as I did, described the decision as "a blow to ... the Baby Bell telephone companies," and emphasized that it should make it easier for companies to compete with the Bells in multiple states. The Times, by contrast, put a banner headline across the front page of the Business section, "High Court Says Local Phone Giants Don't Have to Sell Access." That headline referred to a different part of the decision, which said that the Baby Bells did not necessarily have to lease access to every single part of their existing network. The Times actually said the ruling "could delay efforts" to open local phone service up to competition.

We're all in favor of counterintuitive readings here, but in this case the Times has taken an ancillary--though not irrelevant--part of the decision and placed it at center stage. Sometimes what's obvious is also true.