How Will Market View Citigroup's New CEO, Plans?

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Pandit handed the third largest bank by assets, Citigroup (NYSE: C), over to his protégé Michael Corbat poised for a turnaround, but requiring realignment in most of its major businesses. While third quarter financial results were mixed and losses widened, strength was shown in Citigroup's North American commercial, investment, and retail businesses. The company posted third quarter net income of $468 million, or 15 cents per share. After accounting for a write down in its retail business and gains and losses of $3.27 billion, it earned $1.06 a share. The company earned a $1.23 a share a year ago.

Pandit has never been able to fully shake off mounting losses from the financial crisis. And the international business where the CEO was expected to shine is posting losses. Corbat has targeted Citigroup's two weakest areas for improvement - turning around non-performing lending assets and breathing life back into emerging markets, a former Citigroup stronghold. As a former Pandit protégé involved in the very business areas chomping away at earnings, Corbat has a lot to prove.

Admittedly, Pandit's CEO-ship endured during Citigroup's darkest years. To his credit, unlike Lehman's, Bear Stearns, and other casualties of the financial crisis, Citigroup remained whole, after shedding its troubled brokerage, Smith Barney. The bank remains hobbled with billions of dollars in underperforming assets. Although nicely segregated on financial statements into Citi Holdings, its impact on earnings cannot be neatly tucked away. Citi Holdings widened its loss from $1.22 billion to $3.56 billion from last year’s period. The large loss makes it harder to remove the assets from Citigroup's larger picture through rhetoric of “for future sale.” New management needs to more clearly delineate how and when it will dispose of Citi Holdings.

One cannot argue that the bank is not executing as it should, but is more patience simply required? The third quarter earnings announcement was considered a turnaround point for Citigroup. While gains were modest, there are signs Pandit was outperforming peers, ever so slightly. Mortgage lending is a growing market for US banks and one Corbat needs to strengthen Citigroup's position in. North American retail banking revenues were up 35% on an increase in mortgage revenues for Citigroup. Overall, increases in mortgage revenues on an improving credit situation buoyed bank lenders in the quarter. While Citigroup's bank's mortgage originations declined 15% to $14.5 billion, profit margins widened on mortgage loans. Specifically, the bank's lending margins rose to 2.86% from 2.83% a year ago.

Competitors JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) saw a decline in net interest margin on rising mortgage revenues. Wells Fargo's mortgage banking revenues increased 50% to $2.8 billion year-over-year, while its net interest margin declined to 3.66% from 3.91%. JPMorgan, which also enjoyed an increase in mortgage originations and revenues, saw net interest margin decline from 2.43 to 2.66. The comparative results underscore Citigroup's lower topline growth in mortgage lending, but more efficient operations. As margins are widely expected to narrow in mortgage lending, the slowdown in mortgage revenue relative to its competitors points to problems in the underlying business.

The second market Corbat needs to shake up is international. Citigroup is realizing lackluster performance in its international business, historically a strength for the bank and an area where Pandit was expected to make his mark, especially in the fast growing Asian markets of India and China, formerly high growth markets for the bank. International consumer banking was down 3 percent in the quarter. Citigroup is taking an acute hit from a general slowdown in Asian banking. The bank continues to dominate in Asian wealth management. Citigroup was named top private bank in the Asia-Pacific in 2011 by Private Bank International, overtaking UBS (UBS) and HSBC Holdings (HBC). However, the rankings are relative as the banks' overall wealth management assets fell in 2012.

Citigroup continues to be hit by rising regulatory costs related to the financial crisis. Under a new capital surcharge, international banks are required to pay a “capital surcharge”' or capital cushion to offset risks they pose to the international financial system. Citigroup will likely be required to pay the upper range of the surcharge of 3.5%.

Pandit did begin to do some heavier lifting in the quarter to dispose of underperforming businesses from the financial crisis. Citigroup is selling its 49% interest in Morgan Stanley (NYSE: MS) back to the brokerage for $13.5 billion. During the financial crisis, Citibank transferred its losing Smith Barney brokerage to Morgan Stanley. Citigroup will take a 40% charge on the brokerage sale. Commercial and investment banking have been profitable for Citibank. With increased revenue from fixed income and equity markets, profits rose 67%. Other banks including JPMorgan and Wells Fargo also demonstrated financial strength in trading this quarter.

Yet, Citigroup is not operating as efficiently as these banks, according to Bloomberg. While banks on average realized an increase in productivity per employee in 2012, Citigroup's $206,000 of revenue per employee represents a decline of 7.5% from the first nine months of 2011. In contrast, Bank of America (BAC) realized revenue of $320,000 per employee and Morgan Stanley $530,000, an increase of 5% and 10%, respectively. To boost employee productivity, Corbat plans to follow the lead of these banks and downsize Citigroup's workforce.

Pandit's mixed record, however, means the market and Citigroup board are going to be even less patient with incoming CEO Michael Corbat.

StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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