November 10 2008
The target’s name couldn’t be determined, but it is a regional bank that overlaps geographically with Citigroup’s retail-banking unit, which has its highest concentration of branches in the Northeast, California and Texas. A deal could be reached later this month, the people said.
With Wachovia racing to complete its purchase by Wells Fargo & Co., any acquisition by Citigroup could feel like a consolation prize, because none of the remaining sellers among U.S. banks comes close to Wachovia in size.
The fallout from that deal has added to tensions between Citigroup executives and directors, according to people familiar with the matter. Some board members have felt they weren’t sufficiently kept in the loop, while some executives groused that directors are trying to wield too much clout, people familiar with the matter say. A Citigroup spokeswoman declined to comment.
Some insiders say an acquisition would pump up morale at Citigroup and ease the embarrassment of the Wachovia mess.
Beyond that, the renewed takeover efforts show that Citigroup Chief Executive Vikram Pandit is determined to secure a deeper base of deposits tied to the world’s largest economy. Such deposits are relatively cheap and a reliable funding source that makes them even more attractive as turmoil continues to swirl through the capital markets.
After Citigroup’s U.S. deposit levels declined slightly in the third quarter, the company has been trying to lure new accounts by offering unusually high interest rates on certificates of deposit.
Another reason why Mr. Pandit wants Citigroup to bulk up in the U.S.: As the financial crisis ricochets around the world, Citigroup’s vast global network is becoming yet another source of pain for a company that has piled up net losses of $20.25 billion in the past four quarters.
Last month, Citigroup reported a surprising leap in third-quarter losses on loans in Brazil, India and Mexico, while warning that deteriorating conditions in Colombia, Greece, Italy, Japan, Spain and elsewhere were possible harbingers of rising consumer defaults. The New York company’s sizable operations in economies that have been relatively unscathed by the financial crisis, such as Argentina and Turkey, also could be vulnerable.
“It’s going to get a lot worse everywhere,” says David Trone, an analyst at Fox-Pitt Kelton. Citigroup is the U.S. bank most heavily exposed to havoc in emerging markets, he adds.
Executives at Citigroup say any losses outside the U.S. will be manageable. They say the bank is in much better shape than it would have been had it plowed deeper into U.S. real-estate loans.
“I’d take the emerging-markets position any day of the week,” Gary Crittenden, Citigroup’s chief financial officer, said in an interview.
Citigroup does business in 106 countries on six continents. Its closest rival, HSBC Holdings PLC, operates in 85 countries. U.S.-based J.P. Morgan Chase & Co., Bank of America Corp. and Wells Fargo exceed Citigroup in stock-market value but have little or no international retail presence.
Overall, Citigroup gets about half its revenue from outside the U.S. Around the world, Citigroup offers retail banking, credit cards and wealth-management services to consumers, while providing corporate clients with investment banking, cash management and transaction processing.
Since taking over last December, Mr. Pandit has been eager to push even deeper into emerging markets. To overcome the lack of credit bureaus and other infrastructure that banks rely on in the U.S. and Western Europe to guide lending decisions, Citigroup uses a credit-scoring system that it built.
As the rest of the world is afflicted by economic woes, Citigroup’s method will be tested. “You’re underwriting more on judgment than on facts and science,” says Mr. Trone of Fox-Pitt Kelton.
Citigroup responds that its credit models have been honed for decades and are among the most sophisticated in the world. Still, rising defaults on international consumer loans are inevitable, the bank acknowledges. In the third quarter, Citigroup suffered losses on 4.5% of its international consumer loans, compared with a 3.9% rate in the U.S.
“There will be increasing credit costs across the globe,” Mr. Crittenden says. “But the magnitude hopefully will be muted by the fact that our customer base is upscale.”
Citigroup says it has socked away enough reserves to absorb 10 months of non-U.S. loan defaults. Still, William Rhodes, a senior vice chairman at Citigroup, has said that a bailout of emerging economies by the International Monetary Fund is needed to avoid a “firestorm.”
Since losing out on Wachovia and taking a hard look at Washington Mutual Inc. before the Seattle company’s failed banking operations were sold to J.P. Morgan in September, Citigroup has been fortified with $25 billion in taxpayer-funded capital from the Treasury Department.
That makes it easier for Citigroup to pursue another U.S. bank, though some lawmakers have complained that federal infusions should be funneled into loans, not acquisitions.
They socked away $25 billion in US taxpayers money alright.
Citigroup was one of those banks. Considering their Financial woes one has to wonder who’s money they will use if they buy another bank?