The largest US financial corporation is forced to change its business model

One of the largest financial corporations in the world, the American Citigroup, yesterday announced its division into two companies. Record losses suffered by the largest US corporation in 2007-2008 forced its management to abandon the financial supermarket model in order to improve business efficiency. Universal financial companies are becoming the next victims of the financial crisis after global investment banks.

In accordance with the plan of Citigroup management, headed by Vikram Pandit, the corporation will be divided into two parts. The first, Citicorp, will conduct retail banking operations and engage in investment banking. The second, Citi Holdings, will engage in brokerage and asset management, as well as consumer and mortgage lending. Non-core assets will also be transferred to Citi Holdings, as well as a pool of assets that Citi manages under an agreement with the US government to cover losses. These are mostly problem mortgages, auto and other consumer loans totaling $301 billion.

Citigroup is the largest financial corporation in the United States. The company's total assets amounted to $2.05 trillion as of September last year. The corporation serves over 200 million customers in more than 100 countries; as of June 2008, the number of company branches exceeded 8.3 thousand. The workforce is about 350 thousand people. During the financial crisis, Citigroup lost $28 billion, which is currently a world record.

Citigroup management decided to divide the financial corporation in order to increase the efficiency of its work and improve financial performance. The company's stock quotes began to decline in the summer of 2007; from June to December they fell by 46%, in 2008 by another 77%, and from the beginning of 2009 by 12%. In November, the US government was forced to provide urgent assistance to the company: the Treasury Department bought preferred shares of Citigroup for $20 billion and provided government guarantees for $306 billion. To get out of the crisis, the new CEO of Citigroup Vikram Pandit began restructuring the company and selling off non-core assets (see " Kommersant" dated January 15), but these steps were not enough. The report on the financial results of the fourth quarter of 2008, released yesterday, recorded the company's losses in the amount of $8.3 billion.

Analysts began to doubt the feasibility of a company structured like a financial supermarket since the formation of Citigroup by the legendary financier Sanford Weill, who had been collecting parts of the future conglomerate for 20 years. Buying up banks, investment and insurance companies, Mr. Weill created the Travelers Group, which in 1998 merged with one of the oldest and largest commercial banks in the United States, Citicorp. For the sake of the merger between Travelers and Citicorp, Sandy Weill and Citicorp CEO John Reed even lobbied for the repeal of the Glass-Steagall Act passed during the Great Depression, which prohibited companies from combining banking, investment and insurance activities.

Analysts find it difficult to predict whether the division of the business will be a sufficient step to improve Citigroup's position. “The bank still has problems. It is unknown how many bad assets still remain on the bank’s balance sheet,” notes senior analyst at Uralsib FC Leonid Slipchenko. Chief strategist of Renaissance Capital Hovhannes Hovhannisyan adds that the result of the restructuring may not give a positive result, since “all problem assets will be written off to one of the newly emerged divisions and, perhaps, it will not be able to survive the crisis.”

Citi's Russian office yesterday refused to comment on how the restructuring of the parent structure would affect the local unit.

In Russia, Citi has a retail bank, a division for working with corporate clients and an investment banking division, all of these divisions will be part of Citicorp after the restructuring. Thus, there will most likely be no significant changes in the Russian division.

Banks such as UBS, Societe Generale, HSBC and Barclays operated under the previous Citigroup model. Those banks that suffered heavy losses in the mortgage market were forced to think about dividing their business. Thus, in August last year, UBS, which had suffered $26 billion in losses since the beginning of the crisis, announced the division of its business into three autonomous parts (see Kommersant of August 13, 2008).

Financial supermarkets may become the next victim of the crisis after global investment banks, which have already ceased to exist in their pure form. Lehman Brothers went bankrupt, Bear Stearns was bought by commercial bank JP Morgan Chase, Bank of America absorbed Merrill Lynch. For the sake of the opportunity to receive government support, Goldman Sachs and Morgan Stanley changed their status to bank holding companies and began to develop retail business.

Evgeny Kommersant-Khvostik, Nailya Kommersant-Asker-zade

Citigroup has no time for supermarkets