Thursday, April 12, 2007

Citi's Ongoing Troubles

The big news out of the financial sector this week seems to be Citigroup's latest efforts to resolve its ongoing troubles.

This time, reports have it firing 17,000 people, or about 5% of its staff. Of course, various expense equivalents are presented, and bandied about by analysts, to demonstrate the intended effects on Citi's future performance. One waggish brokerage analyst was so bold as to cry for 80,000 job cuts, to arithmetically bring the firm's revenue/employee in line with Citi's competitors.

Then we have the solemn intonations of every talking head and analyst in sight that,

'this is only half the job.'

Thanks for that. The rest of us would have forgotten that Income Statements begin with the revenue line. God save us from arrogant analysts.

Appearing, from first to last, in this post, are five Yahoo-sourced price charts (click on any chart to view a larger image) for Citigroup, Chase, and the S&P500 Index from 12 months to 30 years. What is clear from the broad array of charts is that, over most timeframes, these two former money center, now universal banks, are typically subject to the same market forces. On occasion, however, one or the other will perform a bit better than the other.

Lately, Chase has done better. So much so that, contrary to my wildest expectation, it has been selected in the high-growth component of my equity strategy's portfolio for April of this year. It's very rare that a large, diversified financial services firm would perform in such a manner as to merit this inclusion.

Citigroup, however, seems to have lost ground most recently at the beginning of this year, for a performance penalty of roughly 10 percentage points over the past year. The five-year view shows the two firms to be roughly equal, while the thirty-year view displays Citi's recent flattening, along with Chase.

So, in a sense, Citigroup does need to address its high-cost operating issues. However, given that, according to my proprietary research, revenue growth is key to long term, consistently superior total return performance, I wonder how capable Citi will be of revenue generation, in the wake of its expense surgeries? If, as many call for, the company cuts further, it almost has to affect the firm's ability to generate revenues at significantly higher rates.

Further, the company has reshuffled senior executives, adding several, and generally given the impression that nobody is in charge.

As I have written in earlier posts about these scale and banking, it may well be that neither firm is capable of long term outperformance of the market, at their current sizes. Prince is an ineffective executive, and has been given, in my opinion, far too long to do his job. However, it is a rather tall order to wring consistently superior performance from these financial concerns. Even Dimon, at Chase, deserves little credit for its current, perhaps temporary, out-performance, since he only took the helm there recently.

Bottom line, as one might say, I would not bet on Citigroup's recent actions to return it to consistently superior total return performance any time soon.

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