March 24 (Bloomberg) -- A decade after its merger with Travelers Group Inc. created the No. 1 U.S. bank by assets, Citigroup Inc. is the stock market's inferior investment compared to Bank of America Corp., JPMorgan Chase & Co. and the Standard & Poor's 500 Index.
No wonder Citigroup Chief Executive Officer Vikram Pandit, just four months into the job, has decided being No. 3 is better than being biggest.
Reeling from $20 billion of writedowns that helped shrink its shares to less than half the 2000 high of $54.76, Citigroup is poised to dispose of more than $200 billion of loans and securities to shore up its capital, said a person with knowledge of the plans who declined to be identified because they haven't been made public.
Pandit is ``going to cut a lot of fat,'' said Robert Olstein, chief investment officer of Purchase, New York-based Olstein Capital Management LP, who holds about 1.75 million Citigroup shares and expects the stock price to double within two years. ``I don't think Pandit cares whether they're No. 1 or No. 2. This isn't a tennis match.''
Reducing the company's $2.2 trillion of assets will give JPMorgan and Bank of America the opportunity to overtake New York-based Citigroup as the country's largest bank. The decision also may erode the interest payments that Citigroup earns, which accounted for 57 percent of the company's revenue last year.
`Hard to Sell'
Pandit may struggle to find buyers during a period of unprecedented losses in the credit markets that have depleted capital available to cover asset writedowns, said Adam Compton, senior research analyst at San Francisco-based RCM Capital Management LLC, which oversees $150 billion and held more than 2.1 million Citigroup shares at the end of December.
``Citigroup would be better off as a smaller entity,'' Compton said. ``But you're giving up whatever profit you're generating on those assets, and it's hard to sell them in this kind of a market.''
The company probably will lower its asset base by letting loans and securities pay off as they come due, rather than sell them at a loss, said the person who declined to be identified. That may include $49 billion of securities the bank had to assume when it bailed out seven off-balance-sheet investment funds.
Pandit, 51, plans to tell shareholders in the next seven weeks how he intends to rebuild Citigroup after the company lost more than $150 billion of market capitalization since the start of 2007. Citigroup's value dropped below $100 billion on March 17 for the first time since 1998, before rebounding to $117 billion on March 20. Citigroup spokeswoman Shannon Bell said Pandit wasn't available to comment.
Prince's Reign
Citigroup lost the title of biggest bank by market value during the fourth quarter to Bank of America of Charlotte, North Carolina. New York-based JPMorgan took the second spot in January. Citigroup has returned an average 0.1 percent a year in New York trading, including reinvested dividends, since then- Travelers CEO Sanford ``Sandy'' Weill and then-Citicorp CEO John Reed announced their merger in April 1998. Bank of America rose 5.4 percent a year in the same the period, JPMorgan gained 3.2 percent and the S&P 500 advanced about 3 percent.
Under Pandit's predecessor, Charles O. ``Chuck'' Prince, Citigroup's assets increased by $689 billion from 2005 through 2007, an amount larger than the entire balance sheet of Wells Fargo & Co., the fifth-biggest U.S. bank. As of March 20, Citigroup's market capitalization was just $10 billion larger than San Francisco-based Wells Fargo's.
Prince, 58, succeeded Weill as CEO in 2003 and then stepped down in November after his expansion into subprime mortgages and asset-backed lending backfired.
Cash Infusion
Citigroup now plans a ``material balance sheet rationalization,'' Credit Suisse Group analyst Susan Roth Katzke wrote in a March 15 report, a day after she and other Wall Street analysts met with Pandit in New York, where he assured them the bank had adequate capital.
Total assets, including loans, cash and investments, may drop to $1.9 trillion, Olstein estimates. JPMorgan's assets will exceed $1.9 trillion with the pending purchase of Bear Stearns Cos., based on year-end reports. Bank of America's $1.76 trillion of assets may grow to $1.92 trillion by the end of 2008, said Edward Najarian, an analyst at New York-based Merrill Lynch & Co., in a March 4 report to clients.
Pandit may need to expedite asset sales because raising more capital from outside investors is tougher than a few months ago. Citigroup shares have dropped 25 percent since Jan. 15, the day the bank announced the sale of $12.5 billion of convertible preferred securities to the governments of Singapore and Kuwait, Saudi billionaire Prince Alwaleed bin Talal and Weill, 75.
Subprime Bonds
Shareholders already have had to endure a 41 percent cut in the stock dividend, a move Citigroup's board took in January to save $4.4 billion in annual cash distributions.
Pandit and Chief Financial Officer Gary Crittenden started examining how to increase capital late last year. Assets dropped by $175 billion in the fourth quarter, the first reduction since 2005. On March 6, Citigroup announced a plan to pare its $190 billion holdings of U.S. mortgages by not replacing $45 billion scheduled to be paid off this year. Bill Beckmann, Citigroup's 47-year-old mortgage chief, said in a March 14 interview that the bank will reduce the mortgage holdings further in 2009.
``There are some other good places to use that capital,'' Beckmann said. ``This isn't to say we're going to sell off huge chunks of the portfolio. The market wouldn't be kind to that right now.''
Tier 1
Classes of subprime bonds issued in 2006 and rated AAA are trading as low as 68 cents on the dollar, according to a report last week from UBS AG analysts led by New York-based Laurie Goodman. Junk-grade corporate loans are trading at cents on the dollar from the ``low-90s'' to the ``mid-70s,'' Goldman Sachs Group Inc. Chief Financial Officer David Viniar said in an interview in New York last week.
``You have non-distressed assets that are trading at distressed prices,'' Viniar said.
Selling assets that aren't trading at depressed prices would bolster Citigroup's so-called Tier 1 capital, the core measure of solvency demanded by regulators. Under U.S. rules, banks have to set aside sufficient Tier 1 capital, which includes common stock and retained earnings, to provide a cushion that a bank would have to burn through before investors in Tier 2 capital -- mostly subordinated debt --or depositors would suffer losses.
A ``well-capitalized'' bank must have a ratio of Tier 1 capital to assets of at least 6 percent, according to rules set by U.S. bank regulators. Citigroup sets its target at 7.5 percent.
Morgan Stanley
As of Dec. 31, Citigroup's ratio was 7.1 percent, down from 8.6 percent a year earlier. With the recent capital infusions, the ratio climbed to 8.8 percent, Citigroup said in January. Bank of America's was 6.87 percent at the end of last year, and JPMorgan's was 8.4 percent.
Citigroup's plan to pare its mortgage holdings may free up $4 billion to $6 billion in capital, CreditSights Inc. analyst David Hendler estimates.
The bank could reduce total assets by about 5 percent, or about $100 billion, this year by simply not replacing half of the loans that mature, Sandler O'Neill & Partners LP analyst Jeff Harte estimated in a Jan. 14 report. Harte works in Chicago, while Hendler is based in New York.
Pandit's plan to sell loans and securities and divest only marginal businesses may quell speculation that he may seek a broader breakup of the company, such as spinning off the retail banking or wealth-management operations.
``While it appears that a significant dollar amount of non- core assets is being identified, it does not appear that major business lines will be divested,'' Merrill analyst Guy Moszkowski wrote in a March 14 report.
Risk Management
Pandit, a former Morgan Stanley investment banker who joined Citigroup last July as head of hedge funds and private equity, said in December that he's conducting a ``front-to- back'' review, scheduled to be completed in May, that will help determine which assets should be sold.
Such analysis has been his forte since at least the 1980s, when he penned an 89-page dissertation for a Ph.D. in finance from Columbia University. It extends to his personal life. His father, Shankar Pandit, said in an interview in December with the Indian Web site Rediff.com that his son told his wife ``not to work, because if you work, from whatever you earn, 50 percent will go in taxes and the rest will go in housemaids.''
At Morgan Stanley, he rose through the ranks to become head of equity derivatives, then co-head of the trading and investment-banking division, and then sole head.
Looming Writedowns
Pandit wrote in a March 5 memo to employees obtained by Bloomberg News that he's ``deeply engaged'' in Citigroup's risk management and focused on ``capital allocation to ensure that we take advantage of growth opportunities that meet appropriate risk-return standards.''
Such appreciation for the riskiness of banking was lacking in Prince, a career corporate lawyer tapped by Weill to extract Citigroup from the regulatory probes and lawsuits of the early 2000s, Olstein said. Prince ``got sucked into businesses that were big profit makers during boom times, but had no long-term horizon,'' he said.
Prince didn't respond to a request for comment left with an assistant at his office.
Citigroup's assets mushroomed 46 percent from 2005 through 2007 as the bank's balance sheet filled up with corporate loans, subprime mortgages and asset-backed securities whose values have since plunged.
The company climbed to third place in 2007 from 13th in 1999 among underwriters of loans to U.S. companies with credit ratings below investment grade. Now, Citigroup may be facing as much as $3 billion in writedowns on $43 billion of so-called leveraged loans that remain on the books, according to estimates from New York-based analyst Meredith Whitney at Oppenheimer & Co.
``Any bank can grow really fast, because it's easy to go out and give loans, and people take money if you give it to them,'' RCM's Compton said. ``Eventually it catches up with you.''
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