Poster-child II: Citi's Potential Turn-around as Performance Examplar
Hopefully you've had the chance to take a look at yesterday's post on Citigroup. By this point most of the MSM, et.al. commentary is in. Now I'll admit that an in-depth post on Citi and it's deep-seated structural deficiencies has been on my to-do list for a very long time. And interestingly commentators like Jim Jubak and Meredith Whitney have been less than positive (their vidclips are at the bottom of the intro btw...worth watching). However after reviewing the Analyst presentation from last Fri. IOHO they may in fact be dead wrong. Note - we're saying may. If you think back to our template of business business performance (Performance Assessment Basics: Five Fundamental Factors) we argued that a business had to have a strategic vision/business model, execution capabilities that supported it and the ability to manage the outcomes. All of which Citi has lacked for years. Instead it's operated as a discombobulated set of isolated, conflicting and self-serving silos. Even if you believe the breakup thesis each of these silos needs to be turned into an efficient and effective business in its' own right. Then you get to the synergy question.
What we saw in Pandit's presentation starts to answer the mail in each of these areas. Just by way of compare and contrast here's two dloadable files from the old regime and the new. The first is so confusing it's scary. The second is so well-structured, thoughtful and straightforward it's scary in a whole other way. If you dload nothing else take it because of what it tells you first off about Citi. Secondly because of what it shows us about how to think thru a complex business looking to turn itself around. And third because it's as a good an overview of the worldwide finance industry and key strategic trends as you're likely to find. In the same way that looking at IBM's pitches gives you a broader insight so does this. What we show at right is our template of the Fundamental Performance Factors used to create a foward-looking map of what Citi should look like. And which we think Pandit's presentation goes a long way toward speaking to.
Below we have two analysis sections you might find worth looking at. One is a review of real historical performance vs. the common wisdom using long-term stock prices. The second are excerpts from the presentation of key and critical charts with a little discussion wrapped around them. The bottomline here is that major challenges remain - primarily putting in a good management system and changing the culture from one of self-interested aggrandizement to measured collaboration. As Lou Gerstner admitted in his book changing the culture is the hardest part and he left it too late to have much impact. We'll have to see. And as Pandit admits this is NOT an overnight effort nor should it be. Furthermore there's a lot more short-term pain to come from the economy and markets as well as company specific. Nonetheless we think what we see is the beginnings of a Buffet-like long-term value investment opportunity.
- Whitney Says Pandit Faces `Impossible Feat' at Citigroup May 12 (Bloomberg) -- Meredith Whitney, an analyst at Oppenheimer & Co., talks with Bloomberg's Margaret Popper and Carol Massar in New York about Citigroup Inc.'s business strategy, capital position and earnings outlook, and the performance of Chief Executive Officer Vikram Pandit. David Darst, chief investment strategist at Morgan Stanley Global Wealth Management, also speaks. (Source: Bloomberg)
- Jubak’s Journal: Citigroup’s real problem Citigroup says the financial supermarket created in the 1998 merger was never fully integrated. Citigroup now has the tough task of selling $400 billion in “hobby” businesses.
Citi's Actual Long-term Performance
We started off yesterday with the unadjusted l.t. stock chart that lies beyond much of the posturing on "return to investor's" that's been going on. Now we'd like to take look at what happens to that apparent return when you adjust for inflation and when you normalize it for direct comparison to the SP500. Take a look at this chart which adjusts the two prices for inflation using the CPI. You might in passing notice that the SP has been pretty abysmal since 98 but that's another and previously discussed story. IF we've gotten this right then Citi's real heyday was the '80s until the Latin debt crisis and the 1987 market crash. It was slowly re-building it's value thru the '90s but when you look at the trend in the 2nd sub-chart (a log scale) notice that Mr. Weill's much vaunted performance was actually a degradation. OOPS.
So how did Citi perform over this period in comparison to the SP ? One can eyeball it and come up with a pretty strong conclusion but we normalized both price-date sets to 1995=100 so a more direct comparison could be made. Based on this chart the conclusions are reinforced and new ones come out. In the '80s Citi significantly out performed the broader market, in the '90s they were peers and since the late '90s, i.e. since the Glass-Steagall overthrow of Weill, relative performance has deteriorated. DOUBLE OOPS.
Visions of New Futures
In case it slipped your mind the '80s were the era of Walter Wriston who led the charge on major innovations in services and technology, in new products for consumer banking and his able right-hand man was John Reed who made the back-office work for all this as well as made the new technologies, e.g. ATM machines, come to pass. Mr. Outside and Mr. Inside. Have a viable and valuable business model, put the operational capabilities in place and manage to the strategy today, tomorrow and for the future. Do the things you need to do now, for now, but also do the things you need to do for tomorrow now as well. A set of performance principles that eroded away. Now is Pandit going back to those ? Well consider the following charts.
Judging from this chart Pandit is doing exactly that. He's recognized, acknowledged and is putting in place key initiatives targeted at self-arresting the disaster and repairing the repairable while triaging what needs to be gone. He's also making the strategic improvements that lay the foundations for the next several years. AND he's moving on making each business work as well as work inside a cohesive overall business model. Let's also remember that in terms of writeoffs, reorgs, downsizings and capital raising he's already done as much or more as his predecessors didn't do in ten years in less than five months. Previous regimes would declare victory and try to spin it while collecting their bonuses and options. He's telling us this is one small step. Bravo.
Consider this second chart which lays out the five major lines of business that have been id'd. Now this one chart doesn't begin to do justice to the overall presentation. There each is treated
separately and in a way that aligns with our model of performance factors from strategy and market analysis to key execution initiatives; though admittedly incomplete. They're also placed in the context of the overall enterprise. In addition there are key sections on explaining the "Universal Banking Model" and a great example from Mexico showing its' power, a good explanation of a major new approach to integrated Risk Management and threaded thruout a good discussion of a global footprint. Even if Pandit can't make the Universal Bank work what he'll end up with is five major global businesses who are market leaders in share, performance and returns.
Speaking of controls rumor and anecdote has it that there are so many competing initiatives and
measurements that successful branch managers ignore them all. Not to mention all the conflicting mis-directions embodied in inconsistent controls that are mis-measured and not really enforced or enforceable. We've long thought that what Citi really needed was a fundamental set of common metrics related to overall business performance that then translated into custom adaptations for each business unit. And were then carried down to detail profit, service and productivity as well as HR metrics for each sub-unit. We have no idea of whether that sort of Fedex like management system is being considered. What we can see is that the top-levels of a common metric set customized for each line of business are being put in place (again you have to review the pitch to see the details :) ). One of the things that impressed us most was the linkages and discussion for each unit of the strategy and operational initiatives to specific sub-components of these metrics. Marvelous. Somebody really gets it.
If Pandit makes any serious progress at all on these initiatives he'll belong in the same business Hall of Fame with Ghosn and Hurd, the Intel & Cisco teams (who never got themselves in as much trouble btw by orders of magnitude) or Schwab and his team. If he manages to change the culture, put in a management system (the two are not distinct but inseparable - people will change in ways that are rewarded....a key point) and make the UBM work definitely.
We'll see how this all plays out in the next few months and years but Citi along with Ford definitely bear watching as major turn-around stories in the making. If we had Warren's resources we'd already be on the phone starting the preliminary investigations.