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Customers may not notice a big-bank breakup

By Claes Bell ·
Wednesday, March 30, 2016
Posted: 6 am ET

Mario Tama/Getty Images

It might be kind of scary to imagine your bank slicing itself up into smaller companies, but in practice, you might not even notice.

A recent report arguing for the breakup of banking giant Citigroup for the benefit of shareholders has reignited a debate over the pros and cons of a big-bank breakup. But a breakup, at least as envisioned by the analyst in question, Brian Kleinhanzl of Keefe, Bruyette and Woods, probably wouldn't even register with most checking and savings accountholders.

There's no question that large banks have underperformed for stockholders lately, and Citi has been particularly poor, trading below its tangible book value -- the combined value of all its hard assets like real estate and securities, minus its liabilities -- for 5 years running, according to the report. Tangible book value per share is roughly equivalent to what shareholders could expect to receive in a liquidation, meaning that from shareholders' perspective, Citi is worth more dead than alive right now.

Kleinhanzl says his hypothetical breakup plan would increase the overall shareholder value of the company by $71B by selling off international assets and splitting up the rest into two separate companies: Citi Consumer and Citi Corporate. The plan would help the bank become less heavily regulated by putting it below thresholds used to decide which banks are the biggest threat to the global economy if they failed. That would in turn allow the bank to carry less capital to satisfy regulators, and some of that capital could be returned to shareholders.

Welcome to Citi Consumer!

Under Kleinhanzl's plan, retail banking -- what the industry calls the services that include checking accounts, savings accounts, consumer loans, etc. -- would be folded into Citi Consumer.


Image courtesy of Keefe, Bruyette and Woods.

For customers of that new company, it's hard to imagine life would be much different than it had been under the old one. They'd still be able to walk into any of Citibank's more than 800 U.S. branches and make deposits, take out loans, etc.

One issue: With its much smaller international footprint, Citi Consumer accountholders who find themselves traveling overseas would likely find themselves less able to find branches and in-network ATMs internationally.

And those checking and savings accountholders who get wealth management services through Citi could also find themselves out of luck in such a scenario, since investment services would be rolled into Citi Corporate, an entirely separate company. While Citi Consumer might ink a deal to allow Citi Corporate investment services to continue operating in their branches, that wouldn't be guaranteed.

Just a hypothetical, for now

It remains to be seen whether Citigroup or any other banking behemoth will ever actually decide to slice itself to tiny bits in order avoid regulation and return more value to shareholders. As Kleinhanzl points out in a podcast recorded this week, Citi is probably too large for one activist investor to exert enough influence to get it to cut itself down to size.

"Citi does have one of the largest market caps among U.S. banks, but we still think the stock could draw activist interest if returns don't improve by the end of 2017," Kleinhanzl said.

Shareholders did manage to put a proposal on Citi's 2016 proxy ballot that, if passed, would urge the bank's Board of Directors to appoint a 'Stockholder Value Committee' to study the idea (they seem to think it would actually be great for accountholders):

We therefore recommend that the board act to explore options to split the firm into two or more companies, with one performing basic business and consumer lending with FDIC-guaranteed deposit liabilities, and the other businesses focused on investment banking such as underwriting, trading and market-making.

We believe that such a separation will reduce the risk of another financial meltdown that harms depositors, shareholders and taxpayers alike; in addition, given the differing levels of risk in Citi's primary business segments, divestiture will give investors more choice and control about investment risks.

Even if passed, the resolution wouldn't force Citi's management to actually do anything. But if Citigroup's -- and other large banks' -- stock prices continue to languish, pressure will likely build to do something more drastic to generate more value for stockholders.

What do you think? Should Citigroup be broken up? Would that scare you as a checking or savings accountholder?

Follow me on Twitter: @claesbell.

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