Friday, February 03, 2006

Citigroup, the Behemoth: Card Unit Dispensable

When Tom Brown of speaks, one better shut up and listen.

In his latest missive, Brown makes a compelling case for a long due Citigroup (C) breakup:
....we now have two facts about Citi we didn’t have before: a) the company is much more of a sub-prime card lender than it has so far let on and, b) it’s not generating as high a return on its sub-prime-related exposure as its standalone competitors are. Of these two facts, b is the problem. Citi should be paid for the risk it’s taking. And the way to make that happen, in my view, is for the company to spin its card unit off to shareholders, so that it can punch up to its weight. Chuck Prince, do the right thing! Let your card business go!

....Citi has a roughly similar customer mix as Capital One (COF), yet charges a lower coupon than Cap One does and suffers a higher rate of chargeoffs. Which is to say, Capital One tops Citi in virtually every meaningful measure of card lending.

You might argue that Citi, with its vast size, enjoys economies of scale in areas like marketing and processing that Capital One does not. That may be true. (Then again, it may not.) Regardless, any such “scale” advantage would pale in comparison to the huge edge in yield and chargeoffs that Cap One enjoys.

You will have your one view as to why Cap One runs rings around Citi in cards. Here’s mine: Capital One is a highly focused player, and has all the advantaged that focused players have in financial services. Whether the business is mortgage lending, auto lending, or credit card lending, the story is the same: focused players beat generalists every single time.

Which brings me back to the point I started with. Why oh why does Chuck Prince insist on keeping this kludge of a company (whose current P/E is a rip-roaring 10.6 times current-year earnings, by the way) tied up in knots? There’s little doubt that each unit would be a much more effective competitor on its own, unbundled from the others. And think of all the mid-level bureaucracy that could be swept away....
Disclosure necessary: we own 1,000 shares of Citi so we'll surely be watching how this Sophoclean drama plays out.

Let's just hope that, as Citi approaches its moment of humility, it doesn't overstep and inadvertently gouge its own eyes out.

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