As its name implies, Citigroup doesn't see itself as a bank. And in recent years it has worked assiduously to avoid having the market see it as one.

If anyone had any doubts about that, Sandy Weill's gutsy $31 billion purchase of Associates First Capital Corp. last month should dash speculation that Citigroup's primary thrust will be in commercial banking.

Above all, Weill, Citi's chairman and chief executive officer, is determined that Citi's earnings remain superb--it expects to earn a 27.3% return on equity this year, up from 22.9% in 1999. And he is determined that Citi's stock price continue to trade at multiples of 20 or more. And he knows that can't be done with traditional commercial banking.

Indeed, Citi, with its strong capital base and its $791 billion in assets, easily could have bought a First Union Corp. or a Bank One Corp. Their stocks, like Associates', have been in the doldrums. But there's little chance that such banks can earn the kind of returns Weill is seeking.

"Buying a regional bank would be a non-optimal use of shareholder funds because there are so many things you can buy that would offer a higher return," says Diane Glossman, an analyst at UBS Warburg.

Unlike banks, Associates caters primarily to the lower-middle economic class, where interest rates and fees tend to be far higher than those charged by banks. Associates' net interest margin through the first six months of 2000 was 9.55%, compared with about 4% for the average large bank. Of course, the risk is greater, but not that much greater if such lending is done right. And Associates, as well as Citi, seems to have the formula down pat.

Lending to finance company customers already is a significant part of Citigroup's business. A key player in Citi's downscale consumer business is Primerica, with its 100,000 Avon-type, door-to-door salespeople. Primerica is a leader in sales of individual term-life insurance, but it also sells other Citigroup products.

The company's thrust into the downscale market is bound to increase with its acquisition of Associates. Weill told investors that Citi will substantially increase the value of Associates' 1,155 branches by bringing Citi know-how to them. He said the annual revenue growth at Associates branches has averaged only 5%, compared with 26% at Citi's consumer finance branches. And under Citi, Weill expects revenue growth at Associates' branches will quicken based on experience gained by Citi over the past two years from its purchase of about 170 Associates offices.

In addition, Associates' impact on Citi is likely be profound because it will shift the balance of the company's business more towards consumer, making it somewhat less dependent on corporate and investment banking. Last year, global corporate and investment banking accounted for 51.4% of Citi's profits, compared with 43.5% for consumer and 6% for wealth management.

Placing greater emphasis on the consumer side probably will make Citi's earnings less volatile, which should make its happy shareholders even happier. And they will be happier still if Weill can find a way to effectively cross-sell products to Citi's 100 million existing consumer customers. Add to that the 26 million customers from Associates.

Cross-selling was a key objective behind the merger between the Travelers Group and Citicorp in 1998, an objective that so far has been elusive.

Robert I. Lipp, vice chairman and a close colleague of Weill, recently was given responsibility for making cross-selling work. The 62-year-old Lipp is one of the three members of the company's Office of the Chairman, which was established in August. The other two are Weill and Robert Rubin, an investment banker and former Secretary of the Treasury.

Lipp pointed out in a recent interview (before the announcement of the Associates deal), that "we've got approximately 100 million customers, so the math can be pretty significant if you can increase cross-selling by a fraction. One percent would be a huge amount."

If Citi can develop significant cross-sell revenue, it would produce a massive boom. Currently the company's stock trades at a significant premium to its underlying asset value. Go through the exercise of valuing each of Citigroup's businesses individually and you end up with a valuation that is less than the $57.50 that Citi was trading at before the September announcement.

"The market is willing to pay a premium for what [Citi's] management brings to the process," says Lawrence Cohn an analyst at Ryan Beck & Co. Many refer to it as the "Sandy Weill premium."

The very fact that Citi has been trading at a premium is a true testament to Weill, because most conglomerates normally trade at a discount to their underlying asset value.

But there's a problem with relying on a Sandy Weill premium: Weill, who is 67, won't be around forever. So, the ability to market effectively across organizational lines is one way to further convince Wall Street that the company should be worth more than the sum of its parts.

And theoretically, some of those parts are just right for cross-selling.

The biggest component within Citi's consumer unit is the credit card operation, which earned $604 million through the first six months of 2000. That was followed by life insurance and annuities at $389 million, and retail banking at $275 million.

The company's consumer finance unit--CitiFinancial--was a relatively small player with just $229 million in earnings at the mid-year point. Weill had acquired the business back in the early 1990s when it was known as Commercial Credit Co., and he used it as a platform to assemble what later became Travelers Corp. With the addition of Associates, which earned $779.7 million in the first half, CitiFinancial will join the credit card unit as the two largest earners in Citi's global consumer group.

The merger will make Citi into the largest originator of home equity loans in the country, and strengthen its lead in the U.S. credit card market. Citi already had the largest portfolio of credit card loans at $79.1 billion, according to The Nielson Report, while Associates ranked 13th with outstanding loans of $7.4 billion. (Citi reported different pro-forma numbers.)

Their combined total of $86.5 billion moves Citi further ahead of First USA, the credit card subsidiary of Bank One Corp., which has loans of $66.3 billion. Associates also has a large private-label credit card operation, a business in which Citi had not been active.

The addition of Associates' will make Citigroup the largest finance company in the U.S. after the captive finance units of GE, Ford and GM. Just as importantly, the deal will extend CitiFinancial's franchise--which is limited to the U.S. and Mexico--to Japan and Europe as well.

Lipp told U.S. Banker that the company is especially keen to extend its consumer finance franchise into fast-growing international markets by leveraging both Citi's technical knowledge and its presence in 100 countries around the world. The addition of Associates' international network of offices will jump-start that process.

There are a number of cross-selling initiatives going on throughout the company, and while the volume of business attributable to these efforts is still quite modest when calculated as a percentage of Citi's vast revenue base--which topped $82 billion in 1999--there have been some early successes. For example, Citi's corporate bank and its Salomon Smith Barney securities unit have proven to be a powerful combination. (Salomon Smith Barney has a considerable consumer business as well, but it serves a market that is more upscale than the others.)

But in terms of cross-selling, it's a different story in Citi's global consumer business, where the reluctance of retail customers in the U.S. to concentrate their financial relationships with one vendor has made cross-selling a more difficult undertaking.

Cross marketing is one of those activities that sounds like it should be easy to do but in fact is quite difficult. Citi is certainly not the first to try it. In the 1980s, Sears, Roebuck & Co. acquired Allstate Insurance Co. and the Dean Witter securities firm and placed sales representatives for both units in many of its stores. Dean Witter also developed the Discover credit card, which was marketed heavily to Sears credit card holders. Derisively referred to as a "socks-to-stocks" strategy, the supermarket approach never paid off.

"One reason why cross-selling fails is a lack of trust by one part of the institution for another," says Charles Wendel, president of Financial Institutions Consulting in New York. Wendel says that when he worked in Citicorp's corporate bank early in his career, he had to call its German subsidiary to ask for assistance, only to be rebuffed. "We might as well have called Deutsche Bank," he says. Citicorp has traditionally been one of those companies with a high degree of natural friction between subsidiaries, and this attitude tends to frustrate cross-sell efforts.

Lipp estimates that between 3% and 5% of Citi's total revenue is coming from its cross-selling efforts. He declines, however, to commit to a long-term objective. "We're just starting in a lot of these areas and it literally takes a couple of years to really work out the right combination of packages and so forth," he says. "We really haven't done that yet in terms of pricing strategies, where you [sell] bundled products and [use] management information systems to coordinate those activities [and] treat customers based on their total relationship."

The Internet may help Citi accelerate its cross-selling efforts, and the company is in the midst of reformulating its electronic strategy for the consumer group. Individual business units will eventually cross-sell retail products on their various Internet sites, and the company will launch a new Internet banking product in October--called Citi Online--that should also facilitate its cross-selling efforts. "Our intention is to cross sell out of the Internet sites," says Robert B. Willumstad, vice chairman in the global consumer group, who oversees the development of Citi's many Internet projects aimed at consumers.

An electronic medium has the advantage of being able to put a large volume of information in front of a consumer with great efficiency. "The Internet is a transcendent medium, it's a place that people go to look for anything," says David Berry, director of research at Keefe, Bruyette & Woods Inc., the New York-based investment bank. "It offers a way to stitch some of their capabilities together."

Like every other major financial services company in the U.S., Citi has been trying to develop a coherent strategy for the Internet. Former Citigroup co-CEO John Reed, who left the bank in April, had set up something called e-Citi, which functioned almost like a think tank and was charged with the development of Citicorp's overall Internet strategy under Edward Horowitz.

A former Viacom executive, Horowitz reported directly to Reed and ended up building an empire that employed some 1,200 people. Horowitz left the company in August and overall responsibility for Citi's Internet strategy has been given to Deryck Maughan, vice chairman. Since Reed's departure, individual product groups have been given more control over their electronic efforts than was previously the case.

One of Citicorp's biggest initiatives under Reed and Horowitz was the development of an independent online banking platform called Citi f/i, which was intended to serve consumers whose accounts were not domiciled in a Citibank branch. Branch customers who also wanted to bank online were given a separate product called DirectAccess.

Problem was, DirectAccess and f/i were not linked but were maintained as independent operations even though such boundaries are essentially meaningless in virtual space. "That was lunacy," says Willumstad. "You might as well have been a Chase customer."

DirectAccess and Citi f/i are being merged together now, and will be replaced by a new electronic banking product that is scheduled to debut this month. Citi Online will combine the best elements of DirectAccess and Citi f/i, and will be available to Citi customers everywhere. It will also include a new online brokerage account called CitiTrade.

The global consumer group is pursuing a variety of other Internet strategies, as well. In mid-July, Citi opened a new Web site at, which aggregates a consumer's financial relationships with a variety of institutions into one consolidated view. In providing account aggregation to customers of other financial services companies, Citi hopes ultimately to snatch away those customers. (See stories "Shop. Point. Click." and "Aggregation Aggravation", October 2000.)

Also in July, Citi announced a potentially valuable arrangement with America Online where, starting this fall, AOL's 26 million customers will be able to e-mail money to other people using special Citi transaction accounts. AOL customers will not have to be Citi customers to use the service. Of course, Citi would certainly like them to be, and the agreement allows Citi to market all of its retail products to AOL subscribers from a preferred position on AOL Web sites.

In aligning itself with the country's largest Internet service provider, Citi has chosen a powerful partner with which to develop its own online presence. "If there's two partners that I would want in the world," says KBW's Berry, "one would be AOL and the other would be Microsoft."

Citi would like to use its payments arrangement with AOL as a model of how to become a common carrier for financial transactions over the Internet. The company's unrivaled position as the industry's largest originator of credit cards gives it a share in 22% of all sales activity in the U.S., according to Willumstad. "We think we're positioned to become a big player in the payments system over the Internet," he says.

Analyst Diane Glossman thinks this strategy has promise because it casts Citi in the traditional role of being an intermediary. "This is the cornerstone of what banks do for a living," she says.

True enough, but it won't be easy for Citi or any other company to build a commanding presence in the Internet payments market. Expect the competition to be fierce and the necessary investment to be enormous, even for a company with Citi's vast resources. Says Lawrence Cohn, the Ryan Beck analyst, "There are so many people who think they're going to have that role, it's not going to be automatic."

Citi has focused on getting each of its main product groups online with its own Web sites, all linked to each other. More significantly, all of Citi's retail products will be available on central sites like, Citi Online, the company's home page and, its soon-to-be-launched Web site dedicated to AOL users. Says Glossman, "Offering people value packages that are intelligently priced is much easier to do on the Net."

A glaring weakness in Citi's Internet strategy, at least as far as its online banking product is concerned, is the lack of an extensive branch network. A growing number of experts believe the Internet works best as a distribution channel for financial products when it's paired with a network of physical locations. Even people who rarely use branches like having that option available, especially when making deposits into their checking accounts, which is still the core product for the vast majority of banking customers.

The lack of branch access was one of the reasons why Citi f/i never caught on. "Would I much rather have 3,000 branches over the U.S.?" asks Willumstad. "Sure."

And that's one of the challenges facing Weill. Perhaps he'll find a way to make the thousands of CitiFinancial offices act like regular branches for the purposes of the Internet. Citi's broad network of physical locations across the U.S.--including those it acquired with Associates--"could someday fit into a broad consumer banking strategy," says Robert Albertson, president of Pilot Financial LLC investment fund, and a former bank analyst at Goldman, Sachs & Co.

If Citi can succeed in doing that, the Weill premium will be assured, even if Weill's no longer there.

Jack Milligan, a former editor of U.S. Banker, is a freelance writer based in Charlottesville, VA.

Only days before the announcement that Citigroup would acquire Associates First Capital, Keefe, Bruyette & Woods, the New York-based investment bank, released a glowing assessment of Associates' outlook. Rating the financial services firm a "buy," KBW said its price was far under-valued and that "Street estimates for 2001 earnings are too low, and Street estimates for AFS's sustainable growth rate are also too low."In an interview following the announcement, David Berry, KBW's director of research, said he was surprised by the news, although not completely. Some months earlier, in a meeting with clients, Berry mentioned Associates' among a list of others as possible takeover targets by Citigroup.

But, in the interview, he described the market's reaction to the news as a bit "kooky."

The market's initial reaction was negative. Citigroup's stock plunged 4.59% at the close of trading on Wednesday, Sept. 6, the day the announcement was made. That was a far greater decline than that experienced by comparable companies. Morgan Stanley Dean Witter, for example, dropped 0.7%; Merrill Lynch & Co. was down 1.22%, and Chase Manhattan Corp. declined 1.97%.

Berry said he thought it was strange that the loss of market capitalization by Citigroup was greater than the gain in market cap by Associates. Unless Citi messes up the integration of Associates, which Berry doesn't expect to happen, the "net market capital should not go down," he says.

He points out that before the announcement, Citi was selling at about 19 times estimated 2000 earnings, while Associates' multiple was only 10. That gave Citi a lot of leverage to offer a handsome price to Associates.Among the points made by KBW:

  • Associates' earnings will grow at percentage rates in the high teens in 2001 and 2002. That will be an acceleration from the 14% growth Keefe expects ths year.
  • Associates earnings will be bolstered over time because it has begun allocating capital to its businesses that are most profitable. In particular, it iis shifting its resources to the consumer from the commercial sector.
  • The only risk is that truck and trailer write-offs have been rising, but KBW doesn't believe the business has "the potential to be a bottomless pit."

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