Financial Times Editorial Comment: Citigroup’s bloat carries lessons for Barclays and others

Financial Times Editorial Comment: Citigroup’s bloat carries lessons for Barclays and others
Copyright The Financial Times Limited 2007
Published: April 11 2007 18:16 | Last updated: April 11 2007 18:16


Here is a cautionary tale for Barclays and ABN Amro, the European banks that are negotiating a merger. Citigroup has discovered just how difficult it is to manage a megabank.

Citigroup’s announcement of 17,000 job cuts in an effort to save $1.7bn this year was accompanied by some humble pie. Through mergers, the bank has accumulated excess layers of middle management and inefficient back and middle offices, which it is belatedly trying to eliminate.

Citigroup bills this as the biggest shake-up since it was created by a merger of Citicorp and Travelers Group in 1999. Chuck Prince, its chief executive, needs to regain credibility with investors who complain that he has let expenses run out of control.

In some ways, banks are no different from other companies that merge. It is always tough to join two corporate cultures together and to eliminate overlapping layers of management. Companies that are highly practised in implementing acquisitions effectively, such as General Electric, are rare.

But banks have special difficulties, some of which are only emerging after a decade of constant merger activity. Banks such as Citigroup and Bank of America are so large that transforming mergers are hard to find and, as concerns about bad loans rise, they are having to trim themselves.

In the early days of bank mergers, there are some easy wins. It is relatively simple to put together Treasury operations and, at least in the US, close overlapping branches. Investment banking arms can also be reshaped although investment bankers are easily upset and disinclined to save money for the greater corporate good.

But slapping some new signs on branches only goes so far. In the longer term, retail banks are tough institutions to remould. National Westminster Bank’s troubles in the 1990s, which led to its takeover by Royal Bank of Scotland in 2000, were partly due to bloat from its founding merger in 1968.

Old technology cannot simply be ripped out and replaced because computer systems – and often paper files – carry customer and loan information that have to be retained. Tight central controls on credit must co-exist with local oversight of lending. Many different products from credit cards to insurance, must be managed well.

Add to this the complexity of cross-border mergers. Citigroup wants to expand internationally, as its takeover bid for the Japanese broker Nikko Cordial shows. European banks are venturing into such mergers and Barclays is discussing with ABN Amro sensitive issues such as head office location.

The lesson is twofold. First, do not underestimate how difficult it will be to gain enduring value from a merger after the initial gains. Second, keep working to implement mergers, even years after the event. Having failed to obey both principles, Citigroup is struggling to salvage its reputation.