'Underinvested' Citigroup behind in branches

The United States is in the middle of a retail banking war, but Citigroup Inc., one of the biggest US banks, has fallen behind.

Take the corner of 23rd Street and Sixth Avenue in New York City. On the northeast corner is a branch of Chase, with new wood panelling and sleek neon lighting. A half block away is a North Fork branch, with bold colours, gentle lighting, and zebra-skin patterned chairs in a waiting area.

On the northwest corner is a Citibank, with a bland, neutral carpet, harsh lighting and an institutional feel.

Citigroup's competitors like Bank of America Corp. and JPMorgan Chase & Co. have built, bought and refurbished branches to attract retail deposits away from regional banks like North Fork, a unit of Capital One Financial.

Citigroup has tripled the number of its branches in recent years, but it is still behind. Its branches are often not as attractive, and perhaps more importantly it just doesn't have as many: About 972 in the United States, about one-sixth the number Bank of America has.

"They underinvested for too long," said Helene Ocampo, a financial services analyst at Sentinel Asset Management in Montpelier, Vermont, which invests $18 billion. "Citigroup needs a far better network than they have now."

That underinvestment is a legacy of former chief executive Sanford "Sandy" Weill, a Wall Street legend who expanded aggressively in investment banking, insurance, and other areas instead of focusing on branches.

Charles Prince, who succeeded Mr Weill in 2003, admits the branch network needs work, and sees a solution, which he hopes will also help bolster Citigroup's consumer revenues: Turning its Smith Barney brokerages into surrogate banks that gather deposits and offer more banking products.

"We want to offer one-stop service," said Steven Freiberg, chief executive officer of Citigroup's North American consumer operations, in an interview this month.

Getting customers to embrace that idea is one reason Citigroup announced last week that it was rebranding itself as Citi, and using that name for more of its businesses.

But integrating banking and brokerage is a tricky process, Ms Ocampo said.

"Brokerage and banking products are very different, and it can be hard to sell both in the same place," she said.

Invigorating the US retail banking business is just one of the challenges facing Mr Prince, after a year when costs grew faster than revenue and profit.

Mr Prince wants to boost revenue growth from its entire consumer division and from international customers, while keeping a lid on expense growth.

The company's shares reflect its difficulties. Between the end of 2003 and 2006, they rose just 15 per cent, while Bank of America rose 33 per cent and JPMorgan Chase 32 per cent.

Analysts said it may take at least another year before Prince's efforts start to take hold.

"Citigroup shares are an investment that has required more patience than you typically have," said Mark Batty, a financial services analyst at PNC Wealth Management, in Philadelphia, which invests $54 billion.

The bank's strong brand name and foreign operations, and a dividend yield over four per cent, help compensate for the waiting, Batty added.

US commercial banks built some 4,600 branches in the last three years, a six per cent increase that took the total number to 81,319, according to the Federal Deposit Insurance Corp.

Citigroup grew faster, increasing its branch network 25 per cent over two years and tripling it over five years.

But its 972 branches are dwarfed by Bank of America's 5,747, and even by the 1,156 branches at Fifth Third Bancorp Inc., whose asset base is barely one-twentieth as big.

Citigroup's US deposit base is also much smaller. The bank had about $233.6 billion of domestic interest and non-interest bearing deposits at the end of 2006, compared with $470.6 billion at JPMorgan Chase and $598.3 billion for Bank of America.

Deposit funding is crucial for banks' lending margins. Banks can obtain deposit money cheaply by offering, for example, low-yielding checking accounts, instead of paying more to borrow, for example, in the corporate bond market.

Citigroup is working to boost its deposit base. In mid-2007, for example, it will launch a pilot programme to build branches that target Citi Smith Barney customers in Boston and Philadelphia, as it tries to broaden the number of products it sells to brokerage clients.