Chapter 5.1. Competitor Analysis against Closest Rivals
Recently, Citigroup stared to lose its pool-positions compared to its closest rival, Bank of America. In second quarter of 2006, Bank of America took over Citigroup as the most profitable financial institution in the world with quarter earnings of $5.5 billion against Citigroup’s $5.2 billion. Also, in the last year, the gap between the capitals of the two archrivals shrank from $40 billion to mere $4 billion.
So far, Citigroup has managed to sustain higher revenues. It also has better prospects for growth, because it is present in many emerging markets. However, its growth has stalled since a series of scandals brought close regulatory attention, discouraged acquisitions and upset management. In contrast, Bank of America was not hurt that badly. A scandal over mutual funds began with its dealings with a hedge fund, and it has been sued for its role in the financing of Parmalat, Enron and Adelphia, but all this has had little effect on its overall business.
From a wider prospective, Citigroup and Bank of America are very similar. Both have grown to huge size through acquisitions. Both make about one-third of their profit from their corporate banks and most of the rest from consumers. Both have big shares of the credit-card market. Yet, they are different creatures on closer inspection. Citigroup sells complex investment products and has a big investment bank, operations in lots of countries and a tiny domestic retail franchise concentrated in three states, California, New York and Texas. It is not clear how these various bits fit together. Bank of America, in contrast, lives up to its name. It makes almost all its money at home. Its sprawling branch network covers most of the heavily populated states. It has a vast banking business serving individuals and small firms, and a big share of the loan-syndication market. Much of what it does can be standardised and the company goes to great lengths to discourage the kind of individualism that can produce great rewards but add huge risks.
Nevertheless, Bank of America’s revenue growth, which averaged around 6% in the past decade, is still way below those of local institutions, such as Downey Financial, in California, Flagstar Bank, in Michigan, and New York Community Bancorp that have been growing at 17%. All these banks are fairly small and have a narrow range of products: all relied heavily on mortgages in the strong housing market.
According to SNL Financial, a research firm, big banks are making higher returns on equity than smaller ones. Among the biggest, Bank of America’s are higher than most, though not as high as those of Citigroup, US Bancorp, and Wells Fargo. The large banks, though, suffer from lower price/earnings ratios than smaller ones. This can be explained by the fact that the smaller banks do not carry a takeover premium; or it could be that the stock market doubts whether large banks’ profitability can be sustained.
Both, Citigroup and bank of America, are now at the point of close monitoring by regulators, leaving them little options but internal growth. The history of companies putting a long career of acquisition behind them is not working for them this time. After years of strong growth fuelled by its own buying binge, Citigroup has not yet learned how to grow on its own.