Citigroup is looking to get back to serving small investors after being forced to exit the brokerage business more than a decade ago, sources tell On The Money.
People with knowledge of the big bank’s thinking say adding a sizable brokerage to deal with retail clients and high-end investors is part of CEO Jane Fraser’s turnaround strategy, which began with a major reorganization of the long-suffering big bank, cost-cutting and the hiring of new leadership.
In the past year, Wall Street has applauded Fraser’s efforts. Shares are up 47% compared to a 15% rise in the S&P. Shares of JPMorgan, banking’s gold standard run by super-CEO Jamie Dimon, are up 40%.
Before Fraser’s turnaround, Citi had been a banking also-ran, barely competing in high-end businesses like M&A. With its balance sheet in order and the stock price up, Citi is on the lookout for acquisitions, possibly merging with a European bank, as On the Money reported last week.
People close to Citi say buying a brokerage firm has become a possibility because of a less stringent regulatory environment from the Trump administration and the Federal Reserve.
The nation’s third largest bank by assets has a smallish wealth management business scattered across its sprawling bureaucracy that Fraser is reigning in. But expanding in this business is seen as a cost-effective way to generate stable earnings as compared to trading or investment banking.
She could simply ramp up hiring of wealth advisers, also known as brokers, who usually work in teams and take their clients with them when they hop from firm to firm.
Fraser could also buy any number of mid-sized brokerage outfits, which bankers say is being discussed inside the Citi. That would include firms like Stifel, valued at just above $11 billion, so it’s digestible, or even Raymond James, with a market value of $33 billion, which is less so, bankers say.
Stifel has 2,400 financial advisers, a far cry from industry leader Morgan Stanley’s 16,000, but it does give the bank at least a toehold in the market. Raymond James is more sizable at 8,000.
A Citi spokesperson would not deny to On The Money the desire for a brokerage deal.
“Citi is focused on delivering high value for our clients and executing against a clearly laid out strategy, centered on driving strong organic growth and improving returns,” the rep said.
Citi’s near demise during the 2008 financial crisis is one of the reasons why Morgan Stanley is currently the biggest brokerage. Citi’s former brokerage firm, Smith Barney, was among the largest on Wall Street and dates back to Citigroup’s founder Sandy Weill and his protege, a then very young Jamie Dimon. They purchased it in the late 1980s as one of the building blocks of their planned banking conglomerate.
Weill’s vision was to provide one-stop shopping for all financial services both institutionally and for the individual. His dream seemed complete in 1998 when he merged his brokerage and insurance company, then called Traveler’s, with the massive Citigroup commercial banking empire to create Citigroup.
It became the king of banking for a time before its precipitous decline. Dimon was ousted by Weill for various issues including their competing egos, and significant regulatory issues began wearing down both management and investor confidence.
By the time the financial crisis came rolling around, Citi’s balance sheet was a toxic dump of under-water mortgage debt and other problematic holdings. It required multiple bailouts from the federal government from failing and possibly pushing the US economy into a second Great Depression given its size.
That’s when Citi began shedding assets to keep the lights on. It unloaded Smith Barney to Morgan Stanley – a less impaired investment bank run by a shrewd former McKinsey consultant named James Gorman – for billions of dollars.
Gorman used Smith Barney to create a wealth management behemoth that has been powering the firm ever since with a stable source of revenues and at little cost because brokers essentially pay themselves, by scalping fees from their clients.
That’s why Fraser is looking to put the old Citi back together, minus the bad management, bankers say.
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