How the Bank of America and Citigroup compare

When Kenneth Lewis took the helm at Bank of America in 2001, few on Wall Street could have imagined that the once-sleepy southern bank in North Carolina would rise to become the world’s most valuable financial services company.

Yet this week the bank bumped Citigroup, the reigning champion of the global financial services industry, from the coveted top spot five years into the tenure of Mr Lewis, a 37-year veteran of the bank.

When Mr Lewis, 57, took over, he inherited a bank worth about half as much as Citigroup that had been cobbled together through 20 years of acquisitions, culminating in the 1998 merger between BankAmerica and NationsBank of North Carolina.

He set about updating and integrating the group’s disparate banking systems and completed two transformational deals — the $48 billion purchase of FleetBoston, the US retail bank, in 2003 and the $34 billion takeover of MBNA, the credit card company, in January this year.

The so-called efficiency ratio, a key measure of the bank’s profitability, fell from 55 per cent in 2001 to 48 per cent for the first half of this year.

The MBNA purchase turned Bank of America into Britain’s largest credit card issuer in one swoop, giving it about $20 billion of so-called receivables due from UK customers. This deal is unlikely to be the bank’s last in the UK: Bank of America has Britain firmly in its sights as it bumps up against regulatory limits in its domestic market. The bank dropped the FleetBoston and MBNA names in the United States after it bought those companies, but it is keeping the MBNA name for its European credit card operations. It has not yet decided whether to drop the US Trust name.

The group, which derives more than half its income from US retail banking, controls about 9.2 per cent of total US deposits — far more than any competitor — leaving it with little scope to expand without breaching the 10 per cent regulatory ceiling. Last year, international operations accounted for only 7 per cent of Bank of America’s profits and 6 per cent of its revenues. Recently it has sold businesses in Asian and South American countries where it believes that it cannot win a significant enough market share.

Adam Compton, an analyst at RCM Global Investors in San Francisco, said: “Bank of America is primarily a domestic bank with a focus on retail banking and so it will have to look internationally for expansion. I think it will eventually buy a retail bank in Europe, probably Spain or the UK.

“The UK would be more likely because it is more comfortable in that market and already has MBNA, which offers scope to cross-sell products.”

Barclays has long been considered a potential takeover target for Bank of America and yesterday the bank refused to rule out a possible tie-up. Speculation that Bank of America might make a move on Barclays mounted last week when Mr Lewis said that Europe appeared to offer the best prospects for the bank to expand outside the US.

Bank of America, based in Charlotte, North Carolina, said yesterday that it planned to plough “several hundred million dollars” over the next four years into its European capital markets business, based in London.

Jonathan Moulds, Bank of America’s president for Europe, the Middle East, Asia and Africa, said: “We see Europe as offering a tremendous opportunity for growth, particularly in capital markets. We have invested heavily in our capital markets business in the US in the last two years and a lot of our customers are global customers who want global coverage.

“There is also a tremendous amount of capital-raising in Europe, which offers a very significant opportunity for structured products.”

Bank of America has helped companies to raise $34.6 billion (£17.8 billion) of debt this year, putting it at No 20 in the league table of banks helping customers to raise money, according to Thomson Financial. Last year, it advised on $29 billion worth of debt-raising, putting it in 54th place.

However, Bank of America also has big plans for its domestic market and has identified four areas for expansion — small business banking, mortgages, affinity banking and premier banking.

Premier banking denotes customers with between $300,000 and $3 million of investable assets. Affinity banking refers to credit cards, bank accounts and loans sponsored by organisations such as a university or business.

Last week the bank announced the acquisition of US Trust, Charles Schwab’s wealth-management subsidiary, for $3.3 billion in cash. That deal increased the assets under management at its wealth management division to $261 billion.

On Tuesday, Bank of America, whose share price has increased by 18 per cent since January 1, added 0.7 per cent to close at $54.27, giving it a market capitalisation of $243.7 billion — just a whisker ahead of Citigroup. On the same day, Citigroup’s stock fell by 0.7 per cent to close at $49.56. A recovery in Citigroup’s share price last night helped it to nudge back up above Bank of America. But Citigroup’s dominance has been challenged.

Big banks

1
Citigroup $244.9bn

2
Bank of America $242.6bn

3
HSBC $213.2bn

4
JPMorgan Chase $160.2bn

5
ICBC (China) $159.8bn

Cost issues put paid to top ranking

If Bank of America is in acquisition mode, then Citigroup is in clean-up mode, according to Adam Compton, an analyst at RCM Global Investors in San Francisco.

Sandy Weill, the former chairman of Citigroup who was known as Wall Street’s “King of Capital”, built the group into the world’s biggest financial services group through a series of mega-mergers that culminated in the merger of Citibank and Travelers in 1998. In recent years, the international group has narrowed its focus, swapping its asset management unit for Legg Mason’s capital markets business and spinning off the insurance unit of Travelers.

Chuck Prince, who took over from Mr Weill as chairman three years ago, has come under pressure from Wall Street for the bank’s sluggish share price.

Prince Alwaleed bin Talal, the Saudi prince who owns about 4 per cent of the bank – worth about $10 billion (£5.14 billion) — has been the most vocal critic. In July he called for “draconian measures to curb expenses” as he accused the bank of letting costs spiral.

Citigroup was banned from making acquisitions by the US Federal Reserve for much of last year. Mr Prince could not do deals until April, when he convinced the regulator that he had tightened internal controls and settled legal and regulatory issues in three continents that cost the bank more than $5 billion in fines and settlements.

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