Wealth of opportunity for Citigroup unit

For years, Citigroup Inc.’s private bank lived up to its name. Few outside of the New York-based company had ever heard of its small wealth management arm.

But after three years of uninterrupted improvement that has outshone the lagging performance of most of its competitors, outsiders are waking up to the little bank inside the giant one.

“Citigroup’s private bank overachieved last year,” says Robin Pagnamenta, an analyst at Scorpio Partnership Ltd., a London-based research firm specializing in international private banks. “It turned in a unique performance as the only bank to increase both assets under management and net income in its base currency.”

Silver lining

At a time of conflict-of-interest scandals for Citigroup’s investment banking business, private banking was one bright spot for the company to crow about in its first-quarter earnings report last month. The unit offers an unrivaled global reach and a wide array of financial products, which are attracting increasingly wealthy clients. Many of those services – ranging from making leveraged bets on currency exchange rates to investing millions in partnership with Citigroup’s corporate investments – offer a hedge to the turbulent financial markets.

“The higher-net-worth clients naturally gravitate to our model because of the sophistication of the products and because of the access we can provide to Citigroup at large,” says Damian Kozlowski, head of Citigroup’s U.S. private bank.

The private bank’s revenue climbed last year to $1.7 billion, up 10% from that of 2001. Pretax income of $670 million represented a 17% surge.

The private bank is primed for even more growth. Bank officials are planning to add about 50 employees in the New York market alone this year, bringing the total to about 500. Analysts, meanwhile, are expecting the bank to make an acquisition or two, most likely in Europe, where Citi- group’s private bank has less penetration than in the Americas or Asia.

“Acquisitions are likely in the private-banking sector,” Henry McVey, a bank industry analyst with Morgan Stanley in New York, states in a recent report. “We think that [Citigroup chairman Sanford I.] Weill’s view is that private banking provides customers with an excellent window” into other Citigroup financial products.

Still, the private bank must grow even larger to make a real difference in Citigroup’s earnings. It is a mere blip inside the largest financial company in the United States. Taken by itself, the private bank earns more than Melville, N.Y.-based North Fork Bancorp. Inc., the New York region’s fifth-largest commercial bank. Within Citigroup, the private bank amounts to a mere 3% of net income, not yet big enough to be a major force.

The Citigroup unit also lags big European banks and some U.S. competitors. By Scorpio’s measurement, Citigroup private bank’s $671 million in pretax profits trails UBS private bank’s $2.8 billion in profits, Credit Suisse’s $2.2 billion and Merrill Lynch’s $960 million.

Still, the private bank has come a long way from the old Citibank days, when it was operated as five separate units around the globe, engaged in basic banking and trust services for wealthy families. Explosive growth came about after the dismantling of regulations that kept investment banks and retail banks apart.

When Citicorp formed a $70 billion combination with Travelers Group Inc. of New York in 1998, it joined a global bank with the world’s fourth-largest securities underwriter in Travelers’ Salomon Smith Barney Inc. Over time, that union has attracted the most lucrative banking customers, those who have $10 million or more of their own money, often in concentrated stock positions they need to diversify, along with investment banking needs for their corporations.

Clients of the private bank come in three basic categories: entrepreneurs, business executives and wealthy families. Many customers also bring in friends, neighbors and business associates. Of the private bank’s 25,000 clients worldwide, 7,000 are in the United States, with about 3,500 in the New York metropolitan area, which is a hotbed of people with Gatsby-like millions.

Key to the private bank’s profitability is its increasingly wealthy new clients. Four years ago, the average Citigroup private-bank customer had $3 million to $5 million in investible assets. Today, the average client has $10 million, with new clients averaging about $15 million for investing.

Citigroup’s private bankers don’t say no to multimillionaires who have a mere $5 million. If those would-be clients are looking more for plain-vanilla banking services than for complex portfolio management, they are steered to the retail bank. But those who desire the private bank’s specialized services are welcomed.