Why Citigroup should ditch its retail-banking business

I believe that Citigroup is the best international commercial bank in the world. It is the reason to own the stock. The current management team is one of the best that has ever run this bank, proving disciplined and willing to take tough measures to bring this sprawling organization under control. But, there's one nagging problem: The bank's retail business.

Pedestrians pass in front of a Citibank branch in New York.
Scott Mlyn | CNBC
Pedestrians pass in front of a Citibank branch in New York.

I frankly believe that the bank has continually failed in its retail business — the area that focuses on consumers (banking, loans, etc.) – outside of New York City. And, I think it will continue to fail, despite Citi's best efforts.

Citigroup has tried retail banking under a variety of CEOs in a variety of markets. Former CEO John Reed tried to set up a national retail-banking operation by acquiring savings-and-loan organizations across the country, and Chuck Prince took that a step further, building branches all across the U.S. in markets where Citigroup had a meaningful presence in mortgage lending. Just recently, the bank started shutting down some of these offices.

Reed also had a vision to expand to emerging market economies to capitalize on growing income and wealth, opening branches in 50 to 60 countries. Subsequent CEOs Sandy Weill, Vikram Pandit and Mike Corbat started to unwind these overseas operations and today, there are about two dozen retail-banking operations in foreign countries — less than half of what it used to be. All have failed to produce the results the bank wanted. The company has abandoned its retail strategy in China, Japan, Germany and Turkey. It is out of or getting out of Nicaragua, Peru, and Columbia. The bank is still in Mexico but that operation almost imploded a few years ago amid finding of massive corruption.

And, Citi's experience in the residential mortgage market almost bankrupted the whole organization.

To succeed, retail banks must have a wide array of consumer products; they must utilize every conceivable distribution channel; they must have a robust cash-management system for small businesses; and, they must have scale in the markets where they are located. One might argue that Citigroup was unwilling to make the financial commitment necessary to achieve these positions when it implemented each of its banking strategies. Moreover, the bank did not want to build a mass market banking presence in any of its markets.

Today, the bank has the necessary requisites to build this type of banking presence in Mexico, but I think leaving Mexico might be wise. Citigroup has not demonstrated an ability to run this division.

Citi's current retail-banking thrust seems to be fraught with the same weaknesses as the older ones. It is offering a limited product array. It does not seem to want to cultivate the small business market. It does not have massive presence in any of the markets it is attempting to penetrate. The outlook, from my perspective is not positive.

Citigroup understands the credit-card business. It also understands marketplace lending. It should limit its consumer finance thrusts to those activities. In this way, its strong commercial-banking effort would become more pronounced. This management is tough and smart; it is taking the right steps in backing away from retail banking. It should go a bit further and eliminate the business altogether.

Commentary by Richard X. Bove, an equity research analyst at Rafferty Capital Markets and the author of "Guardians of Prosperity: Why America Needs Big Banks" (2013).

An earlier version of this article said that Citigroup has pulled its retail-banking operations out of Massachusetts and Florida altogether. Citigroup recently announced plans to close its Boston branches in January but a spokesman for the bank said that Miami "remains very much one of our most important markets."