Tuesday, January 30, 2007

'Egging' them on

Well we knew something was afoot with Citi as indicated in our post of the 18 January, which states that the US bank was on the acquisition trail in Europe.

Late on Monday, Citi announced its acquisition of Prudential's UK online banking outfit, Egg Banking for £575 million ($1.13 billion) in cash. Citi was quoted as saying that the acquisition is expected to boost earnings in the first year, but I must confess it has left FinancialTech Insider and some analysts we spoke to slightly befuddled.

The acquisition itself was not surprising given that other American banks particularly Bank of America was embroiled in speculation back in December that it was seeking a European acquisition. Citi has also come under scrutiny recently for earnings below its peers in some of its banking divisions and its high level of expenses.

So where does Egg fit into all of this? Ralph Silva, senior analyst, TowerGroup, says retail banking comprises 80% of most European banks profits so it is a business Citi needs to be in. However, unlike a bricks and mortar high street banking acquisition, which some expected Citi to opt for, it has gone for a "single channel" bank, Egg, which has had mixed fortunes over the years in terms of profitability. Overall group profit for Egg in the nine months ended 30 September 2005, was £33 million, compared with a loss of £106 million in Q3 2004.

Prudential's CEO Mark Tucker commented that Citigroup saw "enormous opportunities" in developing Egg's credit card business in the UK, but if the Egg acquisition is viewed purely on the revenue earning potential of its credit card business alone, then Silva says the price Citi paid for Egg is a "little bit expensive", given that Egg's traditional customer demographic has not necessarily been a highly profitable one.

Only time will tell what Citi's plans are for Egg and whether it will introduce more products and services so Egg can increase market share for each customer. On the surface, however, it appears that Egg may gain more from the deal than Citi.

Silva says Citi's foray into UK retail banking could hurt its treasury business which is looking to expand its partnerships and alliances with local banks in Europe so it can process more transactions using Citi's back end infrastructure. As retail banking is generally a bank's most profitable business, Silva says some banks may be reluctant to partner with Citi on the treasury side if they think it is a potential threat to their retail business.

Furthermore, Citi does not have a strong track record as a major retail brand in European cities, with Silva saying it closed its retail banking operations in France because it didn't understand the market. In order to ensure success in the UK, he says Citi will need to ensure it does not introduce "US-style" management into Egg.

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