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Citi Fans Getting Fed Up

Overseas buys fail to address critical domestic weakness.

Investors are still waiting for the other shoe to drop at


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Wall Street has been rife with speculation that the big bank would move to shore up its flagging domestic retail banking business. Some observers have expected Citi to grab a lender with either a big credit card business or branches on the West Coast or in Texas -- two hot markets where Citigroup is a bit player.

Citi's big U.S. rivals --

Bank of America

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JP Morgan Chase

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-- certainly haven't been shy about taking action themselves. All have made deals to bolster their retail banking or credit-card businesses.

Yet despite the unrest at home, Citigroup seems increasingly inclined to globetrot. In the past month, Citigroup has paid $3.1 billion for a stake in Turkey's third largest lender, and paid an undisclosed sum for Central America's largest credit card issuer.

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Both transactions will strengthen Citigroup's already considerable global presence. But neither deal addresses Citigroup's weaknesses in the U.S., nor its struggle to gain market share in credit cards and mortgage banking.

A Citigroup spokesman did not return a phone call seeking comment.

Citigroup's domestic consumer banking weakness was borne out in the third quarter, when net revenue in the group grew an anemic 1% over the prior year to $7.8 billion. The bank, in a recent investor presentation, acknowledged the need to expand its "distribution footprint," in order to reach more U.S. banking customers.

But rather than big footing its nimbler rivals, Citi is acting like it's still handcuffed by the

Federal Reserve


Earlier this year, there was a lot of anticipation when the Fed gave the nation's largest bank the green light to start making sizable acquisitions again. During a Fed-imposed one-year moratorium on big deals, Citigroup was forced to the sidelines while it took steps to improve internal compliance procedures. The restrictions were the result of Citigroup's recent round of ethical and legal scandals.

So when the cuffs finally came off in April, Wall Street expected the company to make a big move.

But six months after the Fed lifted the deal moratorium, Citigroup's moves have been less then inspiring. Chairman and CEO Charles Prince has yet to show investors he has an idea of where he wants to go with its key U.S. banking operation.

That's one reason Citigroup's shares continue to lag behind many of its competitors. The stock is up about 5% since April 4, in line with a 6% advance in the Philadelphia KBW Bank Index. But over the same stretch, shares of Bank of America are up 19%, while JP Morgan has climbed 15%.

Based on trailing earnings, Citigroup shares trade a significant discount to those of Bofa and JP Morgan. Citigroup trades at 10.8 times trailing 12-month earnings, compared to 12.4 for BofA and 13.4 for JP Morgan.

To be sure, the bank hasn't totally neglected its U.S. business. Citi has said it plans to open 1,000 new branches over the next year, but many of those will be located in existing Citigroup buildings. Sources say some of those new bank branches will be located in Smith Barney brokerage offices.

People who work at Citigroup say the bank is waiting for the stocks of some potential acquisition targets, such as

Washington Mutual

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, to fall before making a move.

"Give them time," counsels Sean Egan, a co-founder of Egan-Jones Ratings, a small debt rating agency.

Egan identifies Citigroup's most pressing need as the consumer area, in particular mortgage banking. The slowdown in the housing market has taken a bite out of the profit margins of mortgage banks.

But Egan says mortgage banking is a business Citigroup can't ignore, since so many of its prime competitors are leaders in home lending.

"It would not be surprising," he says, "to see Citigroup make a significant acquisition over the next 18 months."