Banking & Capital Markets

Too Big to Succeed?

Banking giants struggle to keep costs under control.
Joseph McCaffertyMarch 1, 2007

Banking consolidation is far from over. Plenty of banks are still on the lookout for the perfect piece of the puzzle to build out a national brand. But at the top of the list, the Big Three (now that the American automakers have been downgraded to the “Detroit Three” the name is available) are causing some to wonder if the biggest banks are too big.

Citigroup, Bank of America, and JPMorgan Chase are the clear winners of the consolidation game, each with more than twice the assets of fourth-place Wachovia. These banks have bet that cross-selling and scale will give them an advantage. But some critics are wondering if the whole is smaller than the sum of its parts. Hedge-fund manager Tom Brown says that the benefits of building a one-stop shop haven’t materialized. “Huge scale doesn’t count for much in financial services,” he says. Brown suggests that breaking Citigroup into at least four pieces would allow leaner management structures to focus on their businesses and attract better talent.

Rising noninterest expenses at Citigroup may bolster the view that the company has become a lumbering giant. CEO Charles Prince has vowed to bring expenses down. When Todd Thomson, former CFO and head of Citigroup’s Global Wealth Management division, left the bank in January, reports centered on his reputation as a spendthrift.

Richard Bove, an analyst at investment bank Punk, Ziegel & Co., says that while the big banks need to do a better job controlling costs, he doesn’t support the idea that they are too big. “There is no evidence that these banks are losing market share,” he says. Treasurers and CFOs have been willing to give up a little customer service for lower costs and speed, says Bove. “There is no question that corporate customers have benefited from the creation of these giants.”

Whether further consolidation creates more banking supermarkets or a big breakup causes a reversal of the trend remains to be seen. So far, at least, Citigroup CEO Prince is signaling that a breakup is one thought his bank is not entertaining.