Citi has war chest but high standards, CFO says

Citigroup has “stored excess capital” to allow it to make acquisitions during periods when price-earnings multiples in the financial services industry are depressed, as is currently the case, according to Todd Thomson, chief financial officer at the New York-based financial services giant.

But Thomson, speaking last night in Philadelphia at the sixth annual Wharton Financial Institutions Center Risk Roundtable, sponsored by the Wharton Financial Institutions Center and consulting firm Mercer Oliver Wyman, said Citi has rigorous criteria for the companies it buys. The acquisition must be accretive to earnings per share in the first year, and must achieve a 20% return on equity within three to five years.

As for Citi’s own valuation, Thomson said its price-earnings ratio is driven by three factors: income growth, stability of income and returns. Currently, he estimates that two-thirds of Citi’s PE is driven by income growth, with the rest accounted for by stability of its income and by its returns. However, this split tends to reverse in times of stress, he said.

Thomson also said that, while economic capital is a useful metric for supporting strategic decision-making, some more complex metrics, especially economic value added (EVA) is not in vogue at Citi. Sandy Weill, Citigroup’s chairman and CEO, believes EVA has led many firms to make a lot of bad decisions, Thomson said. Thomson added that while it has some value, it’s not a substitute for management decision-making. “The more you complicate the tools, the harder it is to tell if managers are doing the right things,” he said.