Citi break-up more likely, says DoubleLine's Baha

NEW YORK Mon Nov 26, 2012 4:11pm EST

NEW YORK (Reuters) - The time may be right for Citigroup (C.N), long one of the world's biggest banks by assets, to slim down a little, banking expert Bonnie Baha said on Monday.

"It would make sense to break up Citi," Baha, portfolio manager of Global Developed Credit at the $50 billion DoubleLine Capital LP, said at the Reuters Global Investment 2013 Outlook Summit. "The odds for that are probably much higher now than they were three months ago."

Baha was speaking some six weeks after Citi unexpectedly fired its CEO Vikram Pandit only hours after the company reported strong earnings.

Like other analysts, Baha said it was notable how forcefully the board moved against Pandit and installed Michael Corbat as CEO, and expressed concern that such an enormous decision was not better telegraphed to the markets.

Now Citi has the opportunity and obligation to reshape itself at a time of new rules and new leadership, she said.

Baha believes it will be increasingly difficult for the big U.S. banks to carry on as they have in the past, despite stronger balance sheets, she said at the Reuters office in New York.

New financial regulation is forcing lenders to take on less trading risk, such as spinning off their lucrative proprietary trading desks, and in addition to near-zero interest rates, it is harder for the big banks to make money.

"Citi is reinventing itself, but I'm not sure where they are going," Baha said, adding that the direction for the company will ultimately be guided by the board.

But here, too, the board might be well served in offering more information sooner, Baha suggested, noting that the Pandit departure was so unexpected it threw investors for a loop.

At the same time, rival JP Morgan (JPM.N), facing similar constraints in terms of new rules and low interest rates, is faring better than Citi, Baha said. "JP has fallen back on investment management and investment banking, and the 'London Whale' problem aside, they are well positioned," she said.

Baha was referring to JPMorgan's nearly $6 billion trading loss earlier this year, in which one of JP Morgan's credit traders, Bruno Iksil, took such outsized derivatives positions he was dubbed the London Whale. The bet soured earlier this year, causing the bank billions in losses, and costing Iksil his job.

Outside of the U.S., Baha said the troubled euro zone is still an unappealing place to put capital.

"Am I ready to wade into the European banks yet? Not at all."

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(Reporting By Svea Herbst-Bayliss and Katya Wachtel; editing by Gunna Dickson)