Citigroup: Bye-Bye, Ms. American Pie

Facing heavy losses and tighter government regulation in the U.S., Citigroup (C) is fleeing to higher ground -- overseas.

CEO Vikram Pandit on Thursday outlined the company's plans for international expansion. In an unusually frank presentation, he acknowledged that "Overexposure to the U.S. consumer credit risk" has been the leading factor behind the company's struggles in recent years.

In other words, we're outta here. From a business perspective, looking overseas is exactly the right move. While Citi's stateside business remains under pressure, it's recovering fast in other parts of the world, particularly Asia and Latin America. The company also faces much higher consumer and commercial credit costs here at home than it does abroad. Indeed, 85 percent of the banking giant's net consumer credit losses, which soared by 46 percent in 2009, stemmed from North America.

Another reason to focus on overseas growth is that Citi's extensive global operations represent a key competitive advantage over other big financial players. It does business in roughly 140 countries, with 46 percent of its total revenues and net income coming from emerging markets. Europe, the Middle East and Africa account for the biggest chunk of Citi's foreign sales (25 percent), followed by Asia (23 percent) and Latin America (20 percent). Citi's North American businesses generate 32 percent of its overall revenues.

Other highlights from Pandit's presentation:

• Citi forecasts that emerging markets represent more than 55 percent of its potential revenue growth
• Citi expects GDP in emerging markets to grow at triple the rate of developed economies
• Asia last year accounted for 75 percent of the net income Citi earned from its consumer banking operations, versus only 19 percent for North America
• The 150 largest metropolitan areas in the world generate nearly a third of global GDP

In effect, Citi is performing radical surgery in trying to become a slimmer, simpler and more profitable enterprise. In the past two years alone, the company has shed $330 billion worth of assets and slashed operating costs by 20 percent, including ditching 100,000 jobs.

The big question, of course, is how the patient bounces back. Pandit makes some rather optimistic assumptions in dressing up Citi's prospects, particularly its projected investment banking returns. Much also rides on the company's ability to wind down Citi Holdings, which is sitting on a whopping $547 billion in assets.

But some major investors seem convinced, at least for now. Bruce Berkowitz, who runs mutual fund Fairholme Fund, recently bought $700 million worth of Citi shares. George Soros, who as of the third quarter last year held no stock in the company, now owns a stake valued at roughly $380 million.

Said bank analyst Richard Bove yesterday on Bloomberg TV regarding Citi's future earnings:

"If you get rid of everything that has cancer in it, which they've done or are doing, and you're left with only the things that work, it's reasonable to assume that there's 70 cents a share in earnings in the next few years and that the stock should be selling at someplace around 10 to 12 times that."

"There's going to be a huge part of America that's not going to be served" by Citi and other financial companies, Pandit conceded in his speech at the company's 2010 "Financial Services Conference." But the reality is that global behemoths like Citi have to go where the growth is. In theory, the company's overseas growth should eventually position it to boost lending on the home front.

Chart courtesy of Citigroup