(FORTUNE Magazine) – The once sleepy retail banking business is now a fast-paced, deal-hungry space where the big players mostly follow a single, swashbuckling strategy: Buy lots of branches before your rivals can grab them--even if expanding your footprint means paying huge prices. Since late last year, J.P. Morgan, Bank of America, and SunTrust have all announced pricey acquisitions, and in late June, Wachovia agreed to pay a king's ransom of $14.3 billion for SouthTrust of Birmingham. But one maverick isn't buying the conventional wisdom. Citigroup, the world's largest financial conglomerate, is sitting on the sidelines. The stance of Chuck Prince, who's been Citi's CEO for just nine months: Prices are too high, and once they come down there will be plenty of deals to feast on. Shunning the frenzy is probably smart. Warns Charles Wendel, chief of Financial Institutions Consulting: "The banking industry is marching in a lemming-like fashion to buy more branches when it's not clear that many banks can get the efficiencies or extra revenues to justify the prices they're paying."

Citigroup's lone-wolf approach is especially remarkable because, of all the big banks, it's the one that needs to grow its branch network the most. A giant in U.S. consumer finance, credit cards, and brokerage, with the world's broadest retail network outside the U.S., Citi is shockingly undersized in its home market. It has only 800 U.S. branches, vs. 5,600 for Bank of America, 3,200 for Wachovia (including SouthTrust's network), and 2,300 for J.P. Morgan (including Bank One). Even regionals like BB&T of North Carolina and Regions Financial of Alabama boast almost twice as many branches as Citi. "In light of Citi's efforts to grow in places like Korea, Thailand, and Indonesia, it's ironic that it hasn't built a large retail network in states like Texas, Florida, and Illinois," says David Hilder, an analyst with Bear Stearns. Today Citi is a major competitor in just two states, New York and California.

To be sure, Citi is missing lucrative business because of its pygmy status in retail----and management knows it. A vast branch network would enable Citi to sell its credit cards and brokerage services to a far broader array of customers and, by harvesting checking accounts, provide a trove of cheap funds to lend out for car loans and mortgages. "To achieve its potential, Citi needs to expand its retail base," says John McCune, a research director at SNL Financial in Charlottesville, Va. CEO Prince and CFO Todd Thomson have said frequently that growing their branch footprint by buying other banks is a top priority. And chairman Sandy Weill has declared publicly that Citi wants to do more in the booming Hispanic market in the Southwest, a powerful growth engine for Wells Fargo and BofA.

But Citi frets about inflated prices, and for good reason. Retail banking faces a combination of slowing growth and wild-eyed buyers. From 1997 to 2002, U.S. deposits increased at a frenzied 7% annual rate, far above the historical average. Since mid-2003, deposit growth has stopped in its tracks. As memories of the bubble fade, Americans are shifting money into mutual funds and are grabbing fewer of the cheap refis that have been swelling checking accounts. Slow deposit growth makes it far tougher to squeeze profits from branches bought in an acquisition. And look at the prices. As recently as 2002, acquirers were paying just 1.8 times book value for banks. This year the figure is 2.5 times----near the peak levels of the late 1990s, when acquirers like First Union and NationsBank vastly overpaid for branches, sinking their stock prices for years.

Prince vows that Citi won't get blinded by the torrent of dealmaking. "We're in a cycle where prices for branches are out of line," said Prince at a recent investor conference. "This is not the last opportunity that Citi will have to do something in retail in the U.S." Prince is right. The landscape remains so fragmented that dozens of regional banks will still be for sale when the cycle turns downward, as it could in the next year or two as interest rates rise.

The question is whether Citi will wait that long: It reportedly bid a high number for Fleet, though BofA won by bidding even more. If Prince can bide his time, then capture a big bank at a bargain price (one candidate is Washington Mutual, selling at just 11 times earnings), he will prove a shrewd, contrarian dealmaker in the Weill tradition. If not, he'll just be one of the gang that paid too much.

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