EXPENSE REDUCTION AIMED AT SAVING $2.1 BILLION, IMPROVING PROFIT MARGINS
By David Weidner and Murray Coleman
NEW YORK (MarketWatch) — Citigroup Inc., which failed to fully capitalize on one of the most prosperous eras for U.S. financial services companies in recent years, today announced a sweeping expense-reduction that includes 17,000 job cuts and a $1.38 billion pre-tax charge.
The financial-services giant also will take an additional $600 million in pre-tax charges spread during the last three quarters of the year. Citigroup, which is thinning its back-office ranks and moving another 9,500 jobs to lower-cost locations, said the cuts are aimed at reducing $2.1 billion in expenses.
“This effort should enhance our capacity to grow,” said Robert Druskin, who was named chief operating officer in December and given a mandate to find waste. “There will be very little impact on client-facing functions, other than additional efforts to enhance our service levels.”
Citigroup said the expense reductions will lead to savings of $3.7 billion in 2008 and $4.6 billion in 2009. The numbers of job cuts come in the middle to high end of analysts’ expectations. Druskin said the company included cost cuts when it created a budget for 2007, but the budget did not included the charges. He also said about $1 billion of the first-quarter charge is severance costs.
The company also plans to do a better job of buying the supplies and services it needs. Citi said it will centralize 80% of its purchases by year-end and nearly 100% by the end of 2009. About 65% of the company’s purchases are centralized.
“That’s the kind of philisophical change we’re looking at enforcing throughout the company,” Druskin said.
The bulk of savings, about $1.05 billion in 2007, will come from Citigroup’s global consumer and markets and banking groups. Those units will also see $1.725 billion in annual savings in 2008 and 2009.
Citigroup expects $375 million in its technology and corporate operations groups by yearend. The bank will save $550 million each year through 2009 in technology department.
INVESTORS FACE DILEMMA
On the one hand, the pioneering international banking conglomerate retains some of the industry’s most prized assets. Its breadth and depth across the world is still considered top-echelon, if not top-dog, among U.S. bankers seeking to expand overseas.
And aiding that view is a building rampage of sorts undertaken by Citigroup.
The flip-side is that some of its key groups have come under criticism for neglect by past management teams. As a result, many domestic consumer brands have lost some of their luster.
Many money managers argue that Citigroup can no longer be considered on the cutting edge and a pioneer in world banking circles as they were for nearly three decades.
“They’ve got an advantage in terms of scale,” sid David Kovacs, co-manager at Turner Large Cap Value Fund.
“But the problem is that when you get to a certain size, it’s difficult to keep up past growth rates. So they’ve lost a lot of their nimbleness.”
Turner Large Cap Value Fund sold its long-term holdings in Citigroup last month after subprime loan scares rippled through financials. Although less exposed to types of loans at the heat of the controversy, Kovacs says the behemoth’s sheer size could hamper its ability to skate past any future bad news in subprime and related markets.
“Citigroup has grown to a point where creating a new product with enough impact to boost its entire business is much more difficult,” Kovacs said. “It has to take smaller bites out of the market these days.”
Even incremental steps can add up in a blue-chip with a market capitalization of $255.2 billion. Embattled Chief Executive Charles Prince has been trying to keep up with the company’s tradition of innovation.
But expenses have been rising faster than revenue. As a result, Chief Financial Officer Robert Druskin was tasked in December to find as much as $1 billion in cost savings within the financial giant.
“Tangible results should show up later this year in their cost-cutting program,” Lehman Brothers analyst Jason Goldberg said.
“In addition, we should start to see returns grow from investments they’ve made over the last several years in building new branches all over the world to bulking up in investment banking.”
But any impact from such moves is still at least several quarters away, he added.
“Positive operating leverage with revenue growing faster than expenses is big on investors’ minds right now, particularly considering what’s going on in the subprime mortgage arena,” Goldberg said.
Citigroup has a subprime portfolio of more than $40 billion, he added, or about 6% of its total. “It’s bigger than any other bank’s exposure to that market on a percentage basis,” Goldberg said.
Lehman Brothers has a buy rating on the stock and it has worked with Citigroup in the past.
In his most recent research note last week, Goldberg wrote that Citigroup would need to pare some 80,000 positions just to get to its competitors’ level in terms of sales per employee.
Even with drastic cuts and more revamping of operations, some investors say they won’t be impressed.
“They talk about cost-cutting and strategic planning as if they’re coming up with some huge revelations,” said Jim Huguet, chief executive at money manager Great Companies Inc. “But well-managed businesses do that just like breathing. They realize managing costs and growing revenue aren’t luxuries.”
The Tampa-based Huguet still owns some shares of Citigroup in his institutional and high net-worth clients’ portfolios. LM ) , Huguet says his firm’s money managers sold most of its holdings in the company.
“Asset management, when run properly, is a very profitable business and one that’s key to expanding the consumer side of the business,” he said. “It presents complexities to Citigroup’s current management. But some of its key rivals have been able to work through those issues.”
Prince, whose background includes serving as a lawyer, was a good choice when Citigroup was undergoing compliance issues three years ago, argues Craig Woker, a Morningstar Inc. analyst.
“He has made Citigroup much more focused on its core businesses and less inclined to try to hit home runs all the time,” he said. “But putting in-place more long-term strategic planning isn’t enough anymore. A lot of big investors are fed up and want immediate results.”
Prince needs to produce much healthier returns, Woker says. “He’s on a fairly short rope,” the Chicago-based analyst said. “He’s probably got 12-18 months to really perform. At least he should be hoping to get that much time.”
The 17 analysts polled by Thomson Financial have a consensus estimate for Citigroup’s 2007 first quarter earnings of $1.09 per share. That would be down from the same period a year ago when it earned $1.11 a share.
The company’s net income is expected to also fall slightly to $5.5 billion in first quarter 2007 from $5.6 billion a year ago.