May 9, 2008 / 2:30 AM / 9 years ago

Citigroup aims to shed $400 billion of assets

<p>A man walks past the Citibank building in San Francisco, California April 30, 2008.Robert Galbraith</p>

NEW YORK (Reuters) - Citigroup Inc said on Friday it plans to shed $400 billion of assets within three years and boost revenue by up to 10 percent annually, in a bid to restore profitability after huge losses tied to flagging mortgage and credit markets.

Vikram Pandit, who became chief executive of the largest U.S. bank in December, revealed the plans at a much-anticipated presentation to investors and analysts. He has faced growing demands to slash costs, shed poor-performing businesses, and reinvigorate a stock price down by more than half in the last year.

Citigroup shares were down 60 cents, or 2.5 percent, at $23.70 in afternoon trading on the New York Stock Exchange.

"It's definitely going to be a show-me story," said Thane Bublitz, a senior analyst at Thrivent Financial for Lutherans in Appleton, Wisconsin.

Citigroup lost nearly $15 billion in the last two quarters, and has suffered more than $45 billion of write-downs and credit losses since last summer, as the housing slump deepened, subprime mortgages imploded and credit markets tightened. More jobs will be cut, on top of 13,200 announced this year.

"It's a net positive for Citi just to shrink," said Henry Asher, president of Northstar Group Inc, a New York money manager.

Pandit said he plans to reduce $500 billion of non-core "legacy" assets, an amount he said was not "trivial," to below $100 billion in two to three years, largely through sales.

Among the assets to be shed are real estate, leveraged loans, complex debt and structured investment vehicles. Citigroup ended March with $2.2 trillion of assets.

Some investors believe Citigroup, built over nearly two decades by Sanford "Sandy" Weill into a behemoth now operating in some 106 countries, is too big. Charles Prince, who quit as chief executive in November, long rejected that accusation.

"Pandit is telling investors he is going to try to restructure," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey. "He seems to have a different heart than Sandy Weill and Chuck Prince."

Shedding Assets

Reducing assets by $500 billion would make Citigroup about the same size as Bank of America Corp and JPMorgan Chase & Co, whose market values are far higher.

Citigroup's asset base had swelled 49 percent, to $2.36 trillion from $1.59 trillion, in the 18 months ended September 30.

"The two things I wanted to hear, which we heard, were that Citigroup is shrinking the balance sheet and getting the cost structure right," said Anton Schutz, a portfolio manager at Mendon Capital Advisors in Rochester, New York. "These guys weren't defensive, they were offensive. It's a shift."

Unlike Weill, Pandit said he doesn't see the bank as a "financial supermarket," but said he is committed to struggling units such as U.S. consumer banking and credit cards.

"The asset mix is like hardware," Pandit said. "We've got great hardware. The real question is the software."

<p>Citigroup CEO Vikram Pandit in a file photo. Citigroup said Friday that it plans to shed $400 billion of assets within three years and boost revenue by up to 10 percent annually in a bid to restore profitability after huge losses tied to flagging mortgage and credit markets.Peter Morgan/Files</p>

To help market itself, Citigroup is reintroducing the "Citi never sleeps" tagline, among the best-known marketing slogans in U.S. corporate advertising.

Pandit is targeting $15 billion of benefits from the restructuring, largely through cost cuts, with a goal of generating an 18 percent to 20 percent return on equity.

Some investors said he may face an uphill struggle, given tight credit markets, and since more write-downs are possible.

"The problem is, how much more capital do these guys need?" said Mirko Mikelic, a portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan.

Pandit has also slashed Citigroup's dividend by 41 percent, and the bank has raised more than $42 billion of capital since the fourth quarter. "In this environment, excess capital is absolutely a strength," Pandit said.

Chief Financial Officer Gary Crittenden added that the bank could generate $40 billion of excess capital over a few years.

Cutting Risks

Still, the magnitude of Citigroup's asset sales may prompt fresh speculation that the bank will eventually break up.

"Size is not necessarily providing a tremendous advantage," said Jean-Marie Eveillard, a portfolio manager at First Eagle Funds. "The returns on capital, the returns on equity at 20 to 25 percent, I don't think that's coming back."

Pandit is a former top investment banking executive at Morgan Stanley. His inexperience in consumer banking, Citigroup's largest unit, remains an issue for some investors.

"It concerns me that they brought in somebody to run this thing who doesn't have experience in that area," said Jim Huguet, chief executive of money manager Great Companies LLC in Tampa, Florida. "Jump back into Citigroup? No, I'm not."

Citigroup said it plans to expand in investment banking areas where it is underweighted, such as prime brokerage, derivatives and electronic trading, and add private bankers and offices for high-net-worth clients.

In addition, Pandit said that unit will try to reduce risk, and stop doing business with unprofitable clients.

"You can be sure we will properly understand the risks we're taking, and if we can't get that right, nothing else I'm going to say is going to matter," Pandit said.

Crittenden added that senior executives will tie compensation to the success of the restructuring. "Our wallets and our hearts are going to be in the same place," he said.

(Additional reporting by Jennifer Ablan, Kristina Cooke, Megan Davies and Herb Lash in New York; Doris Frankel in Chicago; and Jessica Hall in Philadelphia; Editing by Brian Moss/Gerald E. McCormick/Braden Reddall)

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