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Citigroup: More Downsizing Yet To Come?

 December 06, 2012 02:35 PM

(By Mani) Investors have been wondering what is next for Citigroup, Inc. (NYSE: C) after the exit of Vikram Pandit. Here is the answer: a cut of 11,000 jobs, take about $1 billion charge in the fourth quarter and predict annual savings in excess of $1.1 billion from 2014.

The latest restructuring, which comes after the 5,000 job cuts in January, would shave-off 6,200 jobs in consumer banking division and 1,900 jobs in institutional clients unit.

The party doesn't end here as more cost savings are yet to come as new CEO Michael Corbat continues his strategic review.

"We believe the additional savings could total another $2-5b—with details likely coming in late 1Q13. This implies total cost saves of 5-10% on a base of just under $50b," Deutsche Bank analyst Matt O'Connor said in a client note.

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The pruning of certain non-US consumer businesses should help simplify the Citigroup story along with making it more efficient from a capital and expense point of view.

Moreover, Citi has more leverage to an improving US housing market than versus most banks and is subject to less net interest margin risk given its non US exposure and little US agency RMBS reinvestment risk, which accounts for just 2 percent of earning assets.

Corbat has been with the company for more than 29 years, having served as CEO of Citi Holdings and most recently head of EMEA. It was during his time at Citi Holdings that he might have developed a close relationship with Chairman Michael O'Neill, who reportedly had some strategic differences with former-CEO Pandit.

[Related -Citigroup Inc (C) Q4 Earnings Preview: What To Watch?]

Given current growth prospects and regulatory environment, growing the balance sheet may not be feasible in the near term, and possibly further out as well given the current macro uncertainty. However, outstanding returns can still be achieved in a slow growth, low interest rate environment if companies focus on right-sizing costs, shrinking the balance sheet, and returning excess capital to shareholders.

Along with Corbart, O'Neill had done just that and would probably swing the ax harder on several branches of Citi if they are not giving the desired results. O'Neill has successful experience as a banker who is not afraid to cut the cord if that's best for business.

O'Neill, who joined Citi's board in March 2009, closed about 50 percent of Bank of Hawaii when he was chairman and CEO of the bank between 2000 and 2004.

O'Neill's recent statement of being "extraordinarily focused on our expense level" did gave a hint that he would exercise severe cost controls at Citi, which is the third-largest bank in the U.S. in terms of assets, after JPMorgan Chase (NYSE: JPM) and Bank of America Corp. (NYSE: BAC).

"We continue to believe the longer term earnings power of Citi to be about $6.00 per share (our 2015e is $6.04, our 2014e is $5.14 and our 2013e is $4.61)," analyst O'Connor noted.

The biggest driver of the $1.75 improvement to get to $6.00 is from eliminating the drag from Citi Holdings, with cost control the bulk of the rest. Citi Holdings is expected to eliminate approximately 350 positions and incur approximately 5 percent of the repositioning charges, most which are related to branch rationalization in Greece and Spain.

Within Citi Holdings, the largest drag remains credit costs related to US residential real estate.

"As housing continues to recover, we expect losses to moderate and for C to use more of the $8.5b of related loan loss reserves (nearly 10% of the mortgage book)," O'Connor added.

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