Citigroup plans to shed about $400 billion of assets

May 9, 2008
Singapore Democrats

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Josh Fineman
Bloomberg

Citigroup Inc. Chief Executive Officer Vikram Pandit plans to get rid of about $400 billion of assets over the next three years as he starts to whittle away at the company built by Sanford “Sandy” Weill.

When he’s done, Citigroup may cease to be the biggest U.S. bank, a title the firm has held for a decade.

 

“There will be more” divestitures, Pandit, 51, told shareholders at a meeting today at the bank’s New York headquarters. The company, which lost $5.1 billion in the first quarter, has recorded more than $40 billion of credit losses and writedowns since the subprime mortgage market collapsed last year. The shares declined in New York trading today.

Pandit, who succeeded Charles O. “Chuck” Prince in December, said he’ll shed “legacy assets,” including real estate holdings and collateralized debt obligations, such as bonds backed pools of subprime mortgages. Analysts predict he’ll sell life insurer Primerica Corp. and a retail banking operation in Germany, where Citigroup has about 340 locations. Other options include exiting Brazilian retail banking and trimming operations in Asia.

He has already announced plans that would reduce the bank’s $2.2 trillion of assets by at least $65 billion, according to Susan Roth Katzke at Credit Suisse Group. Last week, Citigroup agreed to sell employee-benefit joint venture CitiStreet LLC. In April, the bank opted to sell the Diners Club International credit-card payment network and CitiCapital, a provider of leases and financing for industries including health care and construction.

Off-balance-sheet funds

Pandit is hoping to dispose of more than $200 billion of loans and securities to shore up capital, a person with knowledge of the plan said March 24. He’ll probably let them pay off as they come due, rather than sell them at a loss, the person said. The stakes may include $49 billion of securities the bank had to take on when it bailed out seven off-balance- sheet investment funds.

“They need to pare back the parts that are broken,” said Barry James, who manages more than $2 billion as president of James Investment Research in Xenia, Ohio, including Citigroup bonds. “He’s a cautious guy. He’s not going to do anything rash.”

Under Prince, Citigroup’s assets increased by $689 billion from 2005 through 2007, an amount larger than the entire balance sheet of Wells Fargo & Co., the fifth-biggest U.S. bank. Prince, 58, was forced to resign last November as the bank headed for a record fourth-quarter loss of almost $10 billion.

Tier 1 capital

Selling assets that aren’t trading at depressed prices would bolster Citigroup’s so-called Tier 1 capital, the core measure of solvency demanded by regulators.

Under U.S. rules, banks have to set aside sufficient Tier 1 capital, which includes common stock and retained earnings, to provide a cushion that a bank would have to burn through before investors in Tier 2 capital — mostly subordinated debt — or depositors would suffer losses.

“He’s carting off the non-significant operations and raising money so that he can reinvest it in the business he’s in, which is loaning money,” said Robert Olstein, chief investment officer of Purchase, New York-based Olstein Capital Management, which owns Citigroup shares.

Pandit has raised $44 billion in capital, more than any financial-services company, through stock sales and private offerings to investment funds controlled by foreign governments including Abu Dhabi.

Weill’s legacy

Citigroup fell 35 cents, or 1.4 percent, to $23.95 at 1:48 p.m. in New York Stock Exchange composite trading. The shares have plunged 54 percent since the end of 2006 to the lowest in almost a decade, erasing gains made under former Chairman and CEO Weill. Weill, who built the company through a series of acquisitions over 17 years, stepped down in 2003 and tapped Prince as his successor.

Pandit told investors today that he expects to deliver return on equity, a gauge of how effectively the bank reinvests earnings, of 18 percent to 20 percent “over time.” The firm produced a return of 19.4 percent on average from 2001 through 2006. The measure plunged to 3 percent last year.

He has already changed managers, putting former Morgan Stanley colleague John Havens in charge of trading and investment banking, moving U.S. consumer head Steve Freiberg to head a new credit-card division and recruiting former Wells Fargo & Co. executive Terri Dial to oversee consumer banking in the U.S.

The bank slashed the quarterly dividend by 41 percent in January to 32 cents a share, the first drop since the early 1990s. Oppenheimer & Co.’s Meredith Whitney has said the bank might have to cut the dividend again to bolster capital as losses escalate.

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