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 The bank's first quarter results on Monday showed just how much work
Citigroup executives have ahead of them in those areas.
In Citigroup's main businesses, revenue fell 3.5 percent in the
quarter while operating expenses eased only 1.5 percent compared
with a year earlier, the bank said. It still needs to cut another
3.5 percent, or $1.5 billion, from its annual operating expenses to
meet its own 2015 targets for efficiency, according to Reuters
calculations.
The company's expenses are too high given its weak revenues, said
Gary Townsend, a longtime bank stock investor who owns Citigroup
shares and formerly ran Hill-Townsend Capital.
High costs have bedeviled Citigroup for a decade. For years, the
bank's problems were mainly linked to its failure to fully integrate
businesses built up over years of acquisitions.
That integration is mostly done. But now the bank, like other major
American banks, is struggling to cut costs as it seeks to cope with
the expense of complying with a welter of new laws and regulations
following the financial crisis.
Executives at Citigroup, which had to be rescued by the U.S.
government three times during that crisis, in the past 18 months
have already eliminated $2.8 billion from the company's overall
annual expense base through layoffs and assorted reorganization and
productivity steps, Chief Financial Officer John Gerspach said on a
conference call with analysts. A big chunk of that stems from the
company's December 2012 announcement that it was eliminating more
than 11,000 jobs.
But of the $2.8 billion, only 20 percent is going to the bottom
line, Gerspach said.
Some 40 percent is being spent to comply with regulations and
control risks. The other 40 percent is covering other expenses and
the added costs that come with investments, such as Citigroup's
purchase of the Best Buy store group's credit card portfolio.
For Citigroup, cost cutting is particularly difficult, because it
operates in more than 100 countries, making it the most
international of the U.S. banks.
Being global hurts the bank on at least two fronts: it makes
complying with U.S. laws more difficult, and it gives the bank
dozens of other regulatory regimes to deal with.
The Federal Reserve recently rejected Citigroup's request to pay
higher dividends to shareholders and buy back more shares, citing
the bank's inability to properly forecast how any markets and
economic difficulty would hurt its many businesses globally.
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Gerspach said the bank needs to devote more resources to deal with
the concerns raised by the Fed. As it is now, Citigroup has more
than 500 people who spend more than half of their time on the bank's
capital requests with the Fed, and somewhere between 1,200 and 1,500
other people that spend at least some of their time on the process.
Citigroup has so much work to do in fixing this that it is not going
to reapply to the Fed for permission to pay an increased dividend
this year, and is instead focusing on a new application for 2015,
Corbat said on the conference call.
Meanwhile, the bank has regulatory and control problems overseas. In
Mexico, Citigroup is reviewing its entire control structure after a
series of problems there. In February, the bank said its Banamex
unit lost $400 million from making loans to a supplier to Mexican
oil company Pemex. Those loans turned out to be bogus, and Mexico's
attorney general is investigating how Pemex supplier Oceanografia
allegedly defrauded Citigroup.
To make matters worse, Gerspach said on Monday that the bank had
discovered fraudulent loans made to another Pemex supplier. He
declined to identify the company, but said the loans involved
would be somewhere around $30 million, and the losses would be much
lower.
Citigroup's Banamex unit also lost some $80 million from bad loans
to homebuilders that executives in New York had nixed but that Mexican
executives made anyway.
(Reporting by David Henry; editing by Dan Wilchins and Martin
Howell)
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