Citigroup Announces Recovery Strategy
May 9, 2008
NEW YORK (MarketWatch) -- Citigroup Inc. plans to reduce about $500 billion of non-core, "legacy" assets over the next several years in a bid to shore up its capital base and divest itself of riskier investments. "These reductions will release capital that we could use in our other businesses," CEO Vikram Pandit said.
The $500 billion figure represents about 22% of the firm's total assets. Pandit said the cuts will be broken down as 4% from auto holdings, 5% from subprime collateralized debt obligations, 6% from highly leveraged commitments, 11% from structured investment vehicles, 35% from real estate and 39% from other, unnamed assets.
The bank will aim to reduce that exposure to less than $100 billion in the next three years.
Citigroup will aim for 16% to 18% return on current equity. It also unveiled an ambitious strategy to reap 9% revenue growth as the company attempts to struggle out from under recent credit troubles.
Pandit further outlined how Citigroup expects to rebound from recent credit woes via a three-phase plan, during which he says Citi must first "get fit," then "restructure," and finally "maximize." Divesting of "hobby" assets would be a major part of that "get fit" phase.
Firm, After Writing Down $45 Billion, Still Exposed to $29 Billion of Subprime Loans
Citigroup has been hit hard by the global credit crunch and fallout in the U.S. subprime mortgage market, as bad bets on securities and rising default rates forced the bank to write off billions of dollars on investments rendered virtually worthless by the international credit markets.
As a result, the bank has lost close to $45 billion in credit losses and write-downs over the last year -- and has seen its stock slide more than 50% during the same period.
The further cuts announced Friday came as little surprise to market players, who have watched Citigroup sever more than 15,000 jobs and shed several noncore businesses over the last 12 months.
The bank also slashed its dividend by more than 40%, and some analysts have predicted Citigroup will need to further trim its payout to shareholders -- or eliminate it altogether.
So far, Wall Street has reacted coolly to the strategy, with many analysts lukewarm about Citigroup's prospects at least until the global credit crunch eases.
"We view the credit markets as still in turmoil and we expect further write-downs," S&P bank analysts Erik Oja and Stuart Plesser wrote.Citigroup, they noted, "still has about $29 billion of total direct subprime exposure."
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