Citigroup may be making wrong cuts, experts say

By Dan Wilchins

NEW YORK (Reuters) - Citigroup (C.N: Quote, Profile, Research, Stock Buzz), facing increasing investor pressure to generate stronger profit growth, plans to cut costs, but experts question if the bank will target the right areas and if cost cutting is enough.

The largest U.S. bank by assets recently named a new chief operating officer and said his first task will be to find ways the bank can lower costs by, for example, sharing back offices across multiple groups and ensuring multiple product lines aren't duplicating efforts.

But whatever the plan, there are signs that Citigroup is making the kinds of cost cuts that threaten future growth, instead of those that increase efficiencies, said Tom Brown, chief executive of hedge fund Second Curve Capital, at the Reuters Investment Summit in New York.

Brown, citing conversations with Citigroup employees, said the bank is laying off staff at branches, which can reduce costs in the near term but can also hurt customer service and ultimately revenues.

If that's true, it's bad news for Citigroup, whose revenues for the first three quarters this year rose just 5 percent compared with the same period last year, while operating expenses rose 13 percent.

Lukewarm revenue growth and rising expenses have crimped profits, which are up 9 percent over last year. By comparison, Bank of America Corp. (BAC.N: Quote, Profile, Research, Stock Buzz) earnings are up more than 20 percent, and JPMorgan Chase & Co.'s (JPM.N: Quote, Profile, Research, Stock Buzz) income from continuing operations is up more than 70 percent.

Citigroup's shares are up just 7.7 percent so far this year, lagging an 11.3 percent gain in the broader banking sector. Citigroup's shares on Wednesday closed up 0.1 percent at $52.32, slightly below a 52-week high hit on Monday.

Citigroup Chief Executive Charles Prince has admitted the share performance is lackluster, but the solution remains unclear.

Cost cutting is not enough, Dick Kovacevich, chief executive of Wells Fargo Corp. (WFC.N: Quote, Profile, Research, Stock Buzz), told Reuters on Tuesday, when asked about Citigroup.

"You've got to get revenue to grow faster. Its rate now is just inadequate," he said. Kovacevich worked at Citibank in the 1980s, but is no longer close to the company.

Several investors that spoke to Reuters said they hope Citigroup at its annual investor conference on Thursday will offer a strategy for boosting revenue.

Boosting revenue while keeping a lid on costs is a tricky business. Citigroup is believed to have underinvested in computer systems in the years leading up to 2003, when Prince took over. Although Prince has had three years at the helm of the company, he may need more time to correct for underinvestment, Kovacevich said.

"Depending on the seriousness of the underinvestment, it could be five to 10 years between investing in this business and seeing the results," Kovacevich said.

Some analysts, including Second Curve's Brown, are reluctant to wait that long, and want to see Citigroup split itself up.

Brown estimates Citigroup could be worth about $61 a share if it were a separate retail bank, commercial and investment bank, retail wealth manager, and international consumer finance company. Brown does not have a position in Citigroup, but might take one if the company's shares fall enough.  Continued...