Citigroup Inc. (C), the third-biggest U.S. bank, could exit or pull back from businesses in 21 countries that are among its least-efficient markets as Chief Executive Officer Michael Corbat seeks to cut costs.
The countries produce less than 10 percent of New York- based Citigroup’s revenue and have a “very low” return on assets of 0.4 percent, Corbat, 52, said today in a presentation.
“These results are unsustainable,” Corbat said. “In these markets, if there is not a clear path to acceptable returns, we intend to significantly scale back or exit certain business lines.”
Corbat is trimming spending as he takes over from former CEO Vikram Pandit, 56, who expanded operations in emerging markets before directors ousted him in October. More withdrawals would add to Corbat’s decision to shutter some branches in the U.S. and Brazil and pull back from consumer operations in Uruguay, Paraguay, Turkey, Romania and Pakistan.
“In these markets, we continue to serve institutional clients, but did not believe we had a near-term path to acceptable returns in our consumer business,” Corbat said in today’s presentation.
Citigroup has operations in more than 100 countries. More than half of the lender’s 2012 revenue came from outside the U.S., according to a financial supplement.
Corbat said the 21 “Optimize or Restructure” markets had an efficiency ratio, or expenses as a percentage of revenue, of 73 percent. Mark Costiglio, a spokesman for Citigroup, declined to comment on what countries Corbat was referring to.
Corbat described 18 other countries as “Optimize Then Grow” markets, including the U.S. and U.K. The markets yield about 55 percent of Citigroup revenue, with high expenses producing a 69 percent efficiency ratio, Corbat said.
“This presents a concentrated opportunity where we can make real progress on efficiency and returns,” Corbat said.
The lender has 20 “Invest to Grow” markets, which produce 30 percent of revenue and have a 49 percent ratio, the CEO said. These markets include Mexico, Singapore, India, Hong Kong and China, he said.
Corbat said he laid out targets for 2015 so that investors can hold the lender accountable.
Citicorp, the division that holds the bank’s ongoing businesses such as consumer banking and trading, should have an efficiency ratio in the “mid-50 percent” range by 2015, Corbat said. The division’s ratio at the end of 2012 was about 64 percent, according to Bloomberg’s calculations.
The bank overall will probably produce a return on assets, or ROA, of 0.9 percent to 1.1 percent by 2015, Corbat said. The ROA, which measures profit from investments, was 0.4 percent at the end of 2012.
Citigroup’s return on tangible common equity, or ROTCE, should be 10 percent or higher by 2015, Corbat said. The measure of profitability was 5 percent in 2012, he said.
Corbat replaced Pandit after directors concluded that he’d mismanaged operations, a person familiar with the matter said in October. Along with exiting markets, cost-cutting will include firing 11,000 workers, Corbat said in December.
“What’s changed is the nitty-gritty on how the business is managed with a reasonable blueprint that makes sense,” Michael Mayo, an analyst with CLSA Ltd., wrote in a note to clients today about the presentation.
Citi Holdings, the division that houses about $156 billion of unwanted and unprofitable assets, is a “drag on earnings” and must be scaled back, said Corbat, who ran the business until the end of 2011. The unit lost $10.8 billion for 2011 and 2012 combined, according to a financial supplement.
Home loans account for the majority of assets in Citi Holdings, Corbat said. While the lender has signed deals to sell about $1.5 billion of mortgages so far this quarter, Corbat said that a large sale of the home-loan portfolio at an acceptable price isn’t possible.
Losses from Citi Holdings’ U.S. mortgages should decline as housing prices stabilize and if the economy doesn’t slow, Corbat said. Citigroup holds $8.4 billion of reserves against losses in the portfolio, which the lender could begin to release “if conditions remain favorable,” Corbat said.
Chief Financial Officer John Gerspach, speaking at the presentation, said that Citi Holdings could break even in 2015 if credit losses decline with litigation expenses tied to the mortgage portfolio and the cost of repurchasing defective loans.
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