Citi's Nightmares Just Keep Getting Worseby
As recently as this summer, the strategy seemed to be working. Citicorp Chairman John S. Reed was making headway on his bold plan to revitalize his seriously ailing bank. He had reduced Citi's payroll by 5,000, to 90,000, and raised more than $1.6 billion in new capital through the sale of assets and convertible preferred stock. Wall Street analysts began expressing cautious optimism that the worst was over for the nation's largest bank.
Now they're not so sure. On Oct. 15, Citi stunned Wall Street by reporting a third-quarter loss of $885 million because of restructuring charges and asset write-downs. It also suspended its 25~-a-share quarterly dividend. This was the bank's worst hit since the second quarter of 1987, when Reed set aside $2.58 billion in reserves against Third World debt. "This is a struggling company," says Keefe Bruyette & Woods Inc. President James J. McDermott.
DOWNGRADED. The loss further eroded Citi's already-thin capital ratio. At the end of September, Citi's core capital stood at 3.64% of total assets, the lowest ratio of any money-center bank. That is below the 4% minimum level that will be required by regulators by the end of 1992. In response, Standard & Poor's Corp. downgraded $22 billion worth of Citi's debt and preferred stock.
Citi's latest setback comes just when other big banks are just emerging from a prolonged slump because of bad real estate loans. On the same day that Citi reported its results, Chemical Banking Corp., its Park Avenue neighbor, reported third-quarter earnings of $131.6 million, compared with with a loss of $43.7 million a year earlier. The announced merger between Chemical and Manufacturers Hanover Corp. will likely put new pressure on Citi's profitable New York retail market. At a meeting with analysts and reporters on Oct. 16, Reed conceded that already, "we have zero revenue growth in our New York branches."
But New York is hardly the only problem Reed faces. Business is also worsening in California, Britain, and Australia. That means Citi's results could deteriorate even further. Nonperforming loans rose by $407 million during the quarter, to $6 billion. But Citi has enough reserves on hand to cover only 24% of the bad debt, half of it real estate loans, according to Kidder, Peabody & Co. At other major banks, the ratio exceeds 50%. That means Citi may be forced to set aside huge loan reserves well into 1992. "We're in a box for the next year or so -- no doubt about it," Reed said.
One senior regulator doubts whether Reed can clear up Citi's troubles. "They've got a long way to go to work through these problems," he says. "There are questions -- strategically -- about what the company can do. Can Citi profitably manage $200 billion in assets? Can this management survive?"
Earlier this year, Reed announced a goal of raising as much as $5 billion in fresh capital by 1993. But analysts fear Citi may need a far heavier dose of new cash. Kidder Peabody analyst Charles Peabody estimates that Citi could require as much as $7 billion in capital. But Reed says that Citi is in no condition to float any more stock. "We're going to earn our way there," he says.
To accomplish this, Reed, once an empire-builder, will have to accelerate his plan for shrinkage and streamlining. Citi announced a $320 million charge for layoffs over the next five quarters. Reed says he is trying to trim annual expenses by an additional $700 million by 1993 -- on top of the $1 billion goal he set in early 1991. Since announcing the latest hit, "we have laid off a ton of folks," he said. But analysts think some 10,000 more may have to go.
DUMPING ASSETS. The pressure is most apparent at the consumer bank, the crown jewel of Citi's empire. Global profits from consumer banking tumbled to $56 million in the third quarter, down from $286 million a year ago. That partly reflected an $80 million provision for possible losses from home mortgages and credit cards. Those losses now may be "flattening out," Reed said. But unless earnings pick up, Reed will have to move faster to shed assets. "We are a bit disappointed that more progress hasn't been made on the capital front," complains S&P analyst Tanya S. Azachs. "They have been talking about selling assets all along, but they have not really been doing it in a full-fledged way."
Over the summer, Reed said he was considering the sale of 12 to 15 businesses to raise capital. Analysts reckon that Quotron Systems Inc. is high on his list (table). Almost half of Citi's quarterly loss came from writing down its $400 million investment in the loss-ridden subsidiary. Quotron, which supplies stock quotes via computer terminals, hasn't fared well against rival information vendors such as Reuters Holdings PLC and Dow Jones & Co.
Despite steady losses, Reed had remained committed to the information business. Much of those losses stemmed from amortization of part of the $680 million acquisition price of Quotron. It wasn't until late last year that Reed acknowledged that he could no longer afford to give it any more money. But like so many of Reed's dreams, Quotron has become a nightmare. While CEOs of other large banks are positioning themselves for the future, Reed still has his hands full rectifying old mistakes. "We're working and sweating it out," Reed said. But the market and regulators may be tiring of waiting for results.
WHAT CITI MAY HAVE TO SELL TO RAISE CASH QUOTRON Stock quote system has been a drag on earnings. But it would fetch less than the $680 million Citi paid for it AMBAC Citi raised $352 million last July by selling 50% of the bond-insurance company, and could unload the rest THRIFTS Citi's Florida thrift has $2.6 billion in assets and slim growth prospects CREDIT CARDS Citi has considered selling up to 20% of its credit card business, but high delinquency rates could preclude an immediate deal FOREIGN UNITS Citi could sell off pieces of its overseas consumer bank, such as its profitable franchise in Spain. Citi recently sold its Italian operation for $273 million