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Citigroup Inc., which failed to fully capitalize on one of the most prosperous eras for US financial-services companies in recent years, announced a sweeping expense-reduction plan on Wednesday that includes 17,000 job cuts and a $1.38 billion pre-tax charge.
The financial-services giant also will take an additional $600 million in pre-tax charges spread over the last three quarters of the year. Citigroup, which is thinning its back-office ranks and moving another 9,500 jobs to lower-cost locations, said the cuts are aimed at reducing $2.1b. in expenses this year.
Analysts estimate the savings will translate into a 6 percent boost to earnings by the end of 2009.
"This effort should enhance our capacity to grow," said Robert Druskin, given a mandate to find waste when he was named chief operating officer in December. "There will be very little impact on 'client-facing' functions, other than additional efforts to enhance our service levels."
The cuts are the biggest by a US company outside the auto industry since June 2005, when 22,000 employees lost their jobs as regional supermarket chain Winn-Dixie declared bankruptcy, according to Challenger Gray & Christmas.
For Citigroup, they are the first significant job cuts and cost saving measures since Chuck Prince took the helm several years ago in the midst of a slew of regulatory problems. Prince, a lawyer by training, has spent the last several years focusing on getting a handle on those problems before turning his focus to today's issues.
Undertaking its first significant restructuring in a decade, Citigroup projected savings from the expense reductions at $3.7b. in 2008 and $4.6b. in 2009.
About 57% of the cuts will come from overseas, though a majority of the prospective savings will come from the US market, Citi said.
The number of job cuts fall at the middle to high end of analysts' expectations and split the research community on the plan's worth. Citigroup spent $52b. in 2006, which included $12b. in pay incentives such as broker commissions at Smith Barney. Overall spending could grow due to acquisitions, Druskin said. Last month, Citi bid $13.4b. for the remainder of Japan's Nikko Cordial Corp. that it doesn't own.
The fear was that some draconian program would be announced (cut 10% across the board) that would have crippled the company's ability to grow," Punk Ziegel & Co. analyst Richard Bove wrote. "This has not happened."
Others, such as the Celent consultancy's David Easthope, weren't as optimistic.
"In addition to management shuffling and cost cutting, investors want growth, growth, growth," he said, adding that Wednesday's moves were an "obvious step."
Druskin said the company included cost cuts when it created a budget for 2007, but the budget did not included the charges. He also said about $1b. of the first-quarter charge is severance costs.
The company also plans to do a better job of buying the supplies and services it needs. Citi said it will centralize 80% of its purchases by year-end and nearly 100% by the end of 2009. About 65% of the company's purchases are centralized.
"That's the kind of philosophical change we're looking at enforcing throughout the company," Druskin said.
The bulk of savings, about $1.05b. in 2007, will come from Citigroup's global consumer and markets and banking groups. Those units will also see $1.725b. in annual savings in 2008 and 2009.
One possible beneficiary from cuts could be Poland, which is seen as a top contender to attract back-office jobs from London.
Citi said a key focus will be to move around 9,500 back-office and support jobs out of its expensive main offices into lower cost locations, and there are few locations more expensive than London.
Citigroup expects $375m. in its technology and corporate operations groups by the end of the year. The bank will save $550 million each year through 2009 in the technology department. Most of those cuts were announced as part of an earlier program, but Druskin did say that Citi would halve the number of data centers to 21 by the end of 2009.
Druskin also said Citi may exit some unprofitable businesses, but declined specifics. About 40 Smith Barney brokerage offices will be closed.
"We are doing things like closing down facilities where we have excess space, closing down some small businesses that we have been in for a long time, never made money, and are taking this opportunity to once and for all deal with," Druskin said.
As the financial industry recorded record profits in 2006, Citigroup was left with lackluster results. While peers such as J.P. Morgan Chase & Co., Bank of America Corp. and Merrill Lynch & Co. turned in quarter after quarter of stunning profits, Citigroup expenses were growing at a 9% annual rate, but revenue was rising only at 6%.
The quest for so-called operating leverage and the stagnant stock price led Chairman and Chief Executive Charles Prince to address the issue head on in a meeting with analysts and investors in December.
During that meeting, Prince said "nobody is more upset about the stock price than I am" and that the bank would rein in investment spending to between $500 and $600m. from $1b. Prince reiterated that commitment Wednesday.
"This is the start of a different way of doing things at Citigroup," Prince said Wednesday.
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