Citi ValueLine Outlook

Citigroup reported a first-quarter loss of $1.02 per share. Results included $6.0 billion in subprime mortgage writedowns, and $3.1 billion in consumer loan losses. Additional charge-offs for leveraged finance commitments, exposure to monoline insurers, and auction rate securities totaled $6.1 billion. The writedowns lowered revenues almost 50% from last year, and caused the loss. Domestic credit costs reflected higher delinquencies on first and second mortgages, credit card, and auto loans. International credit costs reflected weakness in Mexican credit cards and consumer finance in India.
Capital counts. Recent large capital raises affirm that management is ‘‘committed’’ to excess capital ‘‘in this (challenging) environment’’. Too, capital
allocation will now be even more driven by expected payback.
CEO Vikram Pandit’s strategy is multifaceted, as articulated at the investor day that we recently attended at Citigroup headquarters. Citi aims to shed up to $500 billion of assets over time, downsizing the consumer and investment banking businesses, as well as others that are generating unattractive returns. The risk management function has been expanded, and all regions now have their own risk
manager. Too, Citi has added risk managers to its real estate lending and structured finance units, in addition to those it already had in place for its consumer, wealth management, and investment banking operations. Management aims to cut $15 billion of costs per year by 2010 to boost return metrics, simultaneously improving the efficiency ratio. Over 15 database centers will be merged into two or three, eliminating some of the 25,000 employees that oversee the various systems.
These shares are untimely. Mr. Pandit has no interest in breaking up the financial conglomerate that is Citigroup, but instead aims to divest underperforming assets, cut costs, increase capital levels, and improve morale. The de-emphasis of the recently troubled mortgage operations, and an increased focus on international opportunities appear reasonable, in our view. Still, CFO Gary Crittenden notes that there ‘‘could be significant deterioration of credit’’ in the second half of 2008.

Douglas G. Maurer, CFA May 23, 2008

BUSINESS: Citigroup is a diversified financial services company with operations in consumer and corporate banking, insurance, investment banking, and asset management. Businesses include Citibank, Smith Barney, CitiFinancial, Primerica Financial Services, and Banamex. Spun off 23.0% of Travelers Property Casualty, 3/02; spun off 67.0%, 8/02. Sold Travelers Life & Annuity, 7/05. Has about 200 million customer accounts in over 100 countries. Has around 300,000 employees. Officers/directors own approximately .7% of common stock (3/08 proxy). Chairman: Win Bischoff; CEO: Vikram Pandit. Incorporated: Delaware. Address: 153 East
53rd Street, New York, New York 10043. Telephone: 212-559-1000. Internet: www.citigroup.com.


2011-13 PROJECTIONS
-----------------------------------------------------Ann’l Total
Price---------------------Gain-----------------------Return
High 45------------------(+95%)----------------------21%
Low 30------------------(+30%)----------------------11%