Citigroup Inc, the largest US bank, said on Friday it aims to shed $400 billion (Dh1.47 trillion) of assets – nearly 20 per cent of its total – over the next two to three years to become more efficient and profitable.
Citi's newly installed chief executive, Vikram Pandit, has faced demands from investors that he slash costs, shed poorly performing businesses and even split up the bank.
Some investors view Citi, built over two decades by Sanford "Sandy" Weill, as too big to govern, a charge that Pandit's predecessor, Charles Prince, routinely rejected.
Citi, hit hard by the sub-prime mortgage meltdown and ensuing turmoil, said it has about $500 billion (Dh1.84 trillion) of "legacy assets," and it expects to pare those to less than $100 billion (Dh368 billion) within two to three years.
Pandit, at a presentation to investors and analysts, said he sees three stages for Citi: getting fit, restructuring, and maximising the company. These stages, though, will take time, he cautioned.
"It's a net positive for Citi just to shrink. It's too big for management to get their hands around. No one could possibly go into that situation and quickly and completely understand all the nuances of such a sprawling business," said Henry Asher, president of Northstar Group, a New York-based money manager.
"There's no shortage of brain power, but how good is the decision making? The banks that are doing the best today are run by bankers. Look at Jamie Dimon and JPMorgan – that shows that it's possible to be done and done well," Asher said.
The restructuring could improve the bank's results early, but the overall program will require patience, Pandit said.
"Basically Citigroup wants to reduce costs and get back to double digit growth rates. The new management is taking their first major steps in a bid to return to profitability," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.
The assets to be shed include real estate, leveraged commitments, sub-prime collateralised debt obligations and structured investment vehicles. Pandit said the bank will reduce these assets in an orderly fashion.
"In the long run the shedding of some risk embedded in Citi's assets is good. Citigroup will be a stronger company in the end but they will have to endure some short-term pain because they are doing something the market did not expect," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Inc in Chicago.
Although Citi has said previously it planned to shed assets to boost its capital position, the magnitude of the sales worries analysts and is likely to prompt fresh speculation of a break-up of the Wall Street giant.
"Size is not necessarily providing a tremendous advantage," said Jean-Marie Eveillard, a portfolio manager at First Eagle Funds. "Finance, to some extent is a commodity business. The returns on capital, the returns on equity at 20 to 25 per cent, I don't think that's coming back."
Since late last year, Citi has recorded more than $45 billion (Dh165.6 billion) of write-downs and credit losses, raised more than $40 billion (Dh147.2 billion) of new capital including $2 billion (Dh7.36 billion) of preferred shares this week, and slashed its dividend 41 per cent.
Investors have in recent weeks grown increasingly hopeful that the US financial sector is nearing the end of its difficulties after being slammed over the past year by the US sub-prime mortgage market meltdown and ensuing turmoil in global financial markets.
"In the best of all possible worlds, you buy low and sell high. Here, they are selling when they have to," Asher said. "I'm sure they will do their best to create interest in each asset sale, but I don't see them having the strong hand. Whatever buyers are out there have more negotiating power."
Citi also said it expects annual revenue growth of 8 per cent to 10 per cent, with annual net revenue growth of 10 per cent from core operations.
That would include increases of 7 per cent from credit card operations, 8 per cent from consumer banking, 9 per cent from both securities and banking, and from wealth management, and 14 per cent from transaction services.
Pandit said he expects the company to see $15 billion (Dh55.2 billion) in "re-engineering benefits" from the restructuring.
Pandit and his team had been expected to tout Citi's combination of consumer and institutional businesses. They were also expected to outline the bank's focus on cash management, wealth management and cards as key businesses for the future.
Steven Freiberg, CEO of Citi's Global Cards, said the company was best positioned to grow compared with peers in credit cards. He said the company had underinvested in credit card marketing relative to peers since 2004.
In the markets and banking operations, Pandit said Citi was looking at everything to determine the right strategy. He said volatility and returns have been unacceptable and those businesses needed to be restructured to reduce some costs. Some investments, however, would be needed to support growth.
"You can be sure we will properly understand the risks we're taking, and if we can't get that right, nothing else I'm going to say is going to matter," Pandit said.
In the markets and banking sectors, Pandit said the company would exit unprofitable clients. He said, however, no potential client should make big decision without first going to Citi.
The company also said it planned to add private bankers and offices for high net worth clients around the world.