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UPDATE 1-Citigroup's leaders say company needs to simplify itself

(Recasts headline, adds closing share price)

ST. LOUIS (Reuters) - The two men at the top of Citigroup Inc, the third-biggest U.S. bank and the most international, acknowledged on Tuesday that the company must do more to simplify itself.

Asked at an annual meeting of shareholders whether Citigroup is too big to manage, Chairman Mike O'Neill said the task "is certainly harder" for its size and that the company has more years of work in a drive to reduce risk and complexity that started when the company was bailed out in the financial crisis.

"We are making progress, but we are not where we want to be," O'Neill said.

Chief Executive Mike Corbat said the bank is "a couple of years" from turning what he called an "amalgamation" of 35 local consumer banks around the world "into one truly global bank."

The issue of Citigroup's complexity took on renewed importance last month when the U.S. Federal Reserve rejected the company's bid for permission to pay a higher dividend and return $6.4 billion to shareholders through buybacks.

The Fed apparently turned down the capital plan because of multiple issues with Citigroup processes for managing its capital and testing risk in stressful scenarios, said Corbat, citing conversations with regulators. He and O'Neill said the rejection did not seem to reflect a disagreement with Citigroup's strategy or business model.

Corbat said Citigroup will spend more money on staff and information systems to upgrade its capital planning tools in time for the Fed's next annual review in early 2015. The spending will be funded through cost-cutting and productivity gains in other areas, he said.

Costs have been a chronic problem for the company and Corbat has told executives reducing expenses is their number one priority.

He said at Tuesday's meeting he recently gave executives six different sets of assignments to improve the company's business processes and eliminate unnecessary steps. The executives will give the board of directors a progress report this summer.

O'Neill acknowledged that the Fed's rejection of the capital plan had made it virtually impossible for Citigroup to meet a key performance goal set last year of delivering 2015 profits amounting to 10 percent of tangible common equity. O'Neill said he still believes the company is capable of that level of return but did not say when it could be reached.

"I have a lot of confidence in Mike and his management team," O'Neill said in the meeting. The chairman was the key force on the board in October 2012 in pushing out then-CEO Vikram Pandit and replacing him with Corbat, now 53.

O'Neill said, however, he expects directors will factor into Corbat's and other executives' pay this year their failure to win approval of the capital plan.

The company said 84.6 percent of shareholders had endorsed the company's executive pay for 2013, by a preliminary count, down from 92 percent shareholder approval a year ago. The compensation process was overhauled after failing in a 2012 vote with only 45 percent approval.

Citigroup's share price rose 18 cents to $48.02 on Tuesday.

(Reporting by David Henry in St. Louis; Editing by Dan Wilchins and Nick Zieminski)