Citigroup's cost-cutting campaign is coming at a time when the company needs to invest, says CNBC's Charlie Gasparino.
Citigroup chief executive Chuck Prince said the banking giant will cut its investment spending by half next year. His comments came at an investor conference and a Monday announcement that Robert Druskin, Citigroup's investment banking head, would take on the added role as the bank's chief operating officer. Druskin's first task is to focus on costs.
"One of the big problems (analysts and investors) have is Prince is cutting expenses, especially technology expenses, at a time when he really has to be building the corporate infrastructure on the retail side," Gasparino, who spoke with analysts, said on CNBC. "Citigroup was created to cross sell various investment products to small investors. You can't do that right now. By Chuck Prince's own admission, they won't be able to do that for four years."
Gasparino's analysts also said Prince needs to illustrate the company is growing, and one way to do that is through cutting costs.
Prince also acknowledged investors' frustration with the bank's lackluster stock performance: "Nobody is more frustrated with the stock price than I am," Prince said at the bank's annual investor day presentation, which was Webcast.
Prince said that it expects its U.S. consumer group -- which he does not believe has yet "turned the corner" -- to post mid-single-digit revenue growth in the long term. That's below the revenue expectations of Citigroup's other business lines.
"I am cautiously optimistic," said Prince, who met with analysts alongside chief-operating-officer-to-be Robert Druskin, its chief financial officer Sallie Krawcheck and other executives. He added that he won't be pleased until the trends are sustained for several quarters.
Citigroup said that its investment spending next year will be less than half of 2006's levels, but may revisit spending in 2008.
He also said the bank is unlikely to make any major acquisitons in the U.S. next year, but would consider international purchases similar to those the company has been making. "We are looking internationally and the emerging markets are where the high growth is going to be," Prince said, adding that they are very focused on "not overpaying."
Despite rampant speculation, Prince said the company doesn't expect to have any "material spin-offs or dispositions."
The bank also expects both the corporate and investment bank and the international consumer bank to post double-digit revenue growth over the long term, though the former will be subject to "market sensitivity." Credit costs are expected to increase given a "moderate deterioration" in credit quality.
Citigroup has budgeted for revenue to outpace expenses next year, which would require the largest U.S. bank to reverse a trend in which operating expenses have outpaced revenue growth: "I will tell you the budget we submitted to the board provides for positive operating leverage for the company and for each of its major businesses," Prince said. "We will work as hard as we can to deliver."
Overall, "we are looking to deliver good bottom-line results in 2007," he added.
The bank is planning for a "flat to slightly inverted yield curve next year."
Investors gave a moderate vote of confidence to Prince's latest prescriptions for the bank's ills, boosting Citigroup shares. Citigroup stock is up 7.8% so far this year, lagging an 11.4% percent gain in the KBW Bank index for the same period.
"That (cut in 2007 investment spending) is giving investors confidence that there may be operating leverage in 2007 after not seeing a lot of operating leverage in the last couple of years," said Sam Rahman, portfolio manager at Baring Asset Management, which owns Citigroup shares. "I think that's what investors are keying off on."
Still, others remained skeptical. "It's more of the same," said William Smith, chief executive of SAM Advisors, which owns Citigroup stock. "In our opinion, it's disturbing that he (Prince) does not understand what's going on. He is losing the battle here as far as what shareholders want."
Smith said Citigroup shares had been bolstered last week by talk that the bank could replace Krawcheck or even Prince, or could spin off some units.
Druskin, 59, will remain CEO of the commercial and investment banking unit, and will also become chairman of that unit. He will join Prince and Robert Rubin as members of the office of the chairman. All changes are effective Jan. 1.