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Mike Mayo Preps For Citi Meeting

Thursday, 30 Sep 2010 | 10:06 AM ET

Tomorrow Credit Agricole's Mike Mayo will finally meet with the management of Citigroup to focus on the question: what's Citigroup's plan for the future.

Vikram Pandit
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Vikram Pandit

Citigroup CEO Vikram Pandit is expected to attend the meeting along with, CFO John Gerspach.

In advance of the meeting, Mayo published a note titled, “Capex way down and aided expenses." The report outlines some of what he hopes to discuss in a meeting with Citigroup management.

Besides the usual concerns — financial targets, accounting and corporate governance — Mayo has honed in on capital expenditures.

Capital expenditures have been decreasing at Citi ($m)

CITIGROUP BANK OF AMERICA
2000 $2,167 $642
2001 $1,709 $835
2002 $1,377 $939
2003 $2,354 $209
2004 $3,011 $863
2005 $3,724 $1,228
2006 $4,035 $748
2007 $4,003 $2,143
2008 $2,500 $2,098
2009 $1,146 $2,240
Source: Credit Agricole Securities (USA), company reports

His concern is that Citi is saving money by spending less: “…from $3-$4 billion from 2004-2007 to only $2billion in 2008 and $1 billion in 2009.” His conclusion is that “Citigroup’s physical plant is depreciating at a more rapid rate than it is being replaced, leading to an infrastructure that may be outmoded compared to its competitors."

But, in an email to CNBC, Citigroup spokesman Jon Diat says that Mike's interpretation of the numbers is just plain wrong.

"Anyway you look at it, Citi has become a more efficient firm. During 2006-07, we committed the resources to build several large data centers as part of a strategy to centralize our technology. That "large ticket" spending is now completed and we are concentrating on developing platforms that support our global businesses instead of continuing the past practices of having platforms built for each local business. We have reduced our real estate costs by leasing more and buying less; put in place stringent cost controls; and reduced our headcount by 110,000 people — all of which helped reduce our expenses by $11 billion last year. Mr. Mayo is just flat-out wrong."

So, why is this analyst’s report more important than other analysts’ reports?

Well, for one thing Mike Mayo has been a top ranked banking analyst.

He has also testified before the Financial Crisis Inquiry Commission regarding issues of banking reform. Most importantly, Mayo claims he had been shut out of recent analyst meetings at Citigroup because he has been critical of the bank.

This will be his first face-to-face meeting with the bank in about 2-years.

Investors hoping for a critical eye will be glad he is back on the inside. One of his recent notes on Citigroup dated August 30, 2010 had headings including “Financial targets are too optimistic” and “Risk management is an underperformer."

“Our thinking is based on a simple observation: if management does not want to hear a critical external voice, why should we think this same management team will listen to critical internal voices?” the note said.

Ouch.

Now that he is back on the inside, it will be interesting to hear what he has to say.

(Note: Mike Mayo rates Citigroup “Underperform” with a 12 month price target of $3.50)




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