Citigroup, the top U.S. bank by assets, expects its investment spending next year to be less than half the 2006 level, its chief executive said on Thursday, acknowledging that its consumer bank has yet to turn the corner.
Speaking at the bank's analyst day presentation, Charles "Chuck" Prince also said he shares investors' frustration with the bank's lackluster share performance, but encouraged shareholders to be patient. "I feel very good about the changes were making ... but there's no short-cut to get from where we are to where we're going," he said.
Prince, under increasing pressure from investors, on Monday named a new chief operating officer at the bank and promised an increased focus on costs.
During Thursday's presentation, Prince discussed ways Citigroup aims to increase revenue, including expanding its financial advisory business and increasing its private banking efforts.
Increased revenue and lower investment spending should help Citigroup's revenue grow faster than expenses next year, and profits grow faster than revenue, Prince said. That "positive operating leverage" would reverse a trend this year of operating expense growth outpacing revenue growth.
Citigroup's relatively weak earnings growth has weighed on its shares, which are up 8.7% so far this year, lagging an 11.6% gain in the KBW Bank index for the same period.
Investors gave a moderate vote of confidence to Prince's latest prescriptions for the bank's ills, boosting Citigroup shares by 0.8% and making them one of the session's top gainers in the sector index. "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 Inc. in Boston, which owns Citigroup shares. "I think that's what investors are keying off on."
Others remained skeptical. "It's more of the same," said William Smith, chief executive of SAM
Advisors, LLC, 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 Chief Financial Officer Sallie Krawcheck or even Prince, or could spin off some units.
Prince said revenue growth in the U.S. consumer bank was taking longer than he had expected, but he was cautiously optimistic about it improving. The company is taking steps like combining its brokerage and bank franchises, in an effort to offer more products to customers.
Prince said the company was unlikely to make any large U.S. bank acquisitions in 2007, reiterating that there were better opportunities to buy businesses overseas.
Citigroup on Wednesday agreed to acquire Central American commercial and retail bank Grupo Cuscatlan for $1.51 billion and last month led a team of investors that won control of China's Guangdong Development Bank with a bid of 24.3 billion yuan ($3.1 billion).
Citigroup is budgeting for moderate deterioration in credit quality for 2007, Prince said.
Prince, who met with analysts alongside chief-operating-officer-to-be Robert Druskin, Krawcheck and other executives, also said Citigroup could boost credit loss reserves in Japan due to legislative changes.