Markets & Finance

More Changes Needed at Citi?


The financial giant's shares dipped Friday amid news of a management shakeup. One analyst thinks Citi's leadership needs an overhaul

A week after Citigroup (C) warned of a big hit to third-quarter profits, mostly as a result of the recent credit crunch, heads rolled at the giant bank.

The company, with 332,000 employees worldwide, shuffled around several top executives, firing one veteran and promoting a newer exec, Vikram Pandit, to take over both Citi's Markets & Banking division and its Alternative Investments unit.

But some say changes at the very top are needed to revive the flagging Citigroup.

"The pressure to perform continues to build" on Charles Prince, the executive chairman and chief executive, wrote Sandler O'Neill analyst Jeff Harte. However, the Oct. 12 shake-up "bolster[s] our belief that there will not be a chief executive change in the near term."

Harte didn't call for Prince's removal. But investors registered their disappointment with the management changes by selling shares. By midday on Oct. 12, Citigroup shares had fallen 1%, trading under $48 per share. The shares are well below their 52-week high of $57 reached last Dec. 28, and modestly above their low ffor the period of $44.60 recorded Aug. 16.

There is "widely reported investor dissatisfaction with senior management" at Citigroup, "yet a continued absence of change," Deutsche Bank (DB) analyst Mike Mayo wrote in an Oct. 12 note. He criticized the shake-up and downgraded the stock from buy to sell.

Citigroup's leadership needs an overhaul because it has missed targets, made poor decisions, and become too bureaucratic, Mayo argued. The merging of banking, markets and alternative investments at Citi was overdue, Mayo said, but the other announced changes could cause top talent to leave and add another a layer of bureaucracy, which could inhibit "a risk-taking culture."

Citigroup's stock currently trades at about 10 times 2008 earnings. "There is little reason why Citigroup should not trade at nine times [2008 earnings] given the lack of confidence we feel exists around top management," Mayo wrote.

Not everyone is as pessimistic about Citigroup as Mayo. Citi's cost-cutting efforts and profit goals may have been sidetracked by credit market turmoil this year, but things look much better for 2008, says Standard & Poor's equity analyst Frank Braden. There is potential for above average revenue and profit growth "that we think are not reflected in the stock's current valuation," Braden wrote.

He praised the promotion of Pandit, a 50-year-old former Morgan Stanley (MS) exec.

Last week, Citigroup, along with Merrill Lynch (MER) and UBS (UBS), warned investors to expect lower profits in the third quarter, mostly from disruptions in the credit markets over the summer.

Citigroup said its net income was expected to fall 60% from a year ago. It reported losses of $1.4 billion on leveraged finance commitments, $1.3 billion on subprime mortgage debt and $600 million on credit market trading.

Still, the stock market didn't punish Citigroup after the news hit, perhaps taking it as a sign that the worst of the losses were behind it. Prince, the chairman and CEO, called the expected third quarter losses "a clear disappointment." But, he added, "We expect to return to a normal earnings environment in the fourth quarter."

Expect more detail on third quarter losses, and more insight into future profits, to arrive on Oct. 15. That's when Citigroup will release its third quarter earnings report.

According to Reuters Estimates, analysts are now expecting Citigroup to report revenue of $20.8 billion in the third quarter. They expect earnings of 43 cents per share, down from $1.01 a year ago.

(Deutsche Bank and Sandler O'Neill both do business with Citigroup, and Deutsche Bank owns Citigroup shares. Standard & Poor's, like BusinessWeek, is a unit of The McGraw-Hill Companies.)

Steverman is a reporter for BusinessWeek's Investing channel .

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