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Tuesday, July 24, 2007

Citi expenses still out of control

Citigroup recently reported 2nd quarter earnings and they were pretty darn good. Net income rose to $6.23B, or $1.24 per share, from $5.27B, or $1.05 a share, in the same period a year earlier, an increase of 18 percent. Revenue grew 20 percent to a record $26.63B from $22.18B a year earlier. International revenue soared 34 percent to $12.56B.

Much has been made of CEO Chuck Prince's cost cutting plans and how Bob Druskin has been assigned the tough job of reducing head count, moving staffers to cheaper locations and taking other difficult measures. A multi-billion dollar save was supposed to be derived from consolidating and modernizing IT systems.

In looking at the latest 8-K submitted by Citi, the Technology/Communications expense line, which typically shows low to mid-single digit percent increases, jumped 16% this quarter over the previous quarter or 22% over the same quarter in the previous year. Instead of a reduction here, we see an increase of $164M over the previous quarter. This is in addition to another $63M of restructuring charges. Pretty much all the Operating Expense items broken out on separate lines in the 8-K are up by double digits except for one, the mysterious "Other Operating" expense which was down 2%.

In my mind, this throws into question Prince and Druskin's promised expense reductions. It's true that most analysts feel it was unlikely we would see expenses come down this early in the year. Still, I would have expected to see expenses at least hold the line.

Now that we are entering a period when every day we read more about rising foreclosures in the mortgage markets and most banks are raising loan loss reserves, it will be necessary for Citi to get expenses under control if they wish to continue the profit momentum that is in place today.

It looks like surging revenues saved Chuck Prince this time. We'll see how long that can last.

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