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Tuesday, October 16, 2007

Citi expenses not looking any better

Another quarter is in the books and it is time to check in on Citi's expense reduction initiative and see how they're doing.

In all to shouting over the plunge in revenue and profits and the charges and off-balance-sheet vehicles and increased loan loss reserves this quarter, there hasn't been much attention paid to Citi's well-publicized expense reduction efforts.

Let's take a look at each expense category listed in the Consolidated Statement of Income in the 10-Q. I will provide two kinds of numbers, the year-over-year comparison between 3Q2007 and 3Q2006 and the sequential change from 2Q2007 to 3Q2007.

Compensation and benefits -- up y-o-y 15% but down sequentially over 13%. This is a significant improvement and the consequences are mostly being shouldered by the rank and file employees, of course, not the managers currently in the news. There have been staff reductions as planned and a not insignificant number of people leaving voluntarily. Interestingly, there has been some hiring in collections departments as loans go bad and the bank tries to recover their money.

Net occupancy expense -- up y-o-y 22% and up sequentially 9%. The plan was to move various business functions to cheaper locations like Buffalo, NY. I guess they're still waiting for the moving van. In the meantime, Citi continues to open new branches; hence, the increase in expenses.

Technology / communication expense -- up y-o-y 23% but up sequentially only 2%. Technology consolidation was a centerpiece of the cost reduction scenario. Still no saves apparent and, based on the last two quarters, technology spending seems to have stabilized at a level over 20% higher than before the expense reduction initiative was announced.

Advertising and marketing expense -- up y-o-y 39% and up sequentially 4%. It must cost plenty for Citi to put an umbrella over the Mets new baseball stadium.

Other operating expenses -- up y-o-y 36% and up sequentially almost 31%. This catch-all category is showing the most upward momentum. Acquisitions are mentioned as a driver in several lines of business as well as increased customer activity.

All told, total expenses including restructuring charges are up y-o-y 22% and down sequentially about 2%.

Against the current backdrop, a 2% decrease will probably be looked on as a victory. Citi investors, however, are still waiting for evidence this initiative is really succeeding.

For my commentary on expenses in Citi's previous quarter click here.

Full Disclosure: author owns shares of C in a retirement account

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