Citi Profits Plunge 53% On Expenses, Salomon Slide

Citigroup Inc.'s fourth-quarter profits fell 53%, to $677 million, as robust results in consumer banking failed to offset weakness in investment banking as well as rising expenses.

Making its first fully consolidated quarterly report after the October merger of Citicorp and Travelers Group, the company said income from corporate banking slid 21%, to $464 million, as profits at Salomon Smith Barney plummeted.

Citigroup also took $726 million in restructuring and merger charges, which helped push expenses up 19%, to $8.8 billion.

"Obviously, we are not happy with the bottom-line results," co-chairman and co-chief executive officer John S. Reed said in a telephone conference with reporters.

But he added, "our consumer franchise is clearly doing very well, and we expect that to be true for the next couple of years."

The $667.4 billion-asset holding company said profits from consumer operations surged 20%, to $901 million, attributed to higher transaction volumes, improvements in credit quality, and cross-selling efforts.

Credit cards were an especially bright spot, with profits soaring 79%, $277 million.

On a per-share basis, Citigroup earned 28 cents, including restructuring and merger charges. Without the charges, the figure was 60 cents, beating the Wall Street consensus estimate of 56 cents.

Analysts saw a significant improvement from the losses Citigroup recorded in the third quarter, but they added there is still much room for improvement.

"They are not yet hitting on all eight cylinders," said George Bicher, an analyst at BT Alex. Brown. "They are showing earnings power that can only continue to expand."

For the full year 1998, profits declined 13%, to $5.8 billion, or $2.49 a share.

Mr. Reed ascribed the expense climb to year-2000 work and preparations for the single European currency. He added that costs will be higher again in the first quarter before tapering off.

"In 1999 and 2000, we expect to see a significant improvement in the expense trajectory," Mr. Reed said.

Citigroup is expected to record additional merger-related charges in coming quarters. In December, the company said it expected to take up to $900 million in after-tax charges. It also projected pretax expense savings of $680 million this year and $975 million annually by 2000.

Mr. Reed told reporters that the savings goals are "as good or maybe somewhat better" than originally projected.

Meanwhile, corporate banking continued to drag down profits, though they bounced back from losses in the third quarter.

Income from corporate banking in emerging markets rose 189%, to $220 million, fueled by trading results and loan volume, the bank said. The unit had a loss of $19 million in the third quarter.

Salomon Smith Barney profits plummeted 94%, to $13 million, largely because of expenses. In the prior quarter, there was a $396 million loss.

Income from global relationship banking fell 80%, to $30 million, as continued market volatility choked off demand for corporate financing and loan syndications. The unit had a loss of $94 million in the third quarter.

"Global relationship banking had a lousy year and a lousy quarter," Mr. Reed said.

The corporate bank continues to restructure, relegating its global fixed income arbitrage unit to a "much reduced role" and planning for the creation of a centralized risk management function in the next three to four months, Mr. Reed said.

In asset management, income declined 15%, to $51.4 billion, because of higher development and employee expenses, the bank said. Assets under management grew 25%, to $327 billion, aided by the acquisition of J.P. Morgan & Co.'s $4.6 billion portfolio in Australia and the addition of six retail mutual funds.

In consumer banking, Citigroup got a boost abroad, particularly from Asia, where profits rose 62%, to $120 million. The bank attributed the surge to depositors flocking to safe havens.

Income from Primerica Financial Services, Citigroup's unit aimed at financial planning for individuals, grew 14%, to $103 million because of increased cross-sales of insurance, banking, and brokerage products.

In the U.S. bank card business, net credit losses improved to 4.82% from 5.56% of outstanding loans in the year-earlier period.

"Consumer banking continued to be the driver of earnings," said Bradley Ball, an analyst at Credit Suisse First Boston. +++

Citigroup

New York

Dollar amounts in millions (except per share)

Fourth Quarter 4Q98 4Q97

Net income $677.0 $1,438.0

Per share 0.28 0.59

ROA 0.66% 0.79%

ROE 6.20% 14.30%

Net interest margin 4.53% 4.43%

Net interest income 4,978.0 4,466.0

Noninterest income 7,776.0 7,673.0

Noninterest expense 8,793.0 7,367.0

Loss provision 2,899.0 2,562.0

Net chargeoffs NA NA

Year to Date 1998 1997

Net income $5,807.0 $6,705.0

Per share 2.43 2.74

ROA 0.94% 0.65%

ROE 14.00% 17.50%

Net interest margin 4.43% 4.55%

Net interest income 18,744.0 17,577.0

Noninterest income 30,192.0 30,205.0

Noninterest expense 28,551.0 27,121.0

Loss provision 11,116.0 9,911.0

Net chargeoffs NA NA

Balance Sheet 12/31/98 12/31/97

Assets $667,400.0 $697,400.0

Deposits NA NA

Loans NA NA

Reserve/nonp. loans 174% 204%

Nonperf. loans/loans NA NA

Nonperf. assets/assets 0.70% 0.60%

Leverage cap. ratio 6.10% 5.64%

Tier 1 cap. ratio 8.60% 8.37%

Tier 1+2 cap. ratio 11.40% 11.07%

Total outstanding shares 2,258.0 2,279.9 ===

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