Facing diminished revenue-growth prospects, particularly in investment banking, Citigroup is turning its attention to cost reductions.
Additional losses at Salomon Smith Barney could combine with a long anticipated merger-related restructuring charge to lower fourth-quarter earnings substantially, even as consumer businesses show signs of strength.
Analysts said they expect a quarterly loss for Salomon Smith Barney in the range of $75 million to $100 million as the investment bank continues to unwind its position in global fixed-income arbitrage.
In addition, Citigroup is seen taking a restructuring charge of up to $1 billion, or roughly 28 cents a share after taxes.
The losses and the restructuring charge together would result in per- share earnings of 28 cents for the fourth quarter, based on consensus estimates tracked by First Call Corp. That compares with 30 cents a share in the third quarter and 59 cents pro forma in the fourth quarter 1997, according to First Call.
Citigroup was formed Oct. 8 from the merger of Citicorp and Travelers Group.
The restructuring initiative, which comes on top of separate, ongoing restructurings at Citibank and Salomon, would result in annual savings of $600 million to $800 million over the next two years, said George Bicher, an analyst at BT Alex. Brown.
John M. Morris, Citigroup's spokesman, confirmed that the bank had long planned to take a restructuring charge this quarter but would not elaborate Monday on its size or timing. "We have no comment," he said, in response to a Wall Street Journal article reporting the $1 billion figure.
Analysts said continued weakness in Citigroup's capital markets business and the substantial cost-cutting effort highlight an intensified focus on expenses.
Analyst Steven Eisman at CIBC Oppenheimer said the downdraft in global financial markets during the second half of this year "has forced Citi to focus more on the cost side."
"People aren't giving them the benefit of the doubt anymore," Mr. Eisman said. "They're saying, 'show me.'"
Since August, executives from the former Citicorp and Travelers Group have been talking about the cost savings from the combination. Heidi G. Miller, Citigroup's chief financial officer, began in late summer to say that the company expected $1 billion in post-merger expense reductions, analysts said.
That represented a shift in emphasis from April, when executives announcing the deal trumpeted its revenue-generating potential, saying they anticipated $1 billion in combined cost and revenue "synergies."
Analysts said the company has simply found more "low-hanging fruit" that can be pruned from the combined operations. Market watchers said the new company could ultimately reduce its 161,000-strong global work force by as much as 10% over the next year through cost-cutting initiatives.
Much of the cost savings are expected to come from the retail and investment banking groups, which command the biggest portion of Citigroup's expense base.
The Citibank global consumer unit-the retail branch banking operation- composes 25.5% of its total expense base, the largest share. Salomon Smith Barney makes up 19.6%.
Analysts also said the companies have discovered additional savings in consolidating vendor relationships and other support functions.
"They really didn't give a good estimate early on about the potential cost savings, because they delayed any decision on cost until they could see where their strengths were," said Stephen Biggar, an analyst at S&P Equity Research.
Continuing problems in capital markets will also lead to cost cuts, analysts said. Wall Street's fourth-quarter consensus estimate for Citigroup has dropped precipitously in recent weeks as market watchers account for anticipated losses at Salomon Smith Barney.
Salomon posted a $325 million loss for the third quarter because of losses in fixed-income trading and in Russian securities.
Citigroup has been aggressively scaling back in global fixed-income arbitrage, reducing its portfolio since the third quarter from $50 billion to less than $20 billion, Mr. Eisman said. Selling bond inventory "will lead to losses," he noted.
On Monday the First Call estimate for Citigroup's fourth quarter was 56 cents a share, down from 67 cents in mid-November. That did not account for the anticipated $1 billion restructuring charge. Analysts typically do not factor one-time merger charges in their per-share estimates, First Call said.