Cost of Bad Loans Running 25% over Budget, Reed Says
Citicorp's chairman, John S. Reed, said at an internal meeting that the cost of bad loans in the bank's corporate finance sector so far this year was 25% worse than expected.
Nevertheless, corporate bankers attending the two-hour meeting with Mr. Reed on Wednesday said they left the session with morale uplifted. Several spoke of a sense that their embattled chairman was firmly in control.
$1.28 Billion is Budgeted
Mr. Reed told the bankers that Citicorp's corporate banking sector has budgeted $1.28 billion in 1991 for credit-related items such as writeoffs and the cost of carrying repossessed real estate. Based on early indications, however, the actual credit bite is running at an annual rate of $1.6 billion.
Why the sense of optimism, then?
"He pointed out that our corporate net margin - revenue minus expenses before allocations for reserves - are very big numbers," said one banker, who requested anonymity.
"It focused people on the fact that he knows we are making money for him. People in the corporation expect to receive better bonuses this year."
Analysts said they were not surprised to hear that the credit-related deficits are so high. Indeed, credit costs for the corporate sector, which includes many ailing real estate loans, were $404 million in the first quarter.
"The budget was probably prepared in the fourth quarter of last year, and there have been a number of disappointments in the economy and in Citi's real-estate and consumer sector since then," said George Salem, who follows the company for Prudential Securities.
Mr. Salem said big writeoffs and other credit costs will mean continuing high loan loss provisions, which bite into earnings.
After heavy provisions for bad loans, Citicorp earned $70 million in the first quarter. Most analysts are expecting dimmer results when the company reports its second-quarter earnings on Tuesday.
Earnings Estimate Cut
Citicorp's stock closed at $13.375, down $1.125, in heavy trading Thursday after Salomon Brothers analyst Thomas Hanley cut his estimate on the bank's earnings to breakeven this year, and warned of a possible dividend cut.
At the meeting this week, Mr. Reed would not comment on earnings except to say the company had a "reasonable" second quarter, according to several sources.
But he spoke directly about some sensitive subjects, including his own future. The 52-year-old executive said he has spent a lot of time with Citicorp's board of directors in recent months, and he added that he is confident the board supports him.
Directors Endorse Plan
At Citicorp's last board meeting, he said, each director was given 10 minutes to vent his or her views of the company's current state and strategic plan. They fully endorsed it, he said.
In a question-and-answer period, Mr. Reed even alluded to published reports about his divorce. He said he would not comment on his personal life, but pointedly added that nothing is detracting from his ability to manage the corporation.
Mr. Reed also sought to allay fears about layoffs. Published reports this week about 10,000 more layoffs - in addition to 7,000 that occurred in the past year - were off the mark, he said. Citicorp, he said, has to manage itself in a "thinner" manner - with fewer lawyers and accountants in on every decision - but he denied that there are any corporate overhead targets.
He also said that many of the staff reductions would come from the sale or spinoff of 14 nonstrategic businesses. Those sales are being coordinated by vice chairman Paul Collins.
On the issue of capital, Mr. Reed said the company was making good progress toward raising $4 billion to $5 billion to meet regulatory requirements. Asked why the company does not go beyond the bare minimums and build a buffer against future problems, Mr. Reed resorted to a familiar stance.
Capital satisfies regulators, rating agencies, and the public, he reportedly said, but it is sterile money. He also added that he does not want to dilute current shareholders' holdings through additional equity offerings. Citicorp's focus must be on increasing sustainable margins, or operating earnings, he said, and not on capital. That means watching costs as much as it means building revenues.
He also repeated that he is personally monitoring the real-estate and Australian loan portfolios that have marred the bank's results for the past two years.
Meeting Is Broadcast
Mr. Reed made his remarks to hundreds of bankers assembled in New York and, through video and audio hookups, in Europe and Asia. The group was drawn from the ranks of Citicorp's Japan, Europe, North America global finance sector. Part of his favorable reception, several said, came from his willingness to shoulder some blame.
"He was very quick to take it on the chin," one banker said. "He conceded that management had made many mistakes, including an overreaction in [holding down] compensation and bonuses.
"He used the words commitment and compensation, saying he realizes one is a big part of the other. Just the fact that he was willing to say that left a very positive flavor."