Citigroup expects 67% fall in profit New entity blames losses in world markets

Financial services

October 09, 1998|By BLOOMBERG NEWS

NEW YORK -- Citigroup, formed yesterday by the $37.4 billion merger of Travelers Group Inc. and Citicorp, said it expects that losses in global markets drove its third-quarter earnings down by 67 percent from last year's levels.

Citigroup said it's likely to report earnings of about $700 million as investment in Russia and emerging markets caused losses at Salomon Smith Barney and Citicorp. Had Citicorp and Travelers combined a year ago, they would have reported profit from tTC operations of $2.1 billion, excluding a charge related to Citicorp job cuts that drove net income to $1.5 billion.

Cochairmen Sanford Weill and John Reed said they plan to boost profits by reducing risks and cutting expenses at the company, which has 100 million customers and offices in about 100 countries and is the parent of Baltimore-based Commercial Credit Co. Citigroup, whose businesses include banking, insurance, mutual funds and securities, plans to cut as many as 8,000 jobs, or 5 percent of the staff, by year's end.

The Citicorp-Travelers marriage "looks rough for the next year," said Anthony Gray, chairman and chief investment officer of STI Capital Management in Orlando, Fla., which oversees $14 billion.

Citigroup's shares rose 75 cents to close at $32.50.

The merger was originally valued at about $70 billion, and ballooned to about $85 billion on the day the transaction was announced.

"Investors liked the deal until Russia and Long-Term Capital Management," said Joan Goodman, an analyst at Pershing, a division of Donaldson, Lufkin & Jenrette. "They've very afraid of these hedge funds."

Salomon Smith Barney, the third-biggest U.S. securities firm, lost $700 million related to global arbitrage and Russia credit losses, Citigroup said yesterday. The unit already said it lost about $150 million in July and August as global markets tumbled -- $60 million in Russia, $120 million in U.S. bond arbitrage and $180 million in global arbitrage.

Salomon is known for making leveraged bets in fixed-income markets and for volatile earnings. It's had a string of trading losses since Travelers agreed to buy the firm in 1997 and has shuttered some of its investment businesses.

"They are cleaning out everything that needs to be cleaned; they don't want to be in the arbitrage business," said Richard Strauss, an analyst at Goldman, Sachs & Co.

The firm said in July that it would stop making bets with its own capital in the U.S. bond market, after posting a small loss in its global bond unit. The company reported no venture capital and Brady bond gains, which have "contributed significantly" to earnings in previous quarters, the company said in a statement.

Citicorp, meanwhile, lost a combined $240 million after taxes related to Russia and from marking to market fixed income securities, the company said. On Sept. 1, Citicorp put its after-tax losses in Russia at $200 million.

Citigroup said it was optimistic about its earnings for 1999, driven by its consumer and insurance businesses.

"We expect 1999 core business results to be substantially above the pro forma actuals for both 1998 and 1997," Weill and Reed said in a statement.

The company noted that its corporate businesses would continue to operate in "choppy conditions," and said it would monitor its expenses carefully while managing its risks aggressively.

Reed and Weill said they would recommend an 18 cents a common share dividend, to be paid in November.

Pub Date: 10/09/98

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