Citigroup Slashes Won't Hurt Overseas Play: Credit Suisse

NEW YORK ( TheStreet) -- The repositioning announced by Citigroup ( C) last week will only enhance the company's revenue growth in emerging markets, according to Credit Suisse analyst Moshe Orenbuch.

Investors have long considered Citigroup an international growth play, and the company's stock underperformed the market during the first half of 2012, returning just 4%, while the KBW Bank Index rose 16%, because of reduced growth forecasts for emerging market economies.

Orenbuch said in a report on Wednesday that his firm believes that emerging markets growth "will reverse in 2013 and accelerate into 2014, leading Citi to grow faster than US peers." Credit Suisse "expects growth rates in most emerging market economies under coverage to rise, with growth of 5.2% in 2013 and 5.6% in 2014 versus 4.7% growth in 2012."

Citigroup last Wednesday announced a significant move to cut expenses, by cutting 11,000 positions and closing 84 branches, including 44 in the United States, 15 in South Korea, 14 in Brazil, seven in Hong Kong and four in Hungary. The company said that the moves would reduce expenses by $900 million in 2013, with annual savings increasing to $1.1 billion in 2014.

The company said that the branch closures in emerging markets were "consistent with Citi's strategy of focusing on the 150 cities that have the highest growth potential in consumer banking."

Orenbuch estimated that out of the 11,000 positions being eliminated by Citigroup, "about 53% or 5,825 of the total will be derived from Operations & Technology," and said that the company's estimate that its annual revenue would decline by only $300 million as a result of the cuts was "further evidence that the reductions will largely center on non-client facing positions, limiting the negative impact to Citi's top line."

Along with the announced branch closings, Orenbuch said that "Citi plans to scale back or sell consumer operations in Pakistan, Paraguay, Romania, Turkey and Uruguay," showing the company's "renewed focus on where investment dollars are allocated and a focus on being present in high-growth, high traffic urban markets. This shows that Citi is willing to reduce or eliminated modest positions in countries where it is less likely to earn adequate returns."

Citigroup reported that during the third quarter, main subsidiary Citicorp derived 42% of its revenue from operations in North America, with 21% of total revenue coming from operations in Asia, another 21% from Latin America, and 16% in Europe, the Middle East and Africa (EMEA). Citicorp's emerging markets operations provide an even greater percentage of earnings, with Latin America and Asia each contributing 22% to third-quarter net income, while EMEA accounted for 15% and North America 40%.

Orenbuch said that in Latin America, Citigroup's string of credit card and consumer acquisitions in 2007 helped the company "establish a local presence" in select markets, and that "despite more recent investments, "the Latin America Consumer business achieved positive operating leverage in 4Q'11 and continues to do so."

The analyst also said that Citi's "Asia Consumer business achieved positive operating leverage in 3Q'11," but that there was "more recent deterioration in operating leverage in 3Q'12 given pressure in Retail Banking in Korea and Japan, which reflects the continued impact of regulatory changes and slower consumer credit growth in those markets."

According to a transcript provided by Thomson Reuters, Citigroup CFO John Gerspach said during the company's third-quarter earnings conference call that the company recorded $20 million in repositioning charges in Korea, "as we began to rationalize our distribution network and refocus our client segmentation," adding that "while these changes were prompted by the new regulatory environment in Korea, they also simplify the business and align our Korea franchise more closely with the urban-based global strategy we employ in most other markets."

Gerspach said that "our overall outlook for Asia remains positive and we currently believe that in this environment, we can grow revenues from our third quarter base at an annual rate of 4% to 6% with a return to positive operating leverage in 2013."

Citigroup's shares closed at $37.00 Tuesday, returning 41% year-to-date, following a 44% decline during 2011.

The shares trade for 0.7 times their reported Sept. 30 tangible book value of $52.70, and for 7.9 times the consensus 2013 earnings estimate of $4.64 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $5.11.

Orenbuch's 12-month price target for Citigroup is $48, implying 30% upside for the shares. the analyst's target represents a 9.4 multiple to his 2013 EPS estimate of $5.10.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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