Citi to use scalpel not axe in trimming Asia units

By Tony Munroe and Saeed Azhar, Thu Nov 20, 2008 5:54am EST  

HONG KONG/SINGAPORE (Reuters) - Citigroup (C.N: Quote, Profile, Research, Stock Buzz) is scrambling to slash costs in the face of collapsing investor confidence, but the embattled bank is unlikely to retreat from Asia, its strongest performing region. 

Citi is axing 52,000 jobs worldwide and cutting costs by a fifth, but will be reluctant to give up any of its hard won presence in a region where it rivals HSBC Holdings (HSBA.L: Quote, Profile, Research, Stock Buzz) (0005.HK: Quote, Profile, Research, Stock Buzz) and Standard Chartered Plc (STAN.L: Quote, Profile, Research, Stock Buzz) (2888.HK: Quote, Profile, Research, Stock Buzz). 

It is, however, expected to shed staff in Asian units such as investment banking, where dealmaking has dried up, but cuts are likely to be less deep than in the United States and Europe. 

"If they do sell Asian assets they lose a major long-term growth platform. Why would they want to do that?" said David Lum, analyst at Daiwa Institute of Research. "It's certainly a cleaner operation and has been a high growth market for them." 

While Citigroup as a whole lost $2.8 billion in its third quarter -- its fourth quarterly loss in a row -- its Asia business earned $695 million, down just 14 percent. 

Asia quarterly revenue dipped 7 percent to $4.47 billion, compared with a 42 percent drop in North America and 23 percent across the bank, but is up slightly on the year. 

"I want to emphasize that we are changing the way we operate and not pulling back from our clients or our franchise," Ajay Banga, Citigroup's Asia-Pacific chief, said in a note to employees this week obtained by Reuters. 

"As we move forward, we will need to invest in opportunities and continue to hire in high-growth areas," he said. 

Citigroup has around 55,000 staff in Asia, including Japan. 

BRIGHTER SPOT 

Asia has been a comparative bright spot in dismal times for a bank that not long ago was the world's most valuable financial firm. With its shares down 33 percent this week, Citigroup was overtaken by U.S. Bancorp (USB.N: Quote, Profile, Research, Stock Buzz) as the fourth-largest U.S. bank by market value. 

"Citibank are hugely successful and hugely well-positioned in Asia," said Roman Scott, managing director of Calamander Capital in Singapore. 

The problem, he said, is that Citigroup has been damaged globally by aggressively selling securities and structured products that were manufactured by its investment banking operation and have soured in the market downturn. 

"They are their own worst enemy," he said. "HSBC and Standard Chartered will gain market share at their expense because this stuff filtered down to even ordinary customers." 

While Asia has been dragged down by the global slowdown, it is still a growth market and is expected by many to emerge from the downturn more quickly than the United States or Europe. 

Citigroup has been looking to shed assets, and earlier this year offloaded its German business. Last month, it agreed to sell its back-office business in India for $505 million, although that unit is a global operation. 

Otherwise, Asian holdings are seen as last on Citigroup's for-sale list. 

One analyst in Asia, who declined to be identified, said Citigroup is not in the same boat as insurer AIG (AIG.N: Quote, Profile, Research, Stock Buzz), which is unloading assets and shopping around its prized Asia business. 

"For AIG, the case is very obvious; they have to offload assets. In the case of Citigroup the Tier-1 (capital) is still high enough to avoid asset sales in Asia," the analyst said. 

BUMPS IN THE ROAD 

For its success, Citigroup's build-out across Asia has not been without hiccups. 

In India, it is battling a deterioration in consumer credit quality. On Thursday, the bank's South Asia CEO, Sanjay Nayar, left to join private equity firm Kohlberg Kravis Roberts & Co KKR.UL. 

Citigroup (8710.T: Quote, Profile, Research, Stock Buzz) has also slowed its aggressive expansion streak in Japan, where last year it paid about $8 billion for a majority stake in brokerage Nikko Cordial Securities. 

That deal marked its largest acquisition in Asia and its biggest under ex-CEO Chuck Prince, and the bank later paid $4.6 billion more for full control of the brokerage. 

Last month, however, the Nikkei newspaper said Citi will delay a planned merger of two of its Japanese units to temporarily avoid integration costs. In June, the bank said it would all but close its consumer lending business in Japan. 

(Additional reporting by David Dolan in TOKYO, Editing by Ian Geoghegan)