Cost of bad loans 25% worse than expected, Citicorp chairman reports


NEW YORK (American Banker) -- Citicorp's chairman, John Reed, said at an internal meeting that the cost of bad loans in the bank's corporate-finance sector this year has been 25 percent worse than expected.

Mr. Reed told bankers during a two-hour meeting Wednesday that Citicorp's corporate-banking sector has budgeted $1.28 billion in 1991 for credit-related items such as write-offs and the cost of carrying repossessed real estate. Based on early indications, however, the actual credit deficit is running at an annual rate of $1.6 billion.

Analysts said they were not surprised to hear the credit-related deficits are so high. 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 [Citicorp's] real estate and consumer sector since then," said George Salem, who follows the company for Prudential Securities.

Mr. Salem said big write-offs and other credit costs will mean continuing high loan-loss provisions, which cut 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 Tuesday.

Citicorp's stock closed at $13.375, down $1.125, in heavy trading Thursday after Salomon Bros. analyst, Thomas Hanley, cut his estimate on the bank's earnings to break even 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 that he is confident the board supports him.

At Citicorp's last board meeting, he said, each director was DTC given 10 minutes to vent his views of the company's current state and strategic plan. Each fully endorsed the plan, he said.

Mr. Reed also sought to allay fears about layoffs. Published reports this week about 10,000 more layoffs -- in addition to 7,000 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 targets for corporate overhead.

He also said that many of the staff reductions would come from the sale or spinoff of 14 non-strategic 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 reportedly said that capital satisfies regulators, rating agencies and the public but is sterile money.

He also said he does not want to dilute current share holdings through additional equity offerings.

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