The Changes Coming at Citigroup

In a bid to revive profit growth, Citigroup's new chief executive, Vikram Pandit, is restructuring the world's biggest bank to focus on the strongest parts of the beleaguered banks' operations, its global wealth management operations headed by Sallie Krawcheck, its global transaction services and its international consumer businesses, sources at Citigroup tell me.

Pandit is getting high marks from my sources for his attempts to fix the bank, which includes taking a sharp battle-axe to cut the fat marbled through its operations and bringing some rationality to its businesses. My sources tell me Pandit is the right choice for this really difficult task, and his squad is lining up behind him. And despite what some media pundits misguidedly say, a breakup of the bank is not in store, my sources say, nor should it be on the table. Asset divestitures and cost-cutting, the route Pandit is taking, are the right moves for the bank for now.

To re-engineer the company, Citigroup (C) will lay off more than 30,000 workers out of its 370,000 staffers, a workforce number that includes consultants and temps, sources at the bank say.

However, the layoffs will not occur all at once, but instead will be stretched out over the next two years, and involve not just letting workers go, but attrition and branch and office closings.

“We essentially plan to take out our bottom performers and reallocate that capital to higher growth opportunities or better talent,” a source at Citi says.

Pandit has called upon Citi's top guns to get their new strategic plans ready in advance of the company's annual investor meeting in May.

In a memo Pandit sent to employees last week, he noted that “while we face a challenging economic environment in many segments of our operations, fundamentally we remain strong," adding that the bank maintains “incredibly strong positions in emerging markets throughout Asia, Latin America and Eastern Europe” and that “Citi is financially sound - we are well capitalized and extremely focused on the strength of our balance sheet.” Oppenheimer analyst Meredith Whitney has said shares in Citi could drop to $16 if it doesn't shore up its capital cushion.

Pandit, sources say, is looking at not just dialing back its calamitous foray into risky asset backed scuritizations, as well as cost-cutting in its operations, but executing more cross-selling of Citi's own products to customers in its other high-growth divisions, notably, at Krawcheck's global wealth business.

That effort, though, has been hung up by Citi's problematic computer systems which have been hurting the company for years, insiders say.

Citi's former chairman and chief executive, Sandy Weill, cobbled together disparate businesses that were never integrated. “There are so many overlapping computer systems that don't connect or work with each other, I can't begin to tell you,” a source says. “The computer systems are so bad in that they are not integrated, the technology is way behind."

Another source explains: “A Smith Barney client can't walk into a Citi branch anywhere in the world and get a commercial loan from Citigroup or a Citi credit card sold to him. Also, a Smith Barney customer can't transfer his or her account to Citi if he or she wants to, it's ridiculous,” adding, “take that one instance and multiply it by 100, that will give you a sense of what's going on here.”

Citigroup has been moving more rapidly than ever before to fix this problem of lack of cross-selling as well as its computer issues.

The bank recently conducted a pilot project in Boston and Philadelphia aimed at cross-selling Citi's products, such as credit cards, consumer and commercial loans, in its retail branches to its high net worth customers at its global wealth management unit, the Smith Barney legacy division run by Krawcheck which is seeing strong growth. The pilot project was a success, sources say.

Meanwhile, Krawcheck is also overseeing a strategic realignment of Citi's global wealth management division, which has seen strong revenue growth of 28% in 2007 versus 2006, resulting in earnings rising 37%.

Citi is also looking to focus on its fast growing global transaction services, which sells integrated cash management, trade, and securities and fund services to multinational corporations, financial institutions and public sector organizations around the world. This division has a network spanning over 100 countries, with over 65,000 clients and $13.1 trillion in assets.

And Pandit wants to put more capital behind investment banking and trading, as well as its retail banking services in Asia, Latin America and Eastern Europe, notably Brazil, Russia, China and India, to take advantage of the growing middle classes there.

The company has already said it is reviewing consumer lending practices in the wake of record write downs in its mortgage business, commercial lending and weakness in consumer lending. Citigroup has already announced more than $20 billion in total writedowns, and analysts expect even more double digit writedowns this quarter due to the housing and credit crisis.

Citi will also reduce $45 billion worth of mortgage business on its books over the next 12 months a 20% decrease from December 2007 levels, by not replacing loans when they mature or are paid off. It also aims to sell or convert into securities 90% of the mortgage loans it makes in the future, up from 65% now. Concerns still remain over Citi's leveraged loan portfolio.

The shift will mean less pressure on the bank's balance sheet, letting Citi hold less capital against those kinds of loans and letting the bank instead deploy that capital toward other high growth areas.