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Time now to hold the line on expenses

Time now to hold the line on expenses
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First Published: Mon, Jul 23 2007. 01 09 AM IST
Updated: Mon, Jul 23 2007. 01 09 AM IST
Citigroup’s turnaround plan is starting to bear fruit. The US megabank’s earnings were 19% higher in the second quarter than in the first, at $6.2 billion (Rs24986 crore). That’s encouraging news for its embattled boss, Chuck Prince. But it’s too soon to celebrate the bank’s turnaround.
Citi has made some important strides. The bank managed to beat estimates without the help of one-off hat-tricks—like releasing loan loss reserves—that it occasionally relied on last year to juice its performance. In fact, Citi did well this quarter even though it added $870 million back into its reserves. The bank is also growing some of its targeted businesses at a decent rate. Revenue at its international operations increased 12% over the first quarter. Even more encouragingly, Citi now has two successive quarters of positive operating leverage under its belt, meaning its bottom line increased at a faster clip than its revenues.
But therein lies the rub. Impressive though that is, much of it can be explained by the cost cuts unveiled in April. It’s good news that Citi is reaping some gains from that plan. But if one strips the effect of those cuts away, the bank’s showing starts to appear lacklustre once again.
Its underlying performance actually lags several of its peers. Its 4% increase in overall revenue this quarter bested cross-town rival JPMorgan. But more domestically focused banks did better. Wachovia grew its revenues by half as much again, while Bank of America’s growth rate was almost double Citi’s. Prince certainly deserves credit for improving Citi’s bottom line by slashing costs. But now he has to hold the line on expenses—and show that he can improve the bank’s revenues as well.
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First Published: Mon, Jul 23 2007. 01 09 AM IST