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Citicorp’s Restructuring Underscores Bank Troubles Graphic of Dec. 19

December 20, 1990

NEW YORK (AP) _ Citicorp’s severe restructuring is one of the most vivid demonstrations yet of how once-mighty U.S. banks have faltered in a weakening economy.

Predictions are at least as grim for 1991, leading to expectations of more bloodletting.

Analysts generally applauded plan by the nation’s largest banking company, announced Tuesday, to cut its dividend by 44 percent, lay off 8,000 workers, and set aside $340 million for commercial loan losses.

But the amount of money set aside for problem loans was ″a lot less than what many people on street were looking for,″ said Richard Goleniewski, banking analyst for Goldman Sachs and Co.

Analysts’ estimates of the bank’s problem loans range as high as $2 billion.

Raphael Soifer, banking analyst for Brown Brothers, Harriman & Co., said he assumes Citicorp’s loan loss reserves are adequate for now because the bank just underwent a government examination. Results of the U.S. Comptroller of the Currency probe weren’t released because of confidentiality rules.

″But it does raise a question about the future deterioration of the real estate portfolio,″ Soifer said.

Fay Wong, a vice-president at Fitch Investors Service, predicted ″a bumpy year″ for Citicorp as it further pads its problem loan account.

Citicorp is not alone with problem loans. About 30 percent of bank lending involves real estate, and the number of problem loans is expected to rise sharply as property values drop and building vacancies increase.

Citicorp’s real estate problems are especially thorny because the bank’s portfolio has large holdings in the Northeast, among the hardest-hit areas in a recession now enveloping much of the country.

The bank has $13.2 billion loans outstanding, according to reports, making it that largest commercial real estate lender in the country.

Further, many large banks played a significant role in the leveraged buyout trend in the 1980s, which saddled many companies with risky debt. By some industry reckonings, highly leveraged loans account for 10 percent of the loan portfolio for the nation’s seven largest banks.

Like others, Brown Brothers analyst Soifer predicts Citicorp will set aside more cash to cover bank loans in the next year.

″It’s hard to say how much because we don’t know how bad the economy will get here,″ he said.

The proposed dividend cut, to be presented to Citicorp’s directors next month, surprised some in the banking community. Chairman John Reed stated recently a cut in dividends is an inefficient way to raise capital.

″They don’t have a lot of choice here,″ said Goleniewski of Goldman Sachs.

Banks have limited access to capital markets because they’re greatly restricted in securities trading. Selling assets such as real estate holdings and subsidiary businesses are among the key alternatives to raising cash.

Reed’s action boosted investor confidence, said Ms. Wong of Fitch Investors. The credit rating agency reaffirmed Citicorp’s senior debt rating at AA-minus late Tuesday.

Ms. Wong said Citicorp’s restructuring showed managers ″had the will″ to make painful adjustments in the face of bad financial news.

″It’s an event that the analyst community has been anticipating. I think there is relief that Citicorp has come out with it prior to the fourth quarter announcement,″ Ms. Wong said.

But a dividend cut places Citicorp in a very difficult position, said Soifer. Such a cut gives Citicorp just $260 million, hardly enough to cover the amount of its problem loans, believed to be at least $2 billion. He also said a cut in dividends might complicate future attempts to raise cash through the stock market.

The banking company said it would sell some assets to raise cash, but did not elaborate. Few analysts are willing to speculate what might be sold.

Such a sale is in line with economists’ expectations of an overall consolidation in the industry. Bank of New England already has sold nearly $4 billion in assets in the face of the slumping economy.

Timing of any sales will be crucial because of plummeting land values nationwide. The Resolution Trust Corporation, the agency charged with selling off assets of failed savings and loans, is generally viewed as depressing market prices as it tries to unload property.

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