Citigroup cuts 11,000 jobs as Corbat tackles revenue slump

PUBLISHED : Thursday, 06 December, 2012, 8:12am
UPDATED : Thursday, 29 August, 2013, 4:13am

Citigroup’s Michael Corbat, who took over as chief executive less than two months ago, will cut more than 11,000 jobs and pull back from some emerging markets to drive down costs as revenue dries up at global banks.

The lender will take a US$1 billion charge this quarter to cover the 4.2 per cent workforce reduction, which includes 1,900 jobs in trading, investment banking and transaction services, Citigroup said in a statement. The bank, ranked third by assets in the US, said it wants to improve productivity in markets businesses such as cash equities where profit is lagging. The stock jumped as much as 8.1 per cent in New York.

Corbat and chairman Michael O’Neill are cutting deeper than ousted CEO Vikram Pandit had planned as the industry’s slump in trading and investment banking and stiffer capital rules put pressure on profit. The dismissals add to 5,000 announced in January by Pandit, who championed some of the businesses targeted today including markets in Asia and Latin America.

“The new sheriffs are in town,” Gerard Cassidy, a Royal Bank of Canada analyst, said in an interview with Tom Keene on Bloomberg Radio’s Bloomberg Surveillance. O’Neill, 66, led efforts to oust Pandit, and Cassidy said the new chairman played a major role in redirecting the New York-based bank’s strategy. “His fingerprints are all over this,” he said.

Citigroup closed at US$36.46 with its biggest gain since January. Analysts including Cassidy, Wells Fargo’s Matt Burnell and Ed Najarian at International Strategy & Investment repeated their buy ratings.

About 35 per cent of the fourth-quarter costs are tied to eliminating 6,200 jobs in consumer banking, with operations set to be sold or scaled back in Pakistan, Paraguay, Romania, Turkey and Uruguay, according to the statement. Branches will be reduced in five other nations, including 44 in the US Corbat will also cut about 2,600 jobs from operations, technology, human resources, legal and finance, according to the bank.

“While we are committed to – and our strategy continues to leverage – our unparalleled global network and footprint, we have identified areas and products where our scale does not provide for meaningful returns,” Corbat, 52, said in the statement.

The plan will save about US$900 million next year, and projected annual savings will exceed US$1.1 billion beginning in 2014, the company said. Annual revenue will drop about US$300 million, according to the forecast. The US$1 billion charge this quarter is pretax, and US$100 million more will come in the first half of next year.

Management is “rationalising the business in an intelligent way”, Appaloosa management chief executive David Tepper said. Citigroup was Appaloosa’s third-biggest holding by market value as of September 30, according to data compiled by Bloomberg.

The job cuts are “part of a continuum” that began with the previous executives, chief financial officer John Gerspach said on Wednesday at an investor conference in New York. “What you can expect from the management team at Citi is a continuing examination of every one of our businesses,” he said. “We’ll constantly seek new areas to improve efficiency.”

In foreign markets, the bank must be “disciplined in how we come to market in each of these regions and thoughtful about how we’re allocating our finite resources”, Gerspach said.

Financial services firms have announced more than 300,000 job cuts globally since the start of last year, according to data compiled by Bloomberg. Goldman Sachs, Morgan Stanley, Bank of America and UBS AG are among rivals focused on reducing costs.

Bank of America, ranked second by assets in the US, is trimming about 30,000 positions. Zurich-based UBS, Switzerland’s biggest bank, said October 30 it will cut 10,000, and the stock has jumped about 13 per cent since the day before the announcement.

Cost-cutting by investment banks needs to be severe as new capital rules designed to forestall any future credit crisis crimp bank finances, Sanford C Bernstein analysts said last month. Firms must slash pay and headcount and get rid of almost a third of their trading-business assets to earn even half the returns they once made, while replacing some traders with computers, the analysts wrote.

Citigroup’s staff peaked at 374,000 as of March 2008, soon after Pandit, 55, became CEO, according to data compiled by Bloomberg. He then slashed headcount to 258,000 by Sept. 30, 2010, as he disposed of unwanted investments and subsidiaries.

Pandit began boosting staff as he recruited talent for investment banking and trading while adding branches and staff in Asian nations such as China and India and in Latin America. Citigroup reported it employed 262,000 people at the end of this year’s third quarter. That ranked the company third among US banks behind Bank of America and Wells Fargo, and about 2,000 employees ahead of JPMorgan Chase.

Pandit, originally from Nagpur, India, sought to boost revenue from developing markets as the US and Europe slowed.

“In fast-growing emerging markets where standing still risks losing share, we had to invest just to keep up,” Pandit told shareholders in a letter earlier this year. Investments to “grow the client franchise” in Asia and Latin America rose by about US$300 million last year, he said in the letter.

Corbat inherited one of Wall Street’s least productive workforces after Pandit left. Before Wednesday’s announcement, the lender was on track to end the year as the only one of the six biggest US banks with less revenue per employee than in 2005, according to an October 25 Bloomberg analysis.

Pandit was unlikely to lead Citigroup out of emerging markets after previously committing to them, according to Richard Staite, an analyst in London with Atlantic Equities. If he were still in charge, the bank would have probably introduced fewer and “more steady, incremental savings” than those announced, said Staite, who recommends the shares.

The bank had invested US$3.9 billion last year in all of its businesses, including initiatives to meet regulatory requirements, modernise branches and boost spending on consumer marketing, Pandit said during a January 17 conference call with analysts and investors.

“Vikram had invested heavily in the business back in 2010 and last year on the assumption of a stronger global economy,” Staite said. “That obviously hasn’t come through.”

Citigroup’s US branch closures amount to about 4 per cent of its North American branch network and include 13 across Pennsylvania, nine in Massachusetts and six in New Jersey, according to Catherine Pulley, a spokeswoman for the lender. The bank has opened 21 branches in the past 15 months and probably will open more next year, Pulley said.

Citi Holdings, the unit that contains about US$171 billion of unwanted assets, will eliminate about 350 positions, the bank said. Most are related to branch closures in Greece and Spain, the bank said.

The job cuts at Citi Holdings don’t go far enough to fix the unit, according to Charles Peabody, an analyst in New York with Portales Partners. Efforts to quicken its disposal of assets are hampered by a lack of funding for potential buyers, and aggressive sales efforts could produce losses beyond the bank’s current reserves, Peabody wrote in a November 13 note.

Citigroup also plans to shrink that division’s bonuses for this year by as much as 10 per cent, two people with direct knowledge of the decisions said last week.

“At the end of the day, this looks to be nothing more than a branch rationalisation and back-office efficiency story,” Peabody said.

Citigroup has a history of “trashing” its results in the fourth quarter to clean up expenses and other unusual charges, many of which should have been recognised in earlier quarters, Peabody said.

“It makes you wonder if you can trust the core earnings power of the company as depicted in the first three quarters of the year,” Peabody said.