Why Heads Are Rolling at Citigroup

The Grinch made an early appearance at Citigroup (NYSE: C  ) today. This morning, the nation's third largest bank by assets announced a "series of repositioning actions that will further reduce expenses and improve efficiency across the company." Grab the baskets, in other words, because heads are about to roll.

Citigroup restructures operations
While most headlines have focused on the associated 11,000 job cuts, the move signals more than just a thinning of the ranks. It should instead be interpreted as a larger scale restructuring effort designed to make the bank more competitive in the post-financial-crisis world of heightened capital requirements and lower fee income.

The basic contours of the restructuring are twofold. First, Citigroup is dramatically reducing its back-office operations. In its global consumer banking division, where more than half of the cuts will occur, approximately 40% are in the operations and technology functions that support the business. In addition, presumably most if not all of the 2,600 eliminated positions from its corporate/other division will similarly be support workers.

Division

Portion of Charge

Number of Cuts

Global Consumer Banking

35%

6,200

Corporate/Other

25%

2,600

Institutional Clients Group

25%

1,900

Citi Holdings

5%

350

Source: Citigroup's Investor Relations.

Second, Citigroup is concentrating its international operations by consolidating around the 150 or so cities that have the "highest growth potential in consumer banking." Along these lines, it expects to sell or significantly scale back consumer operations in Pakistan, Paraguay, Romania, Turkey, and Uruguay. And it will reduce branch counts in Brazil, Hong Kong, Hungary, Korea, and the United States.

Altogether, in turn, the bank expects to save upwards of $1.1 billion a year starting in 2014. According to Citigroup's new chief executive officer, Michael Corbat:

These actions are logical next steps in Citi's transformation. 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. And we will further increase our operating efficiency by reducing excess capacity and expenses, whether they center on technology, real estate or simplifying our operations.

What spurred the move?
Over the past two years, a number of Citigroup's competitors have announced similar tactics to reduce risk and increase profitability. At the end of October, for example, UBS (NYSE: UBS  ) , a global bank headquartered in Switzerland, announced plans to eliminate up to 10,000 jobs in its investment banking operations. And Bank of America (NYSE: BAC  ) has been aggressively working through its aptly named "Project New BAC," under which it's selling off noncore business units and shedding a total of 30,000 workers.

At Citigroup specifically, the decision was likely encouraged by the bank's notoriously cost-conscious chairman, Michael O'Neill, formerly of Bank of Hawaii (NYSE: BOH  ) , who, according to the Wall Street Journal, is "known in his past jobs for recommending tough medicine." It deserves mention here that O'Neill is also responsible for effectively firing Citigroup's former-CEO Vikram Pandit after a disappointing third quarter in which the bank wrote off $4.7 billion related to the ongoing divestiture of Morgan Stanley Smith Barney, a brokerage unit the bank jointly owns with Morgan Stanley (NYSE: MS  ) .

But regardless of who initiated it, the decision was long overdue. As you can see below, Citigroup currently has the worst efficiency ratio of all the big banks, coming in at 89%. This means that it takes $0.89 in expenses to produce every $1 in revenue. By comparison, it costs only $0.50 to produce that same dollar at US Bancorp (NYSE: USB  ) , $0.57 at Wells Fargo (NYSE: WFC  ) , and $0.60 at JPMorgan Chase (NYSE: JPM  ) . Even Bank of America (NYSE: BAC  ) comes in well below, with an otherwise unacceptable efficiency ratio of 78%.

Source: S&P's Capital IQ.

Is this good or bad news for Citigroup shareholders?
While this is horrible news for thousands of Citigroup employees, for the reasons just discussed, it's being widely heralded by investors. Shares in the megabank are currently up more than 6%. According to David Tepper, the founder and CEO of the hedge fund Appaloosa Management, a major investor in Citigroup: "We think they are rationalizing the business in an intelligent way." Perhaps, but the proof is ultimately in the pudding.

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  • Report this Comment On December 05, 2012, at 8:06 PM, SouthRoad wrote:

    Citigroup is going to fire itself out of existence.

    This will start a death spiral where all their best people will leave ASAP, and meanwhile, to meet expenses, they will try to get rid of the remainder of their best people who "get paid too much". What will be left is a bunch of morons.

    Already, today, I know of no reasonable skilled person with other options that would ever consider going back into the banking sector. There is already a gigantic "Stay away from Wall Street" movement going on. Once they cut too far (which they will), they will have lots of trouble convincing people to go back. They will be stuck fishing from the bottom of the barrel, and the death spiral will continue.

    The real reason that it costs 89 cents for every dollar they earn is not because they have too many people, it is because the people they do have are sub standard already.

    When they are done and the smoke clears it will cost 99 cents for every dollar they earn because their customer service will drop, and all the "good" customers will leave.

    I predict that 30 years from now we will all say "do you remember a company called CitiGroup?. I think they disappeared sometime after TWA"

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