Citigroup Inc. Chief Executive Officer Michael Corbat, who took over 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 $1 billion charge this quarter to cover the 4.2 percent workforce reduction, which includes 1,900 jobs in trading, investment banking and transaction services, Citigroup said Wednesday in a statement. The bank, ranked third by assets in the U.S., said it wants to improve productivity in markets businesses such as cash equities where profit is lagging. The stock jumped 6.3 percent in New York.
Corbat and Chairman Michael O’Neill are cutting deeper than ousted CEO Vikram Pandit as the industry’s slump in trading and investment banking and stiffer capital rules put pressure on profits. 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 advanced $2.17 to close at $36.46 in New York, leading a rally in U.S. bank stocks. Analysts including Cassidy, Wells Fargo & Co.’s Matt Burnell and Ed Najarian at International Strategy & Investment Group Inc. repeated their buy ratings.
About 35 percent 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 U.S.
“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 $900 million in 2013, and projected annual savings will exceed $1.1 billion beginning in 2014, the company said. Annual revenue will drop about $300 million, according to the forecast. The $1 billion charge this quarter is before taxes. An additional $100 million of charges will come in the first half of next year, and Najarian said more cuts could follow.
Management is “rationalizing the business in an intelligent way,” Appaloosa Management LP’s David Tepper said. Citigroup was Appaloosa’s third-biggest holding by market value as of Sept. 30, according to data compiled by Bloomberg.
The job cuts are a “fairly comprehensive initial foray” and “part of a continuum” that began with the previous management team, Chief Financial Officer John Gerspach said 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 2011, according to data compiled by Bloomberg. Goldman Sachs Group Inc., Morgan Stanley, Bank of America Corp. and UBS AG are among rivals focused on reducing costs.
Bank of America, ranked second by assets in the U.S., is in the process of trimming about 30,000 positions. Zurich-based UBS, Switzerland’s biggest bank, said on Oct. 30 that it plans to cut about 10,000 jobs, and the stock has jumped about 13 percent since the day before the announcement.
Cost-cutting by investment banks needs to be severe to deal with the impact of the new capital rules designed to forestall any future credit crisis, 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.
Pandit, originally from Nagpur, India, sought to boost revenue from developing markets as the U.S. 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 $300 million in 2011, he said in the letter.
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 LLP. If he were still in charge, the bank would have probably introduced fewer and “more steady, incremental savings” than those announced Wednesday, said Staite, who recommends the shares.
The bank had invested $3.9 billion last year in all of its businesses, including initiatives to meet regulatory requirements, modernize branches and boost spending on consumer marketing, Pandit said during a Jan. 17 conference call with analysts and investors.
“Vikram had invested heavily in the business back in 2010 and 2011 on the assumption of a stronger global economy,” Staite said. “That obviously hasn’t come through.”
Corbat’s plan calls for job cuts in the operations and technology group and global functions. Citi Holdings, the unit that contains about $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 LLC. 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 Nov. 13 note.
Citigroup also plans to shrink that division’s bonuses for this year by as much as 10 percent, 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 rationalization and back-office efficiency story,” Peabody said Wednesday.
Citigroup has a history of “trashing” its results in the fourth quarter of its financial year to clean up expenses and other unusual charges, many of which should have been recognized 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.
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