Citigroup to Slash 11,000 Jobs: Analysis

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Financial giant Citigroup (NYSE: C) on Wednesday announced that it will slash 11,000 jobs. The move to reduce workforce comes just two months after Michael Corbat became the CEO of Citigroup, following the departure of Vikram Pandit. The move was applauded by investors as Citigroup shares rallied more than 6% on Wednesday.

Focus on Reducing Expenses and Improving Efficiency

Citigroup announced a number of measures that will further reduce expenses and improve efficiency across the company.

CEO Michael Corbat said, “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.”

Job Cuts Across the Board

Citigroup is trimming its workforce across all of its business units. The company’s Institutional Clients Group (ICG) will see a reduction of approximately 1,900 jobs. More than half of the job cuts in the ICG business will be made in the Operations and Technology functions.

Citigroup will slash 6,200 jobs in the Global Consumer Banking business. Nearly 40% of the job cuts in the division will be made in the Operations & Technology functions.

Citi Holdings, which holds the bank’s bad assets, will see a reduction of 350 positions, while Corporate/Other business will see a reduction of 2,300 jobs.

Citigroup expects to incur pre-tax charges of approximately $1 billion in the fourth quarter of 2012 and approximately $100 million of related charges in the first half of 2013. Nearly a quarter of fourth-quarter repositioning charges will be incurred by Securities & Banking and 10% by Transaction Services. Both are part of the ICG division. The Global Consumer Banking division will incur 35% of the fourth-quarter repositioning charges.

Citigroup expects $900 million of expense savings in its 2013 results as a result of the restructuring. Beginning in 2014, Citigroup expects annual expense savings to exceed $1.1 billion annually.

Citi Not Alone in Job Cuts

Citigroup is not the only major U.S. bank to announce job cuts. Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) have also announced workforce reduction.

Bank of America had announced last year that it would eliminate 30,000 jobs under its Project New BAC program. At the time of the release of its third-quarter results, Bank of America said that it has slashed 16,145 jobs since Sept. 30, 2011.

The workforce reduction is not restricted to U.S. banks. A number of major European banks have also announced layoffs. Swiss banking giant UBS (NYSE: UBS) announced in October this year that it will reduce its workforce to 54,000 from 64,000 by 2015. The bank also announced other measures that will reduce its costs significantly while driving further efficiencies across the group more rapidly.

The banking industry is undergoing a major transformation post the 2008/2009 financial crisis. According to data compiled by Bloomberg, financial firms across the globe have announced over 300,000 job cuts since the start of 2011. The job cuts reflect the difficult environment these firms are operating in. While a weak macroeconomic environment has hurt revenue, banks are also facing stricter regulations and capital rules. Given these factors, the job cuts may continue next year.

Implications for Citigroup

Prior to the financial crisis, Citigroup and other major banks said that the universal banking model was the future of the industry. However, it was the big banks like Citigroup that suffered the most during the financial crisis. In fact, Citigroup was on the verge of collapse before it was bailed out.

Since the crisis, Citigroup and other major banks, including Bank of America, have been focused on streamlining their operations to become leaner and more efficient. The job cuts announced by Citigroup are probably just a start. If the macro environment remains weak then more job cuts can be expected at Citi and other banks.

Valuation

Citigroup shares surged more than 6% as investors applauded the company’s plan to reduce workforce. Citi shares are currently trading at a P/E ratio (ttm) of 15.44, which is above the industry average of 10.83.

Year-to-date, Citi shares have gained nearly 40%.


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