Citigroup (NYSE:C) just installed a new CEO in October, and Michael Corbat certainly isn’t wasting any time in his new role.
Even if it means ruining some bankers’ holidays.
We’ll get to the details in a second. But the million-dollar question is, of course, whether this move is good long-term for Citi. My take is that it likely will be — simply because of the seismic shift in the banking environment, regulatory environment and consumer perceptions of big banks over the last five years.
Consider Bank of America (NYSE:BAC), which cut 30,000 jobs amid the financial crisis … and then announced another 16,000 layoffs in September to send its headcount back to crisis-level lows. BofA adjusted down correctly, but adjusted up prematurely.
This summer there were rumblings of piecemeal banking layoffs at Citigroup, Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS) and others. But clearly if the environment remains unfavorable to banks, they should adjust to the “new normal” rather than act like things are hunky-dory when they are not.
It has been a good year for banking stocks, with the Financial Select Sector SPDR ETF (NYSE:XLF) up 20%, nearly doubling the market’s return in 2012. The XLF is led by Bank of America stock, which has doubled year-to-date, and nearly 30% returns for both Citigroup and Goldman Sachs. That’s because profitability has markedly improved at most of these bank stocks.
But this optimism has occurred despite continued top-line declines. Bank of America has seen revenue plummet from $150 billion in 2009 to a pace of just $89 billion for the current fiscal year — and a meager forecast of just $92 billion in 2013. Citigroup is in the same boat, with revenue of $108 billion in 2009 but a pace of just $71 billion this year and forecasts of $79 billion in 2013.
The only way to make more money is to cut. And Citi and BofA are tired of cutting a little here and a little there, and have decided to really gut operations in late 2012 rather than draw things out any longer.
Considering the stagnant top line, this is the right move for Citi — even if it’s unfortunate for the bankers who have been living on edge for months and will certainly have a gloomy holiday as a result of the news.
In case you want specifics, Citigroup just issued a press release announcing it will cut 11,000 jobs. Citi will take a $1 billion charge this quarter as a result, and another $100 million in restructuring charges across the beginning months of 2013. But Citi stock seems to think that’s a small price to pay for efficiency, with shares trending up at the opening bell on the news.
Citi expects “repositioning activity” to be largely focused on the Institutional Clients group and the Global Consumer Banking division. In total, 88 branches will be closing worldwide, including 44 in the U.S.
The choice line from Citi’s release is this quote from 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.”
- Are banks still cheap after their banner year? (Deal Journal via WSJ)
- A UBS analyst says these five bank stocks will benefit from a housing recovery. (TheStreet)
- Big banks have plenty of problems, as these layoffs and recent revenue troubles show, but smaller regionals may hold more promise. (Barron’s)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.