Citigroup Inc. (C - Analyst Report) has come up with the decision to restructure its operations, which will ultimately result in over 11,000 layoffs. The decision comes as Citi counters the fall in its revenue via certain expense reduction initiatives.
Aimed at increasing the efficiency of the company’s overall business, the move includes streamlining operations as well as optimizing footprints across geographies. Encouragingly, this will result in expense savings of $900 million in the year ahead. Moreover, the annual cost savings is projected to surpass $1.1 billion beginning 2014.
However, this comes with an upfront cost. The restructuring, which will take place across a number of the company’s businesses, will lead to a pre-tax charge of approximately $1 billion in the fourth quarter of 2012 and about $100 million of associated charges in the first half of 2013. Also, annual revenues are likely to bear a negative impact of below $300 million.
Restructuring in Detail
The abovementioned repositioning will result in reduction of around 6,200 positions in Global Consumer Banking division with 40% of it being in the Operations & Technology functions that support the business. Of the total repositioning charges in the fourth quarter, around 35% is likely to be incurred by this division.
Consumer operations in Pakistan, Paraguay, Romania, Turkey and Uruguay will either be sold or trimmed down. Further, 84 branches will be shuttered including 44 in the U.S., 15 in Korea, 14 in Brazil, 7 in Hong Kong and 4 in Hungary. Following the revamp, Citi’s global retail branch network will reach 4,000.
In the Institutional Clients Group, around 1,900 positions will be eliminated with over half of this impacting the Operations & Technology functions. Securities & Banking is likely to comprise 25% of the fourth quarter repositioning charges, while Transaction Services will record another 10%.
Further, about 350 jobs will be slashed at Citi Holdings, and out of the total repositioning charges, around 5% will be borne by this unit. This will mainly be associated with the branch rationalization in Greece and Spain.
In addition, Corporate/Other segment will incur 25% of the total restructuring charges. The company will shed approximately 2,300 positions, which support corporate services, real estate, and Citi Holdings, while nearly 300 employees in Global Functions will be sacked.
Owing to the financial crisis, Citi had to opt for a bailout from the U.S. government. Over the past few years, the company has been restructuring its business, making several layoffs, selling assets and trimming down costs. While this marks one of the first major actions under the new CEO, Michael Corbat’s regime, the layoffs started much earlier, i.e. during the former CEO, Mr. Vikram Pandit’s tenure.
Further, in a challenging operating environment, lower returns and stringent capital norms, bolstering revenue has become a challenge. Hence, many Wall Street banks are downsizing their businesses and announcing layoffs.
Bank of America Corp. (BAC - Analyst Report) , Goldman Sachs Group Inc. (GS - Analyst Report) , UBS AG (UBS - Analyst Report) and Deutsche Bank AG (DB - Analyst Report) are rightsizing their businesses and slashing jobs to address revenue slump. We believe that until a recovery in revenue occurs, sustaining and elevating profitability through cost reduction measures including layoffs will continue.
Citi currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. The cost-cutting initiatives augur well for the company and help boost shareholders’ confidence. However, the near-term results are expected to be affected. Estimates are likely to be revised in the near term, but our long-term view on the stock remains favorable.