The long list of organization-wide changes that Citigroup’s (NYSE:C) new CEO Michael Corbat announced earlier this week shows that the global financial giant’s new boss isn’t really in the mood to lose any time to show investors his commitment to “remain extraordinarily focused” on costs.  Investors cheered the revamp by buoying the company’s shares by almost 8% within two days of the announcement.
The key highlights of the proposed changes include a reduction in more than 11,000 jobs to save annual recurring costs of around $1.1 billion starting 2014. The plan comes with its understandable downside – a $1 billion charge this quarter stemming from the reorganization, and a reduction in top-line numbers by around $300 million due to lost revenues. Citigroup joins peers Bank of America (NYSE:BAC), UBS (NYSE:UBS) and Barclays (NYSE:BCS) who are all undergoing a process of rigorous business model streamlining.
We are in the process of updating our $37 price estimate for Citigroup’s stock, in light of the sweeping changes that are expected to be carried out over coming months. In this article, we detail the changes each of Citigroup’s businesses are expected to undergo, and how each change will affect the group’s total value.
Institutional Clients Group (ICG)
Citigroup’s Institutional Clients Group (ICG) houses its Securities & Banking and Transaction Services businesses. These businesses are represented in our analysis by the sales & trading, advisory & underwriting, and global transaction services divisions, and make up almost 60% of Citigroup’s total value as seen in the chart above.
The ICG is expected to record a reduction in 1,900 jobs, with more than half of this coming from the support & administration functions. Various units like cash equities, which have not been very profitable over recent years, will most likely be trimmed. These changes will have an impact on Citigroup’s investment banking margins, which could improve at a faster rate than what we currently forecast in the chart below.
Global Consumer Banking (GCB)
Citigroup’s banking operations boast of being one of the most geographically diversified retail banking networks. But the costs associated with such a wide presence have eaten into the group’s profit over recent years when revenues have remained evasive due to weak economic conditions. It its profitability drive, it’s little surprise that the group is cutting as many as 6,200 consumer banking jobs in an attempt to scale down the business.
Citigroup will focus its banking operations in 150 cities that promise the best growth and intends to sell or drastically reduce operations in Pakistan, Paraguay, Romania, Turkey & Uruguay while consolidating its presence in Brazil, Hong Kong, Hungary, Korea and the United States.
This should bring down Citigroup’s consumer banking expenses drastically from next year. We believe that the division’s expenses as a percentage of revenues will likely fall to just below 50% by the end of our forecast period.
Citigroup’s Citi Holdings division, often termed the “bad bank,” was created in 2009 to house all the poor-performing and non-core assets that the group sought to dispose off over time. Most notably, the division includes Citigroup’s asset management division along with the consumer banking operations in countries like Greece and Spain.
The division will see a reduction in about 350 jobs, all of them from the consumer banking operations in Greece and Spain (see Citigroup Cuts Greece Retail Operations To A Bare Minimum).
Citigroup’s corporate division encompasses various support functions which are often shared across the other operating divisions. These back-end roles will be slashed considerably with about 2,300 admin jobs and an additional 300 multi-divisional jobs expected to be reduced over the next few quarters.
This will reflect in a reduction in overall corporate expenses captured in the chart below.Notes:
- Citigroup Announces Repositioning Actions to Further Reduce Expenses and Improve Efficiency, Citigroup Press Releases, Dec 5 2012 [↩]