Citigroup's plan to cut 11,000 jobs is far from the first big
downsizing Wall Street firms have executed since the 2008 financial
crisis. And it won't be the last.
The nation's third-biggest bank
is the latest in a series of financial institutions to cut large numbers
of jobs. Behind the cuts is new CEO Michael Corbat's push to improve
Citi's performance - and free up cash flow so it can boost its paltry
stock dividend, currently just a penny a share. But Citi, like its
rivals, also faces pressures from new international regulations that
will require banks to boost their capital to protect against future
crises and new U.S. regulations flowing from the Dodd-Frank Act that are
designed to limit banks' risk-taking.
Indeed, while Citi's news
Wednesday isn't likely to set off a short-term wave of layoffs, it's
part of a broader trend toward an economy that depends much less on the
finance industry for jobs and growth than it did before 2008, analysts
say. Since the job market bottomed out in 2010, finance has added only
94,000 of the 5 million net new private-sector jobs, according to
government data. Before the recession, finance accounted for nearly 6%
of private-sector jobs and 22% of the value of the Standard & Poor's
500-stock index.
"We're moving from an economy where we package
financial products to one where we build more things, like products and
roads,'' said Nancy Bush, a banking analyst at SNL Financial. "Consumers
have reduced their debt, governments will reduce their borrowing, As
that happens, everything driven by the financial economy will shrink.
Whether people like it or not doesn't matter.''
In Citi's case,
the moves were overdue, said Michael Mayo, an analyst at Credit
Agricole, a persistent Citi critic who this week recommended its shares
for the first time in years.
Citi's specific problem is it is
under-profitable even by the standards of post-crisis banks, Mayo said.
It has been less than half as profitable as rival JPMorgan Chase in the
last 12 months. Corbat, who took over when Citi dismissed his
predecessor, Vikram Pandit, in October, is the first Citi CEO in years
to deal aggressively with the bank's high overhead, Mayo said.
"CEOs
1 through 4 couldn't get it right,'' Mayo said, cracking wise about
Citi's executive turnover since Sandy Weill left the top job in 2003. "I
didn't think CEO No. 5 would be any better.''
Citi's cuts had
little directly to do with the changing rules. The bank has made
progress toward meeting future capital standards that will phase in next
year through 2019. Its capital base has grown 20% so far this year,
leaving a cushion of cash and securities worth 8.6% of its risk-adjusted
assets (mostly outstanding loans and trading positions) to guard
against future losses, Chief Financial Officer John Gerspach said at an
investor conference sponsored by Goldman Sachs Wednesday.
More
than half of the jobs Citi will cut are in information technology and
other support areas, Citi said. Other cuts included selling or shrinking
the bank's consumer businesses in offshore markets, including Pakistan,
Paraguay, Romania and Turkey. Sticking with its strategy to focus on
150 cities globally where it sees the greatest potential growth in
consumer banking, Citi also will close 84 branches worldwide, including
44 in the U.S.
These decisions have little direct relationship
to either Dodd-Frank or the new capital rules. The bank announced no
plans to exit, or even significantly shrink, businesses such as trading
that require Citi to hold more capital in reserve under the new rules.
Instead, the bank, which will have more than $71 billion of revenue this
year, said the cuts would reduce its annual sales by only $300 million,
while trimming $900 million in annual expenses.
Citi is not alone among banks in needing to trim fat, RBC Capital Markets analyst Gerard Cassidy said.
"When
you look at the top 20 banks in the U.S., their average costs are much
higher than they need to be if they are going to deliver the
return-on-equity numbers shareholders demand,'' Cassidy said. The "vast
majority" of banks' costs are personnel, he says.
To pay for the
cuts announced Wednesday, Citi will take a one-time charge of $1
billion in the fourth quarter and another $100 million in early 2013,
Gerspach said.
Investors applauded the moves. Citi's shares rose 6.3% to $36.46.
The cuts will not be the last at Citigroup, Mayo said.
"The
new CEO isn't working in half measures, but it won't be enough," the
analyst said. "I'd put this in the category of a tremor, and they need
an earthquake."
Industrywide, many cuts do reflect changing
regulation. And so do the areas where banks and other finance companies
are looking to hire people.
Banks are shedding staff in areas
such as trading and parts of investment banking that require a lot of
capital, said Constance Melrose, managing director for North America of
eFinancialCareers, an online marketplace for companies and recruiters to
find finance pros.
At the same time, they are looking to beef up
staff in businesses that don't chew up capital - and in fields such as
information technology and risk management that will let them run more
automated trading operations with fewer people as well as less risk, she
said.
Banks worldwide have announced as many as 300,000 job cuts
since the start of 2011, according to data compiled by Bloomberg News.
The
number of positions open in October in hedge funds dropped 42% from a
year ago, with 30%-plus drops in currency trading, stock research and
mergers. At the same time, companies are looking for 48% more private
bankers, because wealth management is a fee-based low-risk business,
Melrose said. Overall, listings for financial professionals are down 21%
in the last year, Melrose said.
"It would be silly to say hiring
isn't soft, but it's not uniform," Melrose said. "Anything that involves
taking balance-sheet risk is drawing more scrutiny, and that translates
into where you put your people.''
Some cuts are also happening
because regulators are pushing back against banks' desires to raise fees
in order to offset lost trading and other revenue, Cassidy said.
Regulators have forced banks to lower their fees for processing debt
card transactions, for example.
One way regulators may have helped
cause Wednesday's cuts was when the Federal Reserve quashed Citi's
plans to boost its dividend. In April, the Fed announced that Citi
didn't have enough capital to both increase its dividend and survive a
severe recession that would push loan losses higher.
Wednesday,
Gerspach said Citi wants to generate "considerable excess capital for
return to shareholders,'' but he didn't give a timetable for any
dividend hike.
For the economy, the new regulations and the
smaller financial sector they produce will be a mixed bag, said Paul
Edelstein, financial economist at consulting firm IHS Global Insight.
"It's
bad in the sense that it will be harder to get access to credit,"
Edelstein said. "And it will be a good thing if it means we don't have
financial crises any more. There are trade-offs to this."
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