Home Banking Major Restructuring Seeks to Restore Citigroup’s Competitiveness Among US Banking Elite

Major Restructuring Seeks to Restore Citigroup’s Competitiveness Among US Banking Elite

by internationalbanker

By Nicholas Larsen, International Banker


Not since the dark days of 2009’s global financial crisis (GFC) has Citigroup performed so poorly. Its chief executive, Jane Fraser, described the final quarter of 2023 as “very clearly disappointing” for the United States’ third-largest bank by assets. But with the help of a comprehensive multi-year restructuring effort that, among several crucial goals, seeks to streamline operations, boost profitability and propel its stock valuation, the coming months could be the most important in Citi’s recent history as it strives to restore its status among the American banking elite.

Published on January 12, Citi’s fourth-quarter (Q4) results were marred most glaringly by a whopping $1.8-billion loss, in stark contrast to the $2.5-billion net income the bank posted for the same three-month period a year earlier. The loss was largely driven by higher expenses from a series of one-off charges levied against the bank during the quarter, totalling $3.8 billion. A much higher cost of credit—approximately $3.5 billion for the quarter compared to $1.8 billion in Q4 2022—was also hugely responsible for the lacklustre results, as was the bank’s 3-percent decline in total revenue on a reported basis to $17.4 billion. Even when not including the one-off charges and expenses, Citi’s quarterly earnings still declined by more than 20 percent from a year earlier.

In terms of the most impactful charges, Citi was hit by a whopping $1.7-billion pre-tax charge associated with the Federal Deposit Insurance Corporation’s (FDIC’s) special assessment for replenishing the agency’s deposit insurance fund following the failures of key US lenders, including Silicon Valley Bank (SVB) and Signature Bank. The FDIC announced in November that the biggest American banks would be responsible for refilling the fund’s coffers, with Citi’s $1.7-billion contribution being the fourth largest after JPMorgan Chase ($2.9 billion), Bank of America ($2.1 billion) and Wells Fargo ($1.9 billion).

Sizeable losses related to its dealings with Argentina and Russia were also significant drags on Citi’s Q4 results, with the bank reporting a $1.3-billion reserve build tied to these exposures. According to a January 10 filing, moreover, Citi took an additional $880-million revenue hit during the quarter following the decision by Argentina’s newly elected president, Javier Milei, to devalue the peso by more than 50 percent during his first few days in office.

And with a $780-million charge related to Citi’s organisational restructuring and “simplification”—known internally as “Project Bora Bora”—further swelling Citi’s operating expenses for the quarter, these items have only compounded the corporation’s problems at a time when it is seeking to reignite its ambitions in the face of ballooning expenses, lacklustre share prices and widening gaps across most metrics between Citi and its US banking peers. According to the bank, the combination of these items slashed diluted earnings per share (EPS) by around $2.00, whereas excluding the items would have yielded diluted EPS for the quarter of $0.84.

Nonetheless, Citi has remained undeterred in its quest to overhaul its business and restore its competitiveness within the upper echelon of US banking. Perhaps most significant is the planned shrinking of its 239,000-strong workforce, the biggest of all US banks except for the far more profitable JPMorgan Chase. With 20,000 jobs on the chopping block over the next two years, the expected layoffs will represent one of the most significant periods of job cuts across Wall Street’s major lenders in many years. An estimated 5,000 jobs have already been axed since last September, while Fraser confirmed in January that 1,500 managerial roles, accounting for a hefty 13 percent of its global leadership, have been eliminated. A further 40,000 jobs will be shed when Citi lists its Mexican consumer unit, Banamex, in an initial public offering (IPO), meaning that around 180,000 employees are expected to remain. As such, Citi has projected severance costs to potentially reach $1 billion over the medium term.

The bank is also significantly reorganising its internal structure, primarily by elevating its five key interconnected businesses—markets, banking, services, wealth management and US personal banking. By eliminating the bank’s management and regional (the Asia-Pacific, Europe, Middle East and Africa, and Latin America) layers, the leaders of these five businesses will now report directly to the chief executive officer (CEO) as members of the Executive Management Team. According to Citi, this will allow them “to have greater influence on Citi’s strategy and execution, while enhancing accountability” and also give investors “greater transparency into our core businesses”.

Two core operating units that focused on institutional and consumer clients have been scrapped as part of this streamlining drive, while specific business units that have been performing poorly have also been shuttered, including once-thriving units that employed dozens, such as municipal-bond trading and the distressed-debt group.

The consolidation of the leadership of Citi’s geographies outside of North America under Ernesto Torres Cantú, head of international, represents another key pillar of Citi’s reorganisation efforts, with the aim being to narrow the scope of geographic management to local-market client coverage and delivery and legal-entity management. Banking and international divisions also now share a common management team in the hope of “creating greater connectivity across Citi for clients under a leaner structure”, while a newly created client organisation under new Chief Client Officer David Livingstone is now responsible for “strengthening client engagement and experience across the bank’s global network and businesses”.

A recent earnings presentation further detailed key benefits that are envisaged from Citi’s new organisational structure, including:

  • Aligning the organisational structure with the business strategy,
  • Eliminating multiple management layers, including the regional layer,
  • Bringing clients closer to the centre,
  • Creating a client organisation and focusing on five core businesses, further driving top-line revenue growth and synergies,
  • Significantly reducing duplicative governance,
  • Enabling businesses to be run more efficiently by right-sizing the expense base for each business and function,
  • Increasing accountability, transparency and focus on execution.

Fraser said she expects such changes to generate savings of about $1 billion per year for the bank, with the cuts costing around $1.8 billion and savings of $2.5 billion being realised annually by 2026. “I am determined that our bank will deliver to our full potential, and we’re making bold decisions to meet our commitments to all our stakeholders,” she stated in September. “These changes eliminate unnecessary complexity across the bank, increase accountability for delivering excellent client service and strengthen our ability to benefit from the natural linkages that exist amongst our businesses, all with an eye toward delivering on our medium-term targets and our Transformation.”

Such “bold decisions” seem to have generated a largely positive response from the market, moreover. “This meets a major Citi milestone,” Wells Fargo analyst Mike Mayo wrote in late March in a note highlighting Citi as his top stock pick. “The organization simplification, which took 7 months to complete, should provide more evidence that Citi can meet its targets and do so methodically.” Indeed, Fraser was even given a vote of confidence by Warren Buffett, with Reuters reporting on January 19 that the Citigroup CEO was told to “keep going” by the billionaire investor. Buffett’s Berkshire Hathaway invested $3 billion in Citi in 2022, which helped to raise its stock and boost confidence in the bank. As of September 2023, he remains among the top five shareholders, according to data from analytics firm LSEG (London Stock Exchange Group), as cited by Reuters.

With much support for its endeavours, therefore, the bank has reached the final phase of its restructuring programme ahead of schedule. “Today we shared with our colleagues that we have concluded the major actions that we announced in September 2023 that align Citi’s structure with our simplified operating model,” the bank announced on March 24. “After having reset Citi’s strategy and undergone these consequential changes, we will continue to execute on our vision to be the preeminent banking partner for institutions with cross-border needs, a global leader in wealth and a valued personal bank in our home market and focus on our commitment to transform the company for the long term.”

At RBC Capital Markets’ Global Financial Institutions Conference in early March, Fraser acknowledged that Citi remained determined not to “make the mistakes we’ve made in the past”, adding that she was “extremely confident” in the bank’s capital allocation and liquidity. “We’re getting this done.”

In terms of tangible figures, however, much of the hard work still lies ahead. Fraser said she expects Citi’s markets division revenue for the first quarter to fall by an annual 8 percent to reach 12 percent, for instance, although investment-banking revenue may rise by a modest 1 percent. “The restructuring announced two months ago was a long time coming,” Christopher Marinac, director of research at US financial advisory firm Janney Montgomery Scott, told Reuters in mid-January. “The question comes down to: Can they execute on this restructuring in terms of really being able to grow the core business? The jury is still out.”


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