Bloomberg News

Citigroup to Weigh Further Cutbacks in Trading, Investment Bank

February 01, 2012

Jan. 25 (Bloomberg) -- Citigroup Inc., the third-biggest U.S. bank, will consider further spending cuts at its securities unit after an investment of almost $1 billion in the business last year failed to boost revenue.

The lender, which last week announced 1,200 job reductions to save $600 million this year at the Securities and Banking division, will “further restructure” if revenue doesn’t rebound in 2012, Chief Financial Officer John Gerspach said on a conference call yesterday. Profit at the unit fell 24 percent last year to $4.9 billion as Europe’s sovereign-debt crisis rattled world markets, New York-based Citigroup said last week.

“We are not oblivious to the fact that our cost structure cannot be justified by our current revenue,” Gerspach said. “While much of the current difficulty reflects market conditions, we equally have some management and execution challenges.”

The retrenchment shows how a global slowdown in deal-making and trading has thwarted Chief Executive Officer Vikram Pandit’s efforts since the bank’s $45 billion U.S. bailout in 2008 to increase revenue, in part by recruiting talent. Revenue in the securities unit is down 21 percent since 2009, while compensation and other operating costs have climbed 15 percent.

Citigroup gained 5 cents to $29.90 in New York. The shares have dropped 38 percent in the past year.

‘Operating Leverage’

Gerspach, 58, said Citigroup needs the business to improve “operating leverage,” which happens when a company increases revenue faster than costs. The Securities and Banking unit includes stock and bond trading, mergers advice and equity and debt underwriting.

“We must either drive revenue growth and operating leverage, or we will have to restructure, cut capacity and cut expenses,” he said.

The unit is run by James Forese, 48, who reports to Chief Operating Officer John Havens, 55.

Gerspach said results in equities trading and investment banking were “disappointing.”

Revenue from investment banking, which includes merger advisory and securities underwriting, fell 14 percent to $3.31 billion last year. Raymond McGuire and Tyler Dickson run that department. Revenue from equities-trading, led by Derek Bandeen, fell 21 percent to $2.76 billion.

Phone calls for the executives either weren’t returned or were referred to Danielle Romero-Apsilos, a bank spokeswoman, who declined to comment on their behalf.

‘Upgraded Talent’

The bank invested $3.9 billion last year in all of its businesses, including initiatives to meet regulatory requirements, modernize branches and boost spending on consumer marketing, Pandit said during a Jan. 17 conference call with analysts and investors.

“We also upgraded talent in both our institutional and consumer businesses,” Pandit, 55, said then.

The securities unit accounted for “a little less than $1 billion” of the investments, Gerspach said.

“We identified businesses in S&B that we believed were strategically important to our long-term success, but where we lacked scale,” Gerspach said. “Our investment spending left us with less expense flexibility in 2011, particularly as markets began to weaken in the second half of the year.”

‘Expensive Traders’

Job cuts that began late last year eventually will total 5,000, Gerspach told reporters last week, or about 1.9 percent of the company’s 266,000 employees as of Dec. 31. About 1,200 of the job cuts will come from the securities and investment- banking unit, Gerspach said.

“It was unwise to spend significant sums of money hiring expensive traders and investment bankers,” said Richard Staite, an analyst with Atlantic Equities LLC who has an “overweight” rating on the bank’s shares. “Citigroup should focus on lower- risk activities, particularly transaction services, consumer banking and straightforward corporate banking.”

Until European officials forge an “achievable and sustainable” resolution to the crisis, markets will continue to experience “periods of calm and then followed by a period of uncertainty,” Gerspach said.

“Europe continues to remain an overhang on the market,” he said. “It still is very much up to Europe to figure out whether or not they can come up with an achievable restructuring that will settle things down on a more permanent basis. And I think that’s yet to be seen.”

--Editors: Peter Eichenbaum, Dan Reichl

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Donal Griffin in New York at dgriffin10@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.


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