Citigroup - Investors Applaud Corbat's Restructuring Efforts

| About: Citigroup Inc. (C)

Shares of Citigroup (C) rose sharply on Wednesday. CEO Michael Corbat, who took his post just two months ago, positively surprised the market by announcing 11,000 layoffs to cut back on costs in an attempt to boost the bank's profitability.

Wednesday's announcements

Citigroup's new CEO Michael Corbat announced some 11,000 job losses in order to cut on costs. The bank is pulling back from some non-core emerging markets, and Citigroup like all major global banks has been suffering from revenues drying up in global financial markets.

As a result of the job reduction plans Citigroup will take a $1 billion charge in the fourth quarter. The job cuts are sizable, impacting over 4% of Citigroup's workers.

Shareholders are enthusiastic sending shares some 6.4% higher at the close of the regulator trading session. Shares traded as high as $37 during the trading session, at which point shares were trading with gains of 8%.

The Pain Will Be Felt In...

Institutional Clients Group

Citigroup will cut 1,900 jobs in its trading, investment banking, and transaction business. In total some expected 35% of restructuring charges will be taken in the division. More than half of the functions will be cut in technology and support roles. Lower employment is driven by a reduction in global markets activity, and increased capital rules, both impacting profitability.

Consumer Banking

The majority of jobs will be lost in the consumer banking division, in which 6,200 workers will lose their jobs. Citigroup will exit operations or significantly scale them down in countries like Pakistan and Romania. Surprisingly, Citigroup also included Turkey in the list, despite the vibrant and strong economy in the country. Citigroup will close 44 retail branches in the US.

Citi Holdings

Citi's holding division which holds all the bad assets and operations from the firm will cut some 350 jobs, and will take roughly $50 million in restructuring charges to achieve this.

New CEO Corbat

Investors are pleased as CEO Corbat and Chairman Michael O'Neill are making deeper cuts than its previous CEO Vikram Pandit which got ousted earlier this year.

Corbat commented on the job cuts, "While we are committed to (and our strategy continues to leverage), our unparalleled global network and footprint, we have identified areas and products where our scale does not provide for meaningful returns."

Corbat and O'Neill are using this window of opportunity to make deep cuts which Pandit was not ready to make. Investors and analysts are pleased with the size of the cuts, and many expect Corbat to announce further cuts and restructuring plans in 2013.


The estimated payback time of the $1 billion restructuring plan is rather short. Citigroup expects to save $900 million in annual costs for 2013, while savings could reach $1.1 billion in the year thereafter. Revenues will fall an estimated $300 million as a result of the cuts, resulting in net savings of $600 million in the coming year, followed by net savings of $800 million in 2014.

The 6% jump in Citi's shares boosted the firm's market capitalization to roughly $107 billion. As such, the increase in the firm's valuation of $6 billion comes in line with a conservative net present value estimate of future cost savings.

Citigroup's current valuation values the firm at roughly 1.6 times annual revenues, assuming full year revenues of $66-$70 billion. The bank could earn $7-$9 billion for 2012, or roughly $2.75 per share at the midpoint of the range. Citigroup is valued at roughly 13 times annual earnings.

More To Come?

Incoming executive Corbat wasted no time to develop these restructuring plans. Within two months, restructuring efforts were outlined which are quite detailed. Comments from CFO Gerspach hint that Citigroup might announce new measures next year.

CFO John Gerspach held an investor conference in New York on Wednesday and commented on the cuts as well, "The job cuts are part of a continuum that began with the previous executives. What you can expect from the management team at Citi is a continuing examination of every one of our business."

Not Just Citigroup

Global financial firms are stepping up the restructuring of their business, despite the fact that the financial crisis has been around for many years. Lower trading volumes, low volatility and increased regulation has put a strain on activity in markets and leverage, thereby impacting return on equity. Swiss firms UBS and Credit Suisse already announced sizable job cuts, but every major Wall Street bank including Goldman Sachs (GS) and Morgan Stanley (MS) already announced deep cuts.

Investment Thesis

Citigroup had a reasonably solid year so far driven by a rebound of the housing sector which resulted in increased mortgage activity. In October at the presentation of the third quarter results, I called Citigroup my least favorable financial firm.

The company lacked a strategic direction during the last years under command of Vikram Pandit. Citigroup's investors are not too confident either, valuing the bank at 0.7 times its tangible book value.

Investors were enthusiastic when Corbat was presented as CEO of the bank. Today we see why, as he quickly outlined a massive restructuring plan. Furthermore, the restructuring plans seem attractive to shareholders. One-time restructuring charges will be recouped rather soon, and future costs synergies will increase with time. The next step for Corbat is to formulate a credible strategy for the future.

I am a little bit more optimistic at the moment, but I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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