Citigroup’s Investment Banking Arm To Slash Bonuses, Shrink Workforce

Holding true to his commitment to “remain extraordinarily focused” on costs, Citigroup’s (NYSE:C) newly appointed CEO Michael Corbat is reportedly looking to squeeze bonus payments, and cut about 150 additional jobs in the global banking group’s securities & banking division. ^[1] The proposed job cuts are over and above the nearly 1,550 jobs the 17,000-strong division has already reduced over this year. The move hardly comes as a surprise given the difficult economic conditions prevalent. Especially when it was just last month that the largest Swiss bank UBS (NYSE:UBS) announced plans to eliminate 10,000 jobs across all its business units (see Poor Performance Forces UBS To Announce Drastic Job Cuts).

We maintain a price estimate of $37 for Citigroup’s stock, which is around its current market price.

See our full analysis for Citigroup

Citigroup’s ex-CEO Vikram Pandit tried to put the gargantuan banking group on a crash diet over the last two years – divesting non-core assets housed under Citi Holding and cutting costs across the group’s geographically diversified business. An under-performing securities business drew a considerable amount of Pandit’s attention, who announced a reduction in 1,200 jobs in the business early this year. Around July, the business underwent another round of job cuts, which claimed 350 more heads.

The latest round of job cuts proposed by Corbat will see the business lose another 150 jobs, mostly from the equities and underwriting divisions. Additional cost reductions are to be achieved by shrinking the performance-based part of employee compensation by as much as 10%. The bonus-cut policy is not expected to affect all investment banking employees, though, as top performers across the various desk will not take home less than what they did last year.

Citigroup’s securities business has seen a consistent decline in margins since 2009 – something easily seen in the chart above. Operating margins fell from above 45% in 2009 to under 30% in 2011, largely because of falling revenues and an increasing burden of litigation and settlement expenses. But the job cuts since this January have definitely helped, as compensation & other expenses for the business declined 5% over this nine-month period as compared to last year. And the next round of cuts will reflect in margins for next year, which we estimate will rise to above 32% from around 30% for this year.

To better understand the impact of improving margins on Citigroup’s total value, you can make changes to the chart above. It must be mentioned here that the banking group’s securities business is its most valuable business according to our analysis, contributing to more than a quarter of its total value.

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1. Citigroup Securities Unit Said to Cut Bonuses, 150 Jobs, Bloomberg, Nov 29 2012 [↩]