CNBC reports that massive layoffs are being planned by Citigroup Inc., America's largest bank. Faced with huge fourth quarter losses the bank is under pressure to cut costs and another round of job cuts may be the only way out(Citi has already cut jobs once earlier this year).
What really ails Citi? Citi has been growing a bit too fast for some time now.It has been picking up foreign banks and brokerage firms wherever it can, without giving too much thought to managing what it already has. The Nikko Cordial bid, picking up a stake in a brokerage firm in India, the Grupo Financiero buyout in Central America and continuous investments in China reinforce the image of a company that is growing by acquisitions rather than focusing on organic growth.The global sphere of its operations ( it is present in over 100 countries) has naturally led to a huge increase in expenses.In fact this increase had become significant enough for Prince Alwaleed bin Talal to remark to the effect that 'draconian measures need to be taken to curb expenses.' Incidentally the Prince is perhaps the largest single shareholder in the bank.
The tipping point has been the sub prime crisis.Citi has unveiled losses of $6.8 billion for the third quarter and it may lose a further $8 to $11 billion loss in the fourth quarter.Analysts expect the pain to continue into 2008 with expected losses of $4 billion.Citi has a direct sub prime exposure of $55 billion of which $43 billion is in CDO's. It has $135 billion in 'level three' assets.These include those assets which are not heavily traded, such as mortgage backed securities which are difficult to value, more so after the sub prime shakeout. According to Goldman Sachs Citi would need to write off $8 to$11 billion this quarter on account of sub prime losses and have placed it on' America's Sell List.'
Prince Talal acted swiftly and Charles Prince put in his papers Nov. 4th after an emergency board meting.But to say that Prince lost his job solely because of the sub prime investments would not be entirely correct.It had been rumored for several months that Prince's job was on the line unless he could show either impressive revenue growth or noticeable operating improvement. Shareholders were getting restless as the company's stock had not been going anywhere for several years. The only saving grace being the dividend of over 4%. The economy was clearly not in a position to allow the first option, so it had to be the second. After the sub prime loses came in it was unlikely that he could have continued.
It has been suggested that given its large workforce of almost 300,000 Citi can cut its workforce simply by reducing hiring and letting attrition do the work for them.But this strategy has the drawback that it affects all divisions uniformly and takes a bit too long to work out. The company needs to show decisive action and that it means business before the stock market will take notice and reward the decision taken. It is not too difficult for financial firms to find surplus workforce which can be laid off. There are always back offices and IT activities that can be hived off or outsourced. Fortunately for Citi, given its brand name it will be easy for it to find buyers for any such division if it ever decides to do so.The costs of cutting the workforce would be substantial, but small change for a company like Citi. But Citi has to ensure that its actions do not appear to be an act of desperation. Too large a cut and it may scare away potential investors in the short term due to the uncertainties surrounding the impact of such an action on its operations.
Meanwhile Citigroup shares were quoted at $30.47 in early morning trade Tuesday after the Abu Dhabi Investment Authority said it will invest $7.5 billion in Citigroup Inc. Sheikh Ahmed Bin Zayed Al Nahyan called Citi 'a premier brand and with tremendous opportunities for growth.' After this investment is converted into equity shares it will outrank the holding of Prince Alwaleed bin Talal. This investment is significant and it is likely to signal that the free fall in US financial stocks is coming to an end.