As part of a measure to cut ongoing expenses for the benefit of major shareholders, Citigroup has announced a massive reduction of employment, affecting over four percent of the company’s workforce across the world. The new CEO, Michael Corbat, has determined the best course of action to increase the value of the company for investors is to scale back operations. Seemingly in direct response and correlation to the announcement of the four percent reduction, a plan to lay off 11,000 employees, Citigroup’s stock price rose four percent by ten o’clock this morning.
1,900 of the 11,000 jobs eliminated will come from the institutional clients division. 6,200 will come from the consumer banking division, and the company will eliminate 2,600 operations and technology positions. The company projects that these reductions will cause lost potential revenue of about $300 million a year, but will save $900 million in expenses next year and $1.1 billion each year starting in 2014. To account for the reduction, Citi will write off $1 billion this year. That $1 billion is a direct reduction of pre-tax income for the bank, promising to greatly reduce the company’s fourth quarter tax bill.
Citigroup is also cutting bonuses, at least symbolically. In the one division said to face bonus reductions, the securities trading division, average employee bonuses will decrease between five and 10 percent. Executive bonuses won’t be damaged nearly as much, if at all. But let’s face it; if they were, when your $1 million bonus is only $900,000, while shareholders have seen declining value, customers are abandoned through closing branches, and rank-and-file employees are getting laid off, you’re still doing pretty well.
The layoffs will affect global customers the most, with operations ceasing in Romania, Turkey, and other nations where the bank isn’t meeting its goals, but branches in the United States will close as well. When U.S. based operations are reduced, customers in this country will likely see more difficulties with customer service.
A few months ago, the firm handling public relations for Citigroup’s credit card division invited me to a concert in New York City. I decided to attend, and I’m glad I did. Alicia Keys had an amazing performance. The concert was part of a massive advertising campaign for Citi credit cards, and the television commercial featuring Alicia Keys advertising Citi’s exclusive cardmember benefits received a lot of airtime. The purpose of the invitation was to pitch these benefits to the press. I had thought it would have been an opportunity to receive answers to some questions about Citi’s products, but the product manager I was supposed to meet didn’t show up, and the public relations team was more interested in pitching than discussing once we were talking face to face.
I expect this move towards cost-reduction will eventually find its way to the credit card division, affecting some of the best benefits for responsible credit card users, like cash back programs. I expect the heavily-marketed “Citi Rewind” benefit, which allows customers to receive an automatic refund if an item they purchase drops in price after they purchase it — with some restrictions, of course — will not last much longer under this new doctrine. Citi’s credit card division is not automatically affected by changes to the global divisions or the institutions investment division, but when the CEO of the company makes such a broad move as this major cost-reduction plan, it’s bound to eventually affect every nook and cranny of the company.
I reached out to a Citi spokesperson who handles the credit card division to see if the company has any thoughts about how this will affect its customers. From a banking perspective, I expect the number of U.S. branches to be closed to be relatively small and in areas with low population. Overall, it won’t affect many saving and checking customers in this country, but it might make it difficult for some customers, perhaps those in rural areas who already have a lack of choice in their local banking services, to have solid money management options outside of check cashing storefronts and payday loan companies.
This is a good example of how shareholders’ needs don’t always coincide with customers’ needs. In the end, shareholders only win when customers are best served, but when a company takes drastic measures to cut costs such as this, customers lose so shareholders can win in the short term. Credit unions are better than retail banks in this respect — the customers are effectively owners — but that doesn’t necessarily make credit unions always the best choice.
If this restructuring eliminates your main bank branch, follow these steps to switch your bank. Consider doing more of your banking with online savings and online checking accounts, to reduce your reliance on brick-and-mortar locations which may come and go.
With Michael Corbat’s history in taking drastic actions to cut expenses, this is the job he was hired to do. Do you think it’s the right long-term strategy for Citi? Would the bank be better off by reducing expenses in the form of executive bonuses rather than laying off 11,000 employees? It Citi leading the way for more industry cutbacks in 2013?