Citigroup Inc announced it will cut around 20,000 jobs as the company posted a shocking $1.8 billion fourth quarter loss after absorbing nearly $30 billion in credit losses. The disappointing results underscore the challenges facing the financial services giant.
Quarterly Loss Driven by Mortgage Woes
The massive quarterly loss stemmed largely from Citigroup setting aside $18.1 billion in reserves to cover rising delinquencies across its home and consumer lending portfolios, especially credit cards.
Ongoing troubles in the US mortgage and housing markets led to major write-downs. The company took $14.9 billion in pre-tax charges related to subprime mortgages made before the crisis.
“The weak economy and continued credit deterioration negatively impacted results,” said CEO Vikram Pandit. “We are taking the needed actions to become a leaner and simpler company.”
The $1.8 billion loss compared to a profit of $6.13 billion in the year-ago quarter – underscoring the sharp reversal of fortunes. Excluding charges, the bank earned $0.31 per share, missing analyst estimates.
20,000 Jobs to Be Eliminated Over Next Year
Facing huge losses and expected economic headwinds, Citigroup plans to aggressively cut costs and streamline operations.
As part of this restructuring, the company will cut around 20,000 jobs from its global workforce over the next year. The job cuts will span all divisions and affected staff will be notified in coming months.
Previously, Citigroup announced planned layoffs of around 9,000 investment banking positions as deal activity slowed. The new 20,000 job cuts represent a 15% reduction in the company’s roughly 370,000 employees worldwide.
“We are taking these additional steps to reduce expenses and improve efficiency,” Pandit emphasized. The moves aim to realign staffing with reduced business volumes in difficult markets.
More Write-Downs Expected In Future Quarters
While the $18 billion credit reserve build in Q4 was substantial, Citigroup warned that more consumer credit losses are expected in 2009 as the US economy weakens further.
Ongoing rises in foreclosures, bankruptcies, unemployment and consumer delinquencies will likely require additional write-downs. “We believe credit costs will continue to grow in the coming quarters,” Pandit cautioned.
Citigroup could potentially absorb up to $8 billion in further mortgage-related write-downs in the first half of 2009 according to internal estimates. More reserves may also be needed to cover unsecured credit card lending losses.
Strategic Review Underway for Core Businesses
Beyond headcount reductions, Citigroup is undertaking a comprehensive review of all its business operations and assets to identify areas where it can streamline further.
“We intend to identify our core businesses and those non-core assets that are not central to our strategy,” Pandit said. After the review, more business sales and divestitures are likely.
Citigroup will focus on its core strengths in consumer banking and credit cards globally, especially in emerging markets with growth potential. Investment banking operations will be downsized to match opportunity.
The restructuring aims to create a simpler, smaller and more efficient institution able to weather current market turmoil. But more tough quarters likely lie ahead given economic forecasts.
Government Investment Buys Time to Refocus
The $45 billion capital injection from the US Treasury in October 2008 has provided a cushion for Citigroup during this difficult transition process.
The government investment was part of the Troubled Asset Relief Program (TARP) created to stabilize financial institutions amid the crisis. Citigroup has also accessed Federal Reserve lending facilities for funding.
“We appreciate the support we have received from regulatory agencies and governments,” Pandit said. This assistance helps buy time to refocus on high-potential businesses and geographies globally.
Citigroup was once the world’s largest bank before the financial meltdown. The coming year will prove critical in turning around its fortunes through stringent cost cuts, risk reduction and strategic focus on core operations. But the path to recovery looks set to be long and difficult given deepening recessionary headwinds.
