Citigroup Productivity Worst of Big Banks Shows Challenge

Citigroup Productivity Worst of Big Banks Shows Corbat Challenge
A Citibank branch on the ground floor of Citigroup Inc. headquarters in New York. Photographer: Daniel Acker/Bloomberg

Michael Corbat, Citigroup Inc.’s new chief executive officer, says he wants to run a more efficient bank. That means rousing or cutting one of Wall Street’s least productive workforces.

Citigroup generated about $206,000 of revenue for each employee through the first nine months of the year, down 7.5 percent from the same period in 2011, while rivals including Wells Fargo & Co. posted increases, according to data compiled by Bloomberg. Excluding a one-time writedown of $4.7 billion, Citigroup’s productivity rose less than 1 percent.

While the third-biggest U.S. bank cut more than 100,000 jobs with Vikram Pandit as CEO, it probably will end the year as the only one of the six largest U.S. lenders with less revenue per employee than in 2005, according to estimates of analysts surveyed by Bloomberg. By contrast, the figure for JPMorgan Chase & Co. will have increased 19 percent.

Citigroup isn’t “the most efficiently run bank,” said William Fitzpatrick, an analyst at Manulife Asset Management, which oversees about $800 million including the lender’s shares. “Ultimately we do need to see better operating performance.”

Revenue per employee aggregated for the six banks -- JPMorgan, Bank of America Corp., Citigroup, Wells Fargo, Goldman Sachs Group Inc. and Morgan Stanley -- climbed 2.6 percent in the first nine months from a year earlier. The firms cut more than 25,000 jobs over the 12 months ended Sept. 30, and revenue edged up 0.3 percent.

Job Cuts

For the six banks, revenue per employee is set to climb 13 percent this year from 2005.

If Citigroup doesn’t change staffing and reports fourth-quarter revenue of $19.1 billion, the average estimate of 20 analysts surveyed by Bloomberg, full-year revenue per employee will be about $278,000, a drop of 3 percent from 2011 and 17 percent from 2010. It will be 0.5 percent lower than 2005.

To match the estimated yearly figures of more than $320,000 at Bank of America or Wells Fargo, New York-based Citigroup would have to cut about 35,000 of its 262,000 workers. Citigroup, which announced plans in January to eliminate 5,000 jobs, has cut 4,000 positions since the beginning of the year.

“It’s likely they will have some sort of headcount-reduction program more in line with Bank of America, which is looking to get rid of about 10 percent of employees,” said Erik Oja, an equities analyst at Standard & Poor’s in New York. “Having the lowest revenue per employee is something they will have to address, and growing the revenues is pretty tough right now with net interest margins falling and loan growth so low.”

Efficiency Measure

Revenue per employee is a measure of efficiency as banks focus on cutting expenses as record-low interest rates and decreased trading weigh on revenue. Many of the biggest banks have announced job cuts as they target compensation, their biggest non-interest expense.

Citigroup also sets aside lower compensation per employee than peers. It was the only one of the six banks with less than $100,000 in pay costs per worker in 2011 and is the only one set to cut per-employee compensation for 2012. The comparable figure for Charlotte, North Carolina-based Bank of America last year was $131,000.

“Although some of the press coverage has assumed that there’s going to be a focus on expense-cutting, it’s equally important that Citi’s management also focus on sources of revenue growth,” said David Hilder, an analyst at Drexel Hamilton LLC in New York who recommends buying Citigroup shares.

‘Special Emphasis’

Corbat, 52, who ran Citigroup’s business in Europe, the Middle East and Africa before being named CEO, was picked to “place a special emphasis” on operating performance, Citigroup Chairman Michael O’Neill said last week.

“We will remain extraordinarily focused on our efficiency ratios and our overall expense levels,” Corbat said on an Oct. 16 conference call with investors. “It’s around the allocation of all our finite, valuable resources of capital, of balance sheet, of risk appetite, of investment dollars, of tech spend, and so we’re going to be focused on all those.”

The revenue-per-employee calculations exclude accounting adjustments related to the banks’ credit spreads, known as debt-valuation adjustments, or DVA. The six lenders had more than $8 billion of gains on DVA in 2011 as the spread between the price of their debt and U.S. Treasuries widened, lowering the theoretical cost of buying back the debt. This year, the banks’ debt has risen in price relative to Treasuries, forcing them to take almost $9 billion in DVA losses.

Citi Holdings

The biggest obstacle for Citigroup performance is Citi Holdings, the collection of businesses and assets the company is looking to sell or wind down, Hilder said.

The unit has about 11,000 employees, according to Shannon Bell, a spokeswoman for the bank. That means the rest of the company, known as Citicorp, generated about $222,000 per worker in the first nine months, up almost 6 percent from a year earlier. Even without Citi Holdings, the company’s workers produce at least 8 percent less revenue per person than employees at the other big U.S. lenders. Bell declined to comment on the productivity figures.

Citi Holdings has about $174 billion of assets, including money-losing consumer-lending businesses, $60 billion of mortgages that have a delinquency rate exceeding 10 percent and $10 billion of debt including corporate and mortgage-backed securities that are being held at 72 cents on the dollar.

The majority of the division’s employees work for the OneMain Financial consumer-finance unit in Baltimore, Bell said. While the bank started an auction process to dispose of OneMain in 2011, talks ended without a sale, a person familiar with the matter said in January.

‘Most Bloated’

Corbat, who ran Citi Holdings at its creation, said that while the firm continues to look for opportunities for sales, it may choose to hold assets in the current environment. The company has cut $54 billion in assets this year, after reducing the pool by $134 billion last year and $128 billion in 2010.

“They’re probably the most bloated of all the banks simply because they’ve got so many disparate assets, with much of it in Citi Holdings,” said S&P’s Oja. “Obviously, they don’t want to just dump things at fire-sale prices, but you start to get to the point where most of the good assets are gone.”

The productivity figures for Citigroup may suffer from the bank having a larger international presence than peers. While that global footprint is often invoked as a reason for higher potential growth, it also requires more people than a domestic-focused business, Hilder said.

“It’s a little more expensive for them, being in some of the emerging markets,” said Manulife’s Fitzpatrick, who is based in Milwaukee. “We like the markets that they’re in, and if they can get a better handle on expenses and right the ship a little, we think there’s a real good opportunity there.”

Market Share

The bank’s productivity also is affected by declines in market share in institutional businesses, which generate higher revenue per employee than retail units, Hilder said. Goldman Sachs, which generates most of its business from investment banking, trading and asset management, will probably produce more than $1 million per worker this year, up 20 percent from 2011, according to analysts’ estimates.

Morgan Stanley is set to generate about $530,000 for each employee in 2012, a 14 percent increase from a year earlier. The figure for JPMorgan will probably rise 3 percent to $379,000. All three banks are based in New York.

Revenue Swings

Large revenue swings in businesses such as mortgage banking and sales and trading can distort the numbers, making it hard to gauge long-term efficiency trends, said Peter Kovalski, an analyst and portfolio manager at Alpine Woods Capital Investors LLC in Purchase, New York, which manages about $6 billion.

“Mortgage banking this quarter had a great quarter, so if you have a bank that had a large percentage of their revenues coming from mortgages their numbers will look better than businesses that don’t,” Kovalski said. “BofA and Citi are exiting non-core businesses, and that can skew numbers in the short term.”

Pandit, who stepped down as CEO this month, moved to reduce costs after the company reported on July 15, 2011, that expenses were higher than targeted and the stock dropped.

He told investors at a New York conference in December that he would cut about 4,500 jobs. The CEO later increased the figure to about 5,000, including 1,200 from the division that contains trading and investment-banking, as part of an effort to reduce costs by $3 billion.

Expenses fell by $1 billion, or 3 percent, during the first nine months of 2012 compared with the same period the previous year, according to quarterly filings.

‘Sacred Cows’

Pandit probably was distracted from his cost-cutting goal as he grappled with public rebukes while trying to sell unwanted assets, said David Knutson, a credit analyst with Legal & General Investment Management America in Chicago, which owns Citigroup debt. Disposing of Citi Holdings assets remains “the elephant in the room,” he said.

“He had a lot of plates in the air, and there were a couple of setbacks,” Knutson said.

The Federal Reserve in March blocked Citigroup’s proposal to increase payouts to shareholders, who rejected Pandit’s compensation plan in a non-binding vote a month later. Moody’s Investors Service cut the bank’s credit rating by two grades in June, and last month the firm announced a $4.73 billion pretax writedown on the value of its stake in a brokerage venture with Morgan Stanley.

“Expense cuts are painful, and you’ve got to gore some sacred cows,” Knutson said. “You can’t do that if you don’t have an explicit mandate, if you don’t have focus and you’re hamstrung with legacy issues.”

What follows is a table showing revenue per employee at the six largest U.S. banks for the first nine months of 2012 compared with the same period last year. Figures exclude gains and losses for debt-valuation adjustments known as DVA.

                   9M2012     9M2011     % Change
JPMorgan Chase   $ 284,114  $ 287,377    -1.1%
Bank of America  $ 245,413  $ 231,693     5.9%
Citigroup        $ 205,511  $ 222,221    -7.5%
Wells Fargo      $ 242,030  $ 228,572     5.9%
Goldman Sachs    $ 782,699  $ 648,713    20.7%
Morgan Stanley   $ 399,595  $ 370,451     7.9%

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