Citigroup: cuts or no cuts?

Citigroup is expected to take the axe to jobs in an attempt to reduce costs. But will there be any chopping in the corporate and investment bank?

Not according to Dick Bove, an analyst at Punk Ziegel & Co. in the US. "They will probably have to cut jobs if they want to get US$1bn in savings, and the biggest single component of costs is compensation," he tells us. "But if you take a look at Citigroup and say what business is growing, what business is extremely profitable and what business is increasing market share, it's investment banking - why would they cut that back? It would be insane."

Instead of cutting investment banking jobs, Bove says Citigroup is more likely to add them - he says the bank could do with increasing its investment in areas like electronic trading and structured financial products. Citigroup has already announced its intention to increase commodities trading staff by 40%.

Citigroup's fourth-quarter revenues rose 15% to US$23.8bn, but operating expenses rose 23% during the quarter, a phenomenon which is troubling, according to some analysts.

Dave Hendler, a senior financial analyst at CreditSights in New York, says the bank will need to cut US$2bn to US$2.5bn in costs if it wants to remain competitive. He estimates this will amount to between 5,000 and 10,000 of the bank's total 360,000 headcount.

But like Bove, he says the corporate and investment bank is likely to escape relatively lightly: "It will be more a question of consolidating back-office functions and service centres, particularly around areas like retail banking and credit card operations."

Bove questions whether Citigroup should be making cuts at all. "It's the wrong thing to do at this point," he says. "The reason Citigroup is in so much difficulty is that they consistently under-invested in their businesses over the last decade. Now is not the time to go on a cost-cutting binge."