The risky bet of structural reorganization, layoff storm, and slumping stock: Where is Citi headed?

Just when a minuscule sense of optimism prevailed around better days coming for the financial services as markets looked to bounce back, things took a different turn for Wall Street.

Stepping into the second half of the year, it appears big banks still haven’t been successful in escaping their unabating predicament after all. To better situate themselves for murky waters and offset the increase in operational costs, Wall Street banks have axed thousands of jobs that came in waves since late last year among other adjustments. And it continues. JPMorgan Chase released 500 employees in May, in addition to around 1,000 employees from its recent acquisition, First Republic Bank. Goldman Sachs is preparing for its annual round of job cuts for underperformers, slated for October. Morgan Stanley reduced 3,000 jobs from its global workforce by the end of the second quarter, while Wells Fargo is eyeing another layoff round in a move to improve efficiency.

Analogous to its peers, Citigroup has been on a cost-cutting spree and most recently announced a new round of eliminations. But there’s more to it. This time around the potential layoffs are a notch higher and come off the back of a major organizational shift spearheaded by CEO Jane Fraser. The overhaul involves the dissolution of major divisions and overlapping managerial roles leaving behind five main divisions: services, markets, banking, wealth management, and personal banking. The heads of these divisions will directly report to Fraser. The bank has released the three regional chiefs operating in Asia Pacific, Europe and the Middle East and Africa, and Latin America. Employees managed by these regional heads will also most likely lose out on their jobs as the bank launches its plan into motion. According to Fraser, these were some difficult choices she had to make in order to regain lost ground, deliver results, speed up decision-making, and fortify client relationships.

“I am determined that our bank will deliver to our full potential, and we’re making bold decisions to meet our commitments to all our stakeholders,” said Fraser. “These changes eliminate unnecessary complexity across the bank, increase accountability for delivering excellent client service, and strengthen our ability to benefit from the natural linkages that exist amongst our businesses, all with an eye toward delivering on our medium-term targets and our Transformation.”

The bank’s plan to shift gears reportedly picked up steam after Paco Ybarra, the head of Institutional Clients Group voiced his intention to retire in the first half of next year. Nevertheless, it remains to be seen whether the drastic reorganization is well-received internally. Meanwhile, the organization saw some eminent exits after the news of the bank modifying its trajectory went public. Some prominent names departing include Edwardo Cruz, head of Citi's Latin American investment banking operations, and Kristine Braden, former head of the European unit.

“The risk for this type of move is always undesired departures and internal strife, especially with Citi’s history,” said Mike Mayo, an analyst at Wells Fargo.

Addressing the bank’s global workforce at a town hall meeting last week, Fraser emphasized the importance of synergy among different wings of the bank and outlined new goals in a rather straightforward yet exacting tone.

“We have incredibly high ambitions for this bank and, the train, it's gonna move fast,” said Fraser. “So lean in, help us win with clients, help us deliver the changes, or get off the train,” she added.

In 2021, Fraser made a daunting shift in company strategy by exiting 14 consumer markets outside of the US to hone in on the wealth management business. Since then analysts have been keeping tabs on how that strategy may play out going forward. This year's second-quarter results showed that that move wasn’t fruitful – at least for the moment. Wealth revenues slumped 5% as a consequence of continued investment fee headwinds and higher deposit costs. Bearing that in mind, though skeptical, analysts are yet again closely monitoring the new adjustments.

Will the reorientation win back the trust of stockholders?

While Fraser labeled current changes as mandatory requirements to simplify the bank structure and uplift shareholders' sentiment, some view them as means to prove her mettle as the bank has stumbled on its goals in the last quarters, especially in investment banking.

Shares have lost nearly a third of their value since Fraser took the reins of the firm in 2021. Additionally, the bank attracted analysts’ attention who felt a reverberation around the profit outlook for the third biggest US bank after it painted a grim picture with its second-quarter financial results. Its net income dropped like a stone by 36% to $2.9 billion from $4.5 billion last year – and was at odds with higher profits reported by peers JPMorgan Chase and Wells Fargo.

The slump in Citi's net income was primarily led by higher expenses, higher cost of credit, and lower revenue. Higher costs for previous layoffs and increased provisions for credit losses also took a bite out of profits. Revenue decreased sharply on account of the decline in markets and investment banking businesses amid slowing client activity. 

“Markets revenues were down from a strong second quarter last year, as clients stood on the sidelines starting in April while the US debt limit played out,” said Fraser at the time. “In banking, the long-awaited rebound in Investment Banking has yet to materialize, making for a disappointing quarter.”

That said, Citi stock gained around 1.7% the day it announced plans to reassemble, eliminating and consolidating management and regional roles across the organization. Whether the restructuring effort can keep the positive investor sentiment intact and boost stock returns will likely depend on how effectively the workforce can rebound.