Citigroup job cuts could cut revenue, too

NEW YORK (CNNMoney.com) -- Citigroup will announce on Wednesday its first restructuring in ten years, including thousands of job cuts, but analysts say that the cuts could be the exact opposite of what the company needs to grow earnings.

The biggest U.S. bank faces intense pressure from shareholders to juice its bottom line, as the company's stock has grown only 15 percent since Charles Prince came on as CEO in October 2003. To put that in perspective, its shares gained 272 percent during the same length of time from 1997 to 2000.

Citigroup CEO Charles Prince is under pressure from shareholders to restructure.

Prince will announce the results of the companywide expense review Wednesday at 8 a.m. EDT in New York City.

On Monday The New York Times said that the firm would cut 26,000 jobs. Other reports have put the figure as high as 45,000 cuts, and as low as 16,000. The company could take a charge of $1 billion against earnings, according to the Times.

The cuts would be 5 to 14 percent of Citi's current workforce of 327,000 full-time employees.

Prince announced last year that he would review the company's five divisions to create a "leaner, thinner" Citigroup. Revenue growth has not kept pace with spending at the company, putting a damper on earnings.

"Citigroup over the years has built up an investor base with audacious expectations about the returns the company could generate in the future," said Craig Woker, an analyst with Morningstar. "But times have changed - this company is no longer managed by a team that can go out and get growth through cheap acquisitions."

One analyst said that the company's revenue woes began with moves made by earlier CEO Sandy Weill.

"Business by business, Citigroup stripped cash in order to make large acquisitions under Weill," said Dick Bove, an analyst with Punk, Ziegel & Company. "As a result each of these businesses was failing to grow revenue and lost of market share."

Citigroup, which has operations in 100 countries, has over 8,000 bank branches and 200 million customers. The job cuts are expected to heaviest in two of the company's largest divisions, consumer banking and investment banking.

But analysts say that impatient investors could actually be shooting the company in the foot.

"Often when a company embarks on restructuring, they're in hard times, but that's not the case with Citigroup," said Woker. "They just haven't focused enough on the top line."

"What does this ultimately do for them? Not a lot. It only juices the earnings growth number one time. I would much rather see moves toward strong revenue growth rather than trying to eke out some one-time gain from expense savings."

Woker said he could not estimate how many workers would be let go. Bove predicts the number will be between 10,000 and 15,000 - on the smaller side of the estimates. Bove, too, believes the restructuring isn't the solution to Citigroup's earning woes.

"Basically the company has underinvested in its core business for about 10 years," he said. "Now they've set up a crazy cost-cutting program, which is absolutely the wrong thing to do. What they need to do is spend money to benefit from growth in core markets."

The cuts could also result in a significant reduction in earnings, believes Woker.

"If you cut too deeply, you end up potentially sacrificing more revenue than you're saving. The other risk is that growth just naturally starts accelerating on its own, in which case you end up flat-footed, and you end up hiring back employees that you just offered six months of severance pay to," he said.

Citigroup said it would not discuss the review, or other steps the company was taking to improve efficiency.

Investors clearly liked the restructuring news - shares of Citigroup (up $0.91 to $52.49, Charts) rose 1.2 percent in Tuesday trade.

Shares of banks have had a strong week, with Citigroup and rivals Deutsche Bank (up $1.94 to $139.43, Charts) and ING (up $0.51 to $43.72, Charts) all adding between 2 and 3.5 percent.

Neither of the analysts quote in this story own shares of Citigroup, and their firms do not do investment banking business with the company.

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