Citi shares drop as Fraser plans deeper cuts
Citi shares fell more than 5% on Tuesday after the bank’s top executives said they plan to bring forward job cuts and technology investments, a move that could push costs higher in the second half of the year. The decline came after the stock had initially risen on better-than-expected second-quarter earnings.
Investors balk at vague cost plans
Chief executive officer Jane Fraser told analysts on a conference call that the bank was preparing to “lean in with additional investments and other actions.”
The cryptic remark sent shares tumbling, erasing earlier gains.
Wells Fargo analyst Mike Mayo said it “bungled” its answer about what those costs would entail.
“I think they’re pulling forward future expenses, but that’s part of the uncertainty,” Mayo said. “They just said, ‘We’re going to spend a lot more money than maybe you thought and we’re not telling you what we’re spending it on,’ so that doesn’t sit well with investors.
Investors don’t like that type of uncertainty.
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Citi’s chief financial officer Gonzalo Luchetti added that it expects to incur more severance expenses and accelerate investments it outlined at its May investor day.
That suggests the firm plans deeper job cuts than previously indicated.
The bank has already spent US$800 million on severance this year, and headcount fell by 5,000 in the past three months to 219,000.
“We will ramp up investments across the businesses in the second half and incur additional severance as we target future efficiencies,” Luchetti said, declining to provide more details on possible job cuts.
Costs may rise even as profits improve
Citi’s efficiency ratio — a measure of how much it costs to produce a dollar of revenue — is expected to be about 60% for the full year.
That’s higher than the first half, indicating expenses are likely to rise as it invests more of its revenues rather than returning them to shareholders. Company executives also faced questions about why they left their full-year forecast for return on tangible common equity at 10% to 11%, even though the metric has trended higher so far this year.
For investors, the problem is that it is asking them to trust a plan with few specifics. The numbers suggest Citi is willing to spend more now to cut costs later, but the lack of clarity on how many jobs will go — and at what cost — creates a risk that near-term earnings could take a bigger hit than expected. That kind of uncertainty tends to weigh on stock prices, especially after a period of strong performance.
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During the call, Mayo jokingly called Luchetti a possible “Messi of CFOs.”
It was a reference to soccer star Lionel Messi — noting that Argentina was set to face England in the FIFA World Cup semi-finals the next day.
Fraser says she’s playing the long game
Fraser said she believes Citi can hit its return targets and that the additional investments will produce more sustainable profits. It has long been a laggard on Wall Street, and she has spent the last few years restructuring the organization and working through consent orders imposed by regulators six years ago.
“It is 100% on the offense,” Fraser said about the plans. “The momentum is behind us, but we’re going to take advantage of opportunities to bring investments forward, and not just manage to short-term numbers. We’re playing the long game here.”
She also ruled out acquisitions.
That statement came after a report in March that Citi was exploring buying a retail bank or wealth brokerage. For now, its strategy is to spend more on its own operations, even if that means a bumpy ride for shareholders in the short run.
