Banks gird for new world as Citi cuts 11K jobs

• Citigroup to lay off 11,000 people, 4,600 in North America
• Cuts are first big move by new CEO, stock climbs 6.3%
• Cuts focus on support workers and unprofitable branches and countries

Citigroup's plan to cut 11,000 jobs is far from the first big downsizing Wall Street firms have executed since the 2008 financial crisis. And it won't be the last.

The nation's third-biggest bank is the latest in a series of financial institutions to cut large numbers of jobs. Behind the cuts is new CEO Michael Corbat's push to improve Citi's performance — and free up cash flow so it can boost its paltry stock dividend, currently just a penny a share. But Citi, like its rivals, also faces pressures from new international regulations that will require banks to boost their capital to protect against future crises and new U.S. regulations flowing from the Dodd-Frank Act that are designed to limit banks' risk-taking.

Indeed, while Citi's news Wednesday isn't likely to set off a short-term wave of layoffs, it's part of a broader trend toward an economy that depends much less on the finance industry for jobs and growth than it did before 2008, analysts say. Since the job market bottomed out in 2010, finance has added only 94,000 of the 5 million net new private-sector jobs, according to government data. Before the recession, finance accounted for nearly 6% of private-sector jobs and 22% of the value of the Standard & Poor's 500-stock index.

"We're moving from an economy where we package financial products to one where we build more things, like products and roads,'' said Nancy Bush, a banking analyst at SNL Financial. "Consumers have reduced their debt, governments will reduce their borrowing, As that happens, everything driven by the financial economy will shrink. Whether people like it or not doesn't matter.''

In Citi's case, the moves were overdue, said Michael Mayo, an analyst at Credit Agricole, a persistent Citi critic who this week recommended its shares for the first time in years.

Citi's specific problem is it is under-profitable even by the standards of post-crisis banks, Mayo said. It has been less than half as profitable as rival JPMorgan Chase in the last 12 months. Corbat, who took over when Citi dismissed his predecessor, Vikram Pandit, in October, is the first Citi CEO in years to deal aggressively with the bank's high overhead, Mayo said.

"CEOs 1 through 4 couldn't get it right,'' Mayo said, cracking wise about Citi's executive turnover since Sandy Weill left the top job in 2003. "I didn't think CEO No. 5 would be any better.''

Citi's cuts had little directly to do with the changing rules. The bank has made progress toward meeting future capital standards that will phase in next year through 2019. Its capital base has grown 20% so far this year, leaving a cushion of cash and securities worth 8.6% of its risk-adjusted assets (mostly outstanding loans and trading positions) to guard against future losses, Chief Financial Officer John Gerspach said at an investor conference sponsored by Goldman Sachs Wednesday.

More than half of the jobs Citi will cut are in information technology and other support areas, Citi said. Other cuts included selling or shrinking the bank's consumer businesses in offshore markets, including Pakistan, Paraguay, Romania and Turkey. Sticking with its strategy to focus on 150 cities globally where it sees the greatest potential growth in consumer banking, Citi also will close 84 branches worldwide, including 44 in the U.S.

These decisions have little direct relationship to either Dodd-Frank or the new capital rules. The bank announced no plans to exit, or even significantly shrink, businesses such as trading that require Citi to hold more capital in reserve under the new rules. Instead, the bank, which will have more than $71 billion of revenue this year, said the cuts would reduce its annual sales by only $300 million, while trimming $900 million in annual expenses.

Citi is not alone among banks in needing to trim fat, RBC Capital Markets analyst Gerard Cassidy said.

"When you look at the top 20 banks in the U.S., their average costs are much higher than they need to be if they are going to deliver the return-on-equity numbers shareholders demand,'' Cassidy said. The "vast majority" of banks' costs are personnel, he says.

To pay for the cuts announced Wednesday, Citi will take a one-time charge of $1 billion in the fourth quarter and another $100 million in early 2013, Gerspach said.

Investors applauded the moves. Citi's shares rose 6.3% to $36.46.

The cuts will not be the last at Citigroup, Mayo said.

"The new CEO isn't working in half measures, but it won't be enough," the analyst said. "I'd put this in the category of a tremor, and they need an earthquake."

Industrywide, many cuts do reflect changing regulation. And so do the areas where banks and other finance companies are looking to hire people.

Banks are shedding staff in areas such as trading and parts of investment banking that require a lot of capital, said Constance Melrose, managing director for North America of eFinancialCareers, an online marketplace for companies and recruiters to find finance pros.

At the same time, they are looking to beef up staff in businesses that don't chew up capital — and in fields such as information technology and risk management that will let them run more automated trading operations with fewer people as well as less risk, she said.

Banks worldwide have announced as many as 300,000 job cuts since the start of 2011, according to data compiled by Bloomberg News.

The number of positions open in October in hedge funds dropped 42% from a year ago, with 30%-plus drops in currency trading, stock research and mergers. At the same time, companies are looking for 48% more private bankers, because wealth management is a fee-based low-risk business, Melrose said. Overall, listings for financial professionals are down 21% in the last year, Melrose said.

"It would be silly to say hiring isn't soft, but it's not uniform," Melrose said. "Anything that involves taking balance-sheet risk is drawing more scrutiny, and that translates into where you put your people.''

Some cuts are also happening because regulators are pushing back against banks' desires to raise fees in order to offset lost trading and other revenue, Cassidy said. Regulators have forced banks to lower their fees for processing debt card transactions, for example.

One way regulators may have helped cause Wednesday's cuts was when the Federal Reserve quashed Citi's plans to boost its dividend. In April, the Fed announced that Citi didn't have enough capital to both increase its dividend and survive a severe recession that would push loan losses higher.

Wednesday, Gerspach said Citi wants to generate "considerable excess capital for return to shareholders,'' but he didn't give a timetable for any dividend hike.

For the economy, the new regulations and the smaller financial sector they produce will be a mixed bag, said Paul Edelstein, financial economist at consulting firm IHS Global Insight.

"It's bad in the sense that it will be harder to get access to credit," Edelstein said. "And it will be a good thing if it means we don't have financial crises any more. There are trade-offs to this."

Contributing: Gary Strauss.