Now that investors and analysts have had a chance to digest Citigroup’s cost cuts a broad consensus is forming that the bank hasn’t gone far enough. Many believe the company will continue to lose money in 2009, despite cutting as many as 52,000 jobs by 2009.
What’s going to hurt Citi?
- It’s not just real estate anymore. The worldwide economic slow down is going to spread the banking pain far beyond anything we’ve seen yet in the mortgage led markets. Commercial loans, credit card loans, loans made in emerging markets, student loans: everywhere you look in the lending business of Citigroup there is going to be pain.
- Competition. Citi is paying to keep its depositors. It is currently offering annual percentage yields of 3.00% and greater for savings accounts. Some depositors are getting 3.25%. That’s far more than rivals, and 3X higher than the basic rate paid by JP Morgan Chase. While this miight be a great deal for Citi, it’s expensive and shows that Citi is struggling to build its depositor base.
- More Losses, Smaller Balance Sheet. Dan Wilchens at Thompson Reuters points out that it is easy to see Citigroup losing money in 2009 for the second straight year. “The bank is trying to scale its balance sheet down to roughly its size in 2005 and 2006,” Wilchens writes. “If it were to generate about $85 billion in revenue in 2009, similar to levels of a few years ago, and expenses were no more than the $50 billion to $52 billion it is aiming for, it could face losses if it had to set aside at least $35 billion for the year to cover loan losses. That amounts to $8.75 billion a quarter, which Citigroup could easily surpass after setting aside $9 billion in the third quarter of this year.”
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