(Bloomberg) --Jane Fraser is learning quickly that shrinking a bank can be an even tougher task than expanding one.
The chief executive officer of Citigroup is trying to downsize a bank that analysts and investors consider one of Wall Street's most bloated, taking a hatchet to some of its units — most recently its municipal-bond and distressed-debt trading businesses — after selling off much of its international retail business.
The new year will be a pivotal one for Citigroup, whose stock underperformed rivals JPMorgan Chase and Wells Fargo in 2023. Fraser and Chief Financial Officer Mark Mason are under pressure to show that, after repeated attempts by predecessors to restore investors' faith in the New York-based company following the 2008 global financial crisis, this time will be different.
"This will have to be the year where the rubber hits the road," said Piper Sandler analyst Scott Siefers. "People want to believe in Jane and Mark's vision, but they're also realists about what can be done. It's a big ship to turn around."
Turning the ship around means overhauling the bank to help lift returns so they're in line with peers and proving that Citigroup can set — and meet — financial targets after years of missing goals. But it needs to do so without harming staff morale and denting the strength of franchises at one of the world's most global banks.
At the top of Fraser's to-do list this year is getting rid of the bureaucracy she says has long plagued the bank. Starting in September, the company began eliminating management roles around the world to fit with Fraser's new strategy. On Wednesday, Citigroup said it would take about $780 million of fourth-quarter restructuring charges. More rounds of cuts are expected in the first three months of the year, with staff at lower levels likely to leave.
That's all with the help of Boston Consulting Group. Within Citigroup, the project is known as "Project Bora Bora." It simplified the bank into five key units, and is cutting 13 layers of management to eight.
Fraser also needs to navigate new capital rules being laid down by US regulators, while also preparing Citigroup's Mexican retail unit, Banamex, for a public listing in 2025 and trying to sell the company's Polish retail business.
When they release fourth-quarter results on Friday, Citigroup's leaders are expected to give more detail on trimming more of the bank's 240,000-plus headcount, including how much its recent cuts have cost it in severance. Wells Fargo analyst Mike Mayo expects the bank to cut about 25,000 staffers by 2026, including the staffers who depart as the company winds down or exits retail businesses in countries such as Korea and Russia.
Widening the gap between the bank's costs and its revenue is key to proving the success of its leadership. In 2023, Citigroup spent more than $54 billion, excluding interest on its debt, according to the average estimate of analysts in a Bloomberg survey, and the bank is expected to report revenue of just above $78 billion, Mason said last month.
Citigroup is trying to boost its annual revenue by about 4% to 5% on average in the next few years — a figure some analysts say it's unlikely to achieve in that time frame.
"We're skeptical about the bank's ability to reach those revenue targets," said Wolfe Research analyst Steven Chubak, who nonetheless upgraded Citigroup to outperform this month because of its cost-cutting work. "It's punchy for JPMorgan. It's aggressive for any bank, not just Citi, especially with rates having peaked."
A representative for Citigroup declined to comment.
This week for the first time, Citigroup made clear the relative profitability of each of its newly formed core units: services, markets, banking and international, wealth and U.S. retail banking.
The disclosures — outlined in a filing late Wednesday — are particularly important for the services group, which includes treasury and trade solutions and securities services. The bank has long claimed the treasury-management business is its "crown jewel" and under-valued by potential investors. Bolstered by Citigroup's global reach into almost 160 countries, the unit supports vital corporate functions such as digital payments, receivables and liquidity management.
The latest historical financial results showed the services business generated returns of 23% in the third quarter, almost three times higher than the 8% from its markets operations, which houses its army of traders.
Meanwhile, returns at its burgeoning wealth business — a key tenet of Fraser's turnaround plan — were 3.5% in that period compared to 15% two years prior. At its banking unit, returns were 3.1% in the third quarter, and the operations even lost money in certain previous periods.
The bank's leadership has shown it's prepared to trim even longstanding and competitive businesses to meet its broader goal of increasing profitability. Citigroup was once the market leader in U.S. municipal bonds, and had some strongly profitable years in distressed-debt trading, before deciding late last year to shutter both businesses.
There are echoes of past attempts to lift the bank's stock price. Former CEO Vikram Pandit trimmed tens of thousands of jobs in the wake of the global financial crisis, and then thousands more when Citigroup struggled during Europe's sovereign-debt crisis. Less than two months after Pandit's 2012 ouster, successor Michael Corbat announced 11,000 job cuts.
Those attempts failed to lift the bank's shares much after they fell more than 75% in 2008. The challenges kept coming and, more than three years ago, the bank got hit with a pair of consent orders, with regulators demanding improvements to Citigroup's internal controls and risk management. The orders remain in place.
The bank's shares trade at about half of the forecast value of its assets a year in the future — the worst of big banks by far. It ended 2023 with its stock up 14%, beating out Bank of America Corp.'s 1.7% increase, but lower than Wells Fargo's 19% and almost half of JPMorgan's 27%.
Some investors are also nervous about the new regulatory headwinds Citigroup's facing. New rules by regulators intended to stabilize banks in the wake of last year's regional-banking tumult may force Citigroup to exit more of its riskier businesses and hold additional capital on its balance sheet. With a history of operational missteps, those regulations — known as Basel 3 Endgame — may hit Fraser's bank harder than its peers.
Still, so far, there are signs of confidence emerging in Citigroup's plan. Shares jumped after Mason signaled aggressive efficiency measures in December, and Mayo — the veteran Wall Street analyst — has made the bank his top pick for 2024.
Whatever happens with earnings Friday, Citigroup is hoping investors will trust its long game.
"They might have worse trading or worse investment banking than some of the other big banks — and if that's one quarter here and there, it doesn't matter," said Evercore analyst Glenn Schorr. "That doesn't change what people are buying into per se. They are buying into this self-help, healing story."
