First Chicago Sets Layoffs, Aims to Save $100 Million
First Chicago Corp. announced Wednesday that it plans to lay off 1,000 employees, or 6% of its work force, in a drive to cut $100 million in annual operating costs.
The layoffs will cause a third-quarter restructuring charge of $30 million to $40 million. Analysts said they expect the charge will wipe out at least half the company's third-quarter earnings.
Share Price Rises
"It's been clear that expenses were out of line with revenue. They needed to address it, and they've done it," said James Rosenberg, an analyst at Lehman Brothers. "Ongoing earnings should be better."
First Chicago's shares closed Wednesday at $24.87, up 12.5 cents.
The company said the bulk of its cost savings will be wrung from its global bank, which has 7,200 employees and serves large corporate customers.
The unit, which was pared last year, will be restructured to focus on fee-based corporate finance products rather than traditional lending. Traditional lenders are expected to bear the brunt of the layoffs.
First Chicago, with $48 billion in assets, said the restructuring will be "substantially" completed by December. But a spokeswoman stressed that the full $100 million reduction in costs might not show up until next year.
The planned restructuring is the first large-scale cost-cutting effort in recent years by Chicago's largest banking company, which has 17,500 employees. With revenues weak and the costs of bad loans remaining high, reducing operating costs is a principal means for banking companies to bolster profits.
First Chicago's noninterest expense in the first quarter totaled 68.23 cents for every dollar of revenue. That's slightly less than the money-center bank average of 68.9 cents for the same period, as measured by Salomon Brothers Inc.
The company has made inroads on reducing costs. Excluding the costs of acquisitions and foreclosed real estate, operating expenses in the second quarter were down 6% from the comparable period a year earlier.
The profits from First Chicago's global bank have been extremely weak. The unit last year accounted for about 69% of the company's assets but provided only 27% of its revenues.
"It's the area with the weakest performance," said John Snow, banking analyst at Chicago Corp.
Lisabeth Weiner, spokeswoman for the banking company, said management had not decided whether to leave specific businesses. But the company clearly plans to emphasize less asset-intensive products, such as advisory services and risk management.
But those businesses also are extremely competitive, analysts said.
"Corporations pay fees for banks and others to put their capital on the line," said Christoph Kotowski, banking analyst at Oppenheimer & Co. "That's what banks get paid for."
The move away from traditional corporate lending had a familiar ring. In the bank's annual report, it said its global bank would shift "from asset-intensive lending activities toward fee-based and transaction products and services."
Ms. Weiner said Wednesday's announcement was a continuation of that shift. [Graph Omitted]