(Bloomberg) -- Citigroup Inc (NYSE:C). is preparing to cut hundreds of jobs in its trading division -- stark new evidence that an industrywide slump in revenue this year may be more permanent than the tweets and policy moves rattling clients.
The New York-based bank plans to slash jobs across its fixed-income and stock-trading operations over the course of 2019, according to people familiar with the matter. That includes at least 100 jobs in the equities unit, which would amount to almost 10% of the division’s workforce, the people said. About 80 of the cuts will take place at Citigroup’s London operations, one of the people said.
For months, as global banks watched their revenue from trading slump, industry leaders have said clients were temporarily taking to the “sidelines” amid unpredictable twists in President Donald Trump’s trade negotiations and the Federal Reserve’s shifting stance on interest rates. Yet a growing number of banks are now cutting staff, a sign that executives are worried about more permanent challenges.
“This won’t be the last trading-related job cuts story,” Jeff Harte, an analyst at Sandler O’Neill, said in a telephone interview. “The rest of Wall Street is thinking the same way.”
A constellation of factors have been weighing on trading desks, aside from this year’s market swings. Hedge funds, typically banks’ most active clients, have suffered outflows while struggling to outperform lower-cost funds. New rules are limiting lenders’ ability and willingness to make principal bets with their own money. And technological advancements are narrowing spreads in many corners of the market.
Trading revenue at the five biggest U.S. banks on Wall Street dropped 8% in the second quarter, following a 14% slide in the first three months of the year -- setting up global banks for their worst first half in more than a decade. At Citigroup, combined revenue from equities and fixed-income trading fell 5%, excluding a one-time gain from selling a stake in a trading venture.
Deutsche Bank AG (DE:DBKGn), already struggling to overhaul its Wall Street operations, made the biggest move earlier this month, announcing plans to exit equities trading. The Frankfurt-based firm is cutting a total of 18,000 jobs as part of its broad restructuring. Other major banks in Europe, including HSBC Holdings Plc (LON:HSBA) and Societe Generale (PA:SOGN) SA, are also eliminating hundreds of workers.
“It’s a tough cyclical outlook after broad revenue declines in the first half, and structural client challenges remain,” said Bloomberg Intelligence analyst Alison Williams (NYSE:WMB). “So we could see more staff reductions across banks.”
Under Pressure
At Citigroup, Paco Ybarra has been shaking up the firm’s institutional-clients division since he took the group’s helm this year. That’s included some hiring.
But the bank is under particular pressure to trim costs after promising to improve its efficiency ratio, a gauge of profitability measuring how much is spent to produce a dollar of revenue. Some analysts have expressed disappointment in Citigroup’s progress so far, as well as doubts about its separate goal to boost return on tangible common equity to 12% this year.
The company whittled its efficiency ratio to 56.5% in the first half, a 90 basis-point improvement from last year. The firm is aiming to cut it by a total of 175 basis points this year, though progress can be harder to come by in later months, when banks typically generate less revenue. Citigroup executives vowed this month to continue cutting costs.
“We’re going to do everything within our power to get to those numbers,” Chief Executive Officer Mike Corbat said as the bank posted earnings July 15. The firm won’t end planned investments in technology or risk its efforts to improve safety and soundness, he said. “But everything else is on the table.”
A Citigroup representative declined to comment for this story. The firm’s shares dropped 0.6% to $71.76 in New York on Monday, paring the stock’s advance for the year to 38%.
Equities Battle
The cuts to the equities division are something of an about-face after Citigroup spent years trying to make the unit more formidable.
“We’ve been investing in talent, we’ve been investing in technology, we’ve been allocating balance sheet for our clients -- and we’ve seen the benefit of that,” Chief Financial Officer Mark Mason said of the business at a conference last month. “There’s more to be done there, obviously, but we’re pleased with the progress we’re making.”
Still, the unit has struggled to vault up the league tables. Revenue from trading equities at Citigroup tumbled 17% to $1.6 billion for the first half of 2019. That’s the lowest total among major U.S. firms and would place it sixth among global banks, according to Bloomberg Intelligence. And in March, the firm ousted eight equities traders in Hong Kong and suspended three others after a sweeping internal investigation into its dealings with some clients.
In the latest changes under Ybarra, the institutional clients division announced on Monday it would combine its equities business with its prime, futures and securities-services unit, according to an internal memo that cited industry consolidation and intensifying margin pressures.
“Those are similar enough businesses they should be run together,” said Harte, the analyst. “They’ve taken a fresh look or a new set of eyes to a lot of the businesses within the bank, and you’re seeing the changes flow through.”
(Adds scale of cuts in London in second paragraph.)
