Citigroup Inc. (NYSE:C)’s recent actions could set the tone for the rest of the banking industry, according to analysts from RBC Capital. They released a report this morning, saying that they expect the banking industry to take steps to become more efficient and examining the implications of Citigroup Inc. (NYSE:C)’s cost-cutting moves announced on Wednesday.
As ValueWalk reported yesterday, Citigroup announced that it was eliminating 11,000 positions, which amounts to more than 4 percent of the bank’s staff around the world. Additionally, we reported that, Morgan Stanley (NYSE:MS) and Goldman Sachs Group, Inc. (NYSE:GS) are seriously eyeing layoffs. The move will lower expenses by $900 million next year and $1.1 billion the following year. It will also result in a $1 billion charge against the company’s fourth quarter.
Since the financial crisis, Warren Buffett's Berkshire Hathaway has had significant exposure to financial stocks in its portfolio. Q1 2021 hedge fund letters, conferences and more At the end of March this year, Bank of America accounted for nearly 15% of the conglomerate's vast equity portfolio. Until very recently, Wells Fargo was also a prominent Read More
RBC Capital analysts believe that this re-positioning will have a $300 million negative impact on the bank’s annual revenue, and they expect that because of the current macro environment, Citigroup Inc. (NYSE:C) is just the first of many banks to take such drastic cost-cutting measures.
RBC did an analysis of the banking industry as a whole. They estimate that the top 20 banks in the U.S. may have to cut costs by about 16 percent and eliminate about 4 to 5 percent of their workforce so that their efficiency ratio will be approximately 55 percent, which would keep them in business and profitable. In addition to workforce reductions, other cost-cutting measures RBC analysts expect banks to take include less costly alternatives to traditional bank branches, like mobile banking, ATMs, and other similar channels.
Analysts at RBC said that if banks do chose to bring their efficiency ratios in line with their estimated 55 percent, the improvements will eventually bring about higher evaluations for the banks. They expect that these banks will be able to see their return on equity increase.
Currently, RBC Capital lists the nation’s top performing banks as M&T Bank Corporation (NYSE:MTB), U.S. Bancorp (NYSE:USB), and Wells Fargo & Company (NYSE:WFC). They say that these banks are “well managed, achieve above average return on equities and have the lowest efficiency ratios.” They believe that “the banks that are the most profitable will be awarded the higher stock valuations.” They also believe that these banks will be “the hunters preying on the low valued banks.”