In furtherance of its strategy of reducing international operations, Citigroup Inc. (C) entered into a deal with DenizBank, the Turkish unit of Sberbank, Russia’s largest lender to vend its consumer banking unit in Turkey. Price for the transaction was undisclosed. Moreover, the deal awaits regulatory approval and is expected to be completed in third quarter 2013.
As per the terms of the agreement, DenizBank will take over 1.2 billion liras ($650 million) worth of assets and 1.5 billion liras (about $800 million) of deposits of Citigroup’s Turkish unit. Moreover, Citigroup’s consumer business in Turkey had 600,000 clients and 1,500 employees as of Dec 2012.
Citigroup’s decision to sell off its consumer operations in Turkey comes as part of its restructuring initiatives to counter the fall in revenues. Aimed at increasing the efficiency of the company’s overall business, the initiatives include streamlining operations as well as optimizing footprints across geographies. Moreover, annual cost savings are projected to surpass $1.1 billion beginning 2014.
With the addition of retail banking activities of Citigroup, the position of DenizBank will be consolidated. However, Citigroup will continue its commercial and corporate banking activities in Turkey.
Background
Earlier in Mar 2013, at an investor conference in Boston, Mike Corbat, the new chief executive officer (CEO) of Citigroup came up with financial targets for the company, set to be achieved by 2015. Moreover, the CEO announced restructuring initiatives for the markets where Citi is operating its business.
Corbat aspires to earn return of 10% on tangible common equity in 2015, up from 7.9% earned in 2012. Moreover, return on assets is expected in the range of 0.9% – 1.1%, up from 0.62% in 2012, adjusted for certain items. Specifically, at Citicorp, efficiency ratio is aimed to improve in the mid–50%.
Citigroup operates in numerous markets worldwide. Therefore, Corbat has planned to restructure, reduce or exit some of the operations in 21 markets globally to enhance returns. Though names of such markets were undisclosed, but it was intimated that most of them involve consumer businesses. Notably, in Dec 2012, Citi announced its plans to exit consumer businesses in Uruguay, Paraguay, Turkey, Romania and Pakistan.
Our Viewpoint
With the ambition of achieving financial targets in 2015 by restructuring the business, Corbat aims to provide clients with products globally. Streamlining of operations and efficiency improvements would aid Citi to accomplish its goals within the stipulated time.
Further, in a challenging operating environment, lower returns and stringent capital norms, bolstering revenue has become a challenge. Hence, many Wall Street banks are downsizing their businesses and announcing layoffs.
Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and Deutsche Bank AG (DB) are rightsizing their businesses and slashing jobs to address revenue slump. We believe that until a recovery in revenue occurs, sustaining and elevating profitability through cost reduction measures including layoffs will continue.
Citigroup is scheduled to announce its first-quarter 2013 results on Apr 15. The Zacks Consensus Estimate for the quarter is pegged at $1.18 per share. The Zacks Earnings ESP (Read: Zacks Earnings ESP: A Better Method) for Citigroup is -0.85% for the first quarter. This, along with its Zacks Rank #3 (Hold), makes us less confident regarding the company reporting an earnings beat.
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