Overhauling a business isn’t cheap, and Citigroup is warning investors to expect even more spending this year.
Citi said Friday that its expenses will increase 5% to $54 billion in 2023 after they rose 8% overall last year. The bank’s transformation efforts, including changes to its risk-control, data and finance programs, drove part of the jump in expenses during 2022, and similar costs will weigh on the bank’s bottom line this year, executives said. Higher business volume in certain units also drove increased costs.
“Citi is level-setting by saying that expenses are going to be a lot higher for the next year and the year after that,” said Mike Mayo, managing director at Wells Fargo securities.
The New York bank “will begin to bend the curve of our expenses by the end of 2024, Chief Financial Officer Mark Mason said on a call with analysts Friday. Many of those anticipated cost savings will come from the exit of Citi’s businesses in several foreign countries, internal restructuring and the winding down of investments it is making to address risk and control issues.
The bank is in the middle of a multiyear transformation spearheaded by CEO Jane Fraser, who took the helm of the $2.3 trillion-asset bank nearly two years ago.
This year will be the first when the bank must manage its transition alongside a potential economic recession, which Fraser expects to arrive in the second half of 2023. Citi’s forecast increase in expenses this year, plus a significant reserve build, show that the bank is bracing for both internal and external challenges.
In the fourth quarter, Citi set aside $640 million for potential loan losses. A year ago, it released about $1.3 billion in funds it had previously set aside to cover soured loans.
Citi said that it completed three additional divestitures in the fourth quarter — in Malaysia, Thailand and Bahrain — the latest step in Fraser’s plan to exit consumer banking in 13 international markets. The bank is also in “active dialogue” regarding the sale of its consumer franchise in Mexico, which Citi announced in early 2022, Fraser said Friday.
JPMorgan Chase also said Friday that it expects higher expenses this year. The nation’s largest bank, which boosted its loss provisions in the fourth quarter, cited higher labor costs and a $500 million increase in its Federal Deposit Insurance Corp. assessment as two of the factors expected to boost expenses by 7% in 2023.
Other financial institutions reporting their fourth-quarter results on Friday said expenses rose at the end of last year. Bank of New York Mellon reported an 8% increase in expenses in the fourth quarter. Noninterest expenses at Bank of America were up 6% last quarter compared with a year ago.
Citi recorded profit of $2.5 billion in the fourth quarter, a 21% decrease from a year ago. Earnings per share totaled $1.16, above the $1.14 expected by analysts. Revenue increased 6% in the final three months of 2022, in line with analysts’ expectations.
Revenue in the bank’s investment banking division fell by 59% in the fourth quarter from a year ago. That was in line with decreases at other big banks, which suffered from a steep decline in dealmaking last year.
Citi’s treasury and trade services business, which helps global firms manage their treasuries, continued to serve as a bright spot for the bank. Revenue in the unit increased 36% in the fourth quarter.
Citi made a series of personnel changes to start the new year. The bank named Ryan Crowley the new chief operating officer of its U.S. consumer bank, according to a memo viewed by American Banker this week. Citi also announced that it would begin searching for a replacement for Jim O’Donnell, the current head of the bank’s wealth management arm, who has been promoted to vice chairman.
Citi shares were up about 2% on Friday afternoon.