Citi Layoffs: The Impact on Customers, Investors

Citigroup’s (C) layoffs – part of a plan to cut about 53,000 jobs in coming quarters – represent the latest bad news to drop on the financial sector and the economy. The company also plans to cut expenses by 20%. (Read Citigroup’s announcement here.)

These developments will ripple through bank stocks and the broader market. But Citi’s cuts also raise questions for its banking, credit-card and mortgage customers, along with brokerage customers of the company’s Smith Barney unit.

Here’s a look at key questions related to Citigroup’s moves. SmartMoney.com will continue to update this information throughout the day.

QUESTION: I’m a Citibank customer. Do the layoffs mean my bank branch will close?

ANSWER: Citi hasn't released details about specific branch closures yet. (A spokesman declined to comment on the possibility of such an announcement in coming weeks.)  But some closures are possible, says Ed Kountz, a senior analyst for financial services at Jupiter Research, a market research group. “It’s still unclear where the layoffs are coming from,” he says. Early indications are that Citi's cuts will focus more on wealth management and investment banking, rather than consumer retail banking. However, given the ambitious level of cuts, it would not be surprising to see Citi use this as an opportunity to evaluate and cast off its lowest-performing branch locations, says Kountz.

It's unlikely you’ll be left without a Citibank branch nearby. Banks carefully assess where to open new branches, and big banks like Citi typically don’t close one branch unless there’s another one nearby.

QUESTION: Will my bank and ATM fees at Citibank go up?

ANSWER: It would be risky for Citibank to raise fees drastically compared with competitors. The bank would risk losing customers – and their deposits -- to banks that charge lesser fees. Overall, however, fees are on the rise throughout the banking business as financial institutions look for ways to increase profits.

QUESTION: What does this mean for investors in Citigroup specifically? Stocks, bonds, the dividend?

ANSWER: The market’s initial reaction to the Citigroup layoffs wasn’t favorable. Investors usually applaud this sort of aggressive cost-cutting by driving up a stock’s price, but shares in Citi sold off on the news, albeit modestly. Partly that's because it's hardly a surprise that Citi would shed jobs, even on such a massive scale. Landenburg Thalmann analyst Richard Bove pointed out last week that it was a positive development that Citi had already axed 23,000 positions. If anything, the Street is saying these latest cuts aren’t deep enough. Even more layoffs, or evidence the current downsizing is paying off on the bottom line, may be needed before bulls rush back in to Citi.

As for bondholders, the effect remains to be seen, but it could well be immaterial. Bove believes there was little or no likelihood that Citi would prove to be insolvent, anyway. As for the dividend, no payout is safe in the current environment, especially one from a bank. And as we've noted, high yields are usually a sign of trouble for a stock. Citi's yield is currently bumping up against 7%, a sure indication of distress.

QUESTION: How does this change the investment outlook for bank stocks in general?

ANSWER: It underscores that this is an industry in the midst of painful consolidation and contraction -- and that bank stocks continue to be very risky. That state of affairs was amply reflected in financials on Monday, which was by far the worst-performing sector of the market. Be mindful that although Citigroup made the biggest headlines, there’s plenty of bloodletting going around: JPMorgan Chase (JPM), HSBC (HBC) and Royal Bank of Scotland (RBS) are all reportedly planning job cuts, too.

QUESTION: I’m a brokerage customer of Smith Barney. Will my broker be laid off? Will there be any other changes?

ANSWER: The Citigroup layoffs may hit some back-office operations at the global wealth management business, says Smith Barney spokesman Alex Samuelson, but it won't generally affect brokers or wealth advisors.

QUESTION: I’m an existing cardholder of a Citibank credit card. Will my interest rates go up and can they change the rates without notifying me?

ANSWER: Citibank recently started notifying some consumers that it was going to increase the interest rate on their credit card. The average bump: 3%. (These notifications preceded the company’s job- and cost-cutting announcement.) “It’s in the fine print: they can raise the rates for any reason,” says Scott Bilker, founder of DebtSmart.com, a money management site. But they do have to notify you. Citi cardholders’ new rates take effect 45 days after they receive notice.

You can opt out of the increase and use your current card until it expires. A more effective solution, however, is to keep the account open and use a different card for purchases, says Bilker. Issuers raise rates to make money, but they don’t want to squeeze you so hard that you abandon them entirely. Making zero purchases on the affected card sends a message without damaging your credit score -- and can result in some tempting promotional financing offers thrown your way.

QUESTION: Will Citibank lower the limit on my credit card because of their cutbacks?

ANSWER: Citibank has not given any indication on whether today’s cutback will affect consumers’ credit limits, and did not respond to a request for comment. But consumers at banks everywhere are seeing limits squeezed these days. “All of the credit card issuers are slashing limits,” says Bilker. The big question is, how low will your limit go? Unlike with changes in rate, credit-card issuers don’t have to offer advance notice of a shift in credit limit. Check your limit on every statement. Call your issuer to confirm balance availability before making a big purchase or adding to an ongoing balance.

QUESTION: I have an adjustable-rate mortgage with Citibank. Will my ARM rate go up because of Citigroup’s problems?

ANSWER: No, not directly. Citibank can’t change the terms on an existing mortgage on a whim – even when it’s doing major corporate restructuring and cost-cutting. The terms set out in the loan agreement that the homeowner signed at closing are legally binding and can’t be altered, says Mark Rodgers, a spokesman from Citigroup. Adjustable rate mortgages also tend to carry rate caps, meaning the interest rate will never go below or above a certain level. So if you’re not familiar with your ARM’s terms, check your mortgage documentation for details.

Less certain is how market reaction to Citibank’s moves – along with everything else going on the financial industry – could wind up affecting the rates that banks use to set ARMs. The interest rate on an adjustable rate mortgage resets during a specified window each year. In many cases, that interest rate changes based on the London Interbank Offered Rate (LIBOR), which is the rate at which financial institutions lend to one another. The LIBOR rate is vulnerable to swings in the economy and recent trouble in the financial markets has lifted rates in recent months, though moves by central bankers have been aimed at trying to keep rates down. Although the 12-month LIBOR rate has eased a bit from its 2008 high of 4.23% hit in October, things remain unstable and it’s possible that the LIBOR rate will move higher, says Keith Gumbinger, vice president of HSH Associates, a Pompton Plains, N.J., mortgage information publishing company. As of Nov. 17, the 12-month LIBOR rate sits just below 3%.

QUESTION: What happens to home equity lines of credit?

ANSWER: Citigroup’s recent announcement of corporate restructuring and cost-cutting will not directly affect a customer’s home equity line of credit (HELOC). But the ongoing financial crisis could and homeowners with HELOCs at Citibank and other financial institutions may see some changes. According to Citigroup, it has an ongoing program in place to monitor customers' HELOC accounts. “We will reduce or suspend a customers' line when we identify significant deterioration in his/her credit and/or significant deterioration in the value of the home,” says Mark Rodgers, a spokesman for Citigroup. “The reduction or suspension of the line protects our customers from borrowing more than the value of their properties. These are standard industry practices and are consistent with safe and sound banking practices.” Indeed, most lenders have reduced the size of HELOCs or cancelled uptapped lines altogether for some of their riskier customers, says Keith Gumbinger, vice president with HSH Associates, a mortgage information publishing company.

Homeowners who already have borrowed money against their homes would not be asked to immediately pay back the money, even if their property has fallen in value. The interest rate, however, adjusts monthly and is tied to the prime rate (which currently sits at 4%). The prime rate tends to move in lockstep with the federal funds rate (a key rate related to loans between banks), which is currently 1%. Should the prime rate drop, homeowners could potentially see their interest rates move lower, too. But after 2003, a number of lenders have put limits, or floors, on how much the interest rate can decrease, says Gumbinger.

QUESTION: Any are there any other implications?

ANSWER: As we noted recently, mass layoffs and IT outsourcing can be remarkably disruptive to security, especially at a time when criminal activity is sharply on the rise.