How Citigroup Is Managing Its Costs of Credit and Expenses
Cost of credit
Citigroup (C) has maintained an efficiency ratio of 56%–59% over the past few quarters, the lowest among its industry peers (IYF). The ratio reflects the bank’s ability to curb expenses and maintain lower credit reserves and losses. The bank’s efficiency ratio improved between 4Q16 and 4Q17, falling to 58% from 59%. The decline was due to controlled spending and partially offset by performance-driven incentives.
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Citigroup could target operating efficiency of 55%–56% in 2018, helped by wider interest margins, lower credit losses, and reserve buildup. In 4Q17, Citigroup saw its credit costs rise 16% year-over-year to ~$2.1 billion, led by a buildup of credit reserves and provisions for loans, benefits, and claims.
Technology investments by banks
In 4Q17, Citibank’s total operating expenses were flat year-over-year at $10.1 billion. They fell 1% sequentially, helped by compensation, premises, and advertisement expenses falling 2%, 1%, and 5%, respectively. The bank’s allocation toward technology spending rose 5% in 4Q17, reflecting an industry-wide trend. Bank of America (BAC) and JPMorgan Chase (JPM) also increased their technology spending to improve their trading activity and core banking performance.
In 4Q17, Wells Fargo’s (WFC) and Goldman Sachs’s (GS) compensations rose thanks to fund performance and investment banking growth. However, they spent less on technology than Citigroup and other major bankers.