How Citi's Branch Purge Is Starting to Pay Off

Citigroup's retail exit from a hot economy like Texas seems odd on the surface, but many consider it a necessary move — and it could mark Citi's last major branch reduction for awhile.

The third-largest U.S. bank agreed this week to sell 41 of its remaining 44 branches in the state to BB&T, and the other three will be closed or converted to other uses, company spokesman Andrew Brent said.

Citigroup will have shrunk its branch network by 11% since yearend once it completes the sale to BB&T, bringing the number of branches to 868 throughout the country.

Such efforts may help tighten operating costs and expenditures, and only limited cuts are expected going forward. Citigroup, which took from North America only 44% of its global annual revenue last year — the smallest percentage among its peers and exactly half that of Bank of America — will now operate in only thirteen states.

“Future shedding will be a pruning, not a hacking,” Raymond James analyst Daniel Marchon said. “If and when there are more divestitures, you would not expect them to be large, given how much they’ve already shrunk back to urban areas.”

The trimmings have helped achieve results. Net operating expense growth, for example, may grow less than 1% in 2015, according to Matt Burnell, senior equity analyst at Wells Fargo Securities. Better operating leverage driven by reduced branch count, growth in card balances and other factors are expected to generate higher revenue growth than last year's, he said.

“We believe continued shrinkage of the branch footprint (e.g., recent Texas branch sales to BB&T) and back-office consolidations will continue to offset investment spending, keeping expense growth slightly below revenue growth in 2015,” Burnell wrote clients in a research note Thursday.

Citigroup has wanted to get out of Texas for years. It acquired more than 130 branches there in 2005 when it bought First American Bank, and Texas was its No. 5 state market in terms of branches. But in 2008 word circulated that Citi wanted to sell its remaining branches. Many of them were in rural locations that did not fit with company executives' increasing focus on certain high-end, urban markets.

It has unloaded branches in Texas since then, including a previous sale of 21 branches to BB&T in June.

The company emphasizes that it will continue to provide commercial, investment banking and other non-retail services in Texas, and that its remaining 9,500 employees will be its second-largest concentration of workers by state.

The binge-and-purge pattern has been repeated elsewhere.

The very largest banks, those with more than $50 billion of assets, drove a branch boom that lasted for two decades, increasing their share of U.S. branches to 42% from 28% over the course of a decade, according to Oliver Wyman consulting subsidiary Celent.

U.S. banks closed a net 1,487 branches last year, the highest number of closures on record, according to SNL Financial. Bank of America, the second largest U.S. lender, has led the way, following an announcement in 2011 that it would eliminate 750 locations as part of its long-term downsizing. It closed 250 as of last year.

There could still be as much as a 30%-40% winnowing within U.S. retail banking, but additional cutbacks are expected to be piecemeal and gradual, said Celent’s Bob Meara, a senior analyst at the firm. “The reason: digital channels are great for transactions, but they aren’t selling products or offering services. Branches still matter.”

In recent months, Citigroup's banking unit has quietly slipped out of Pennsylvania and Delaware, where it had a minimal branch presence, Federal Deposit Insurance Corp. data and bank filings show. Other reports indicate the bank was this year looking to sell 50 more branches in California.

The bank closed more than 70 branches in North America between July 2013 and July 2014, and it plans to continue doing so in select, less urban areas, Chief Financial Officer John Gerspach said during an earnings call in July.

Its branch count has dropped by more than 100 since yearend counting the latest BB&T deal, according to quarterly filings.

During the same period, Citigroup increased average retail loans by 11% and average deposits by 4% — including 11% growth in checking account balances, Gerspach reported.

Still, many other challenges lie ahead for Citigroup.

Investors remain the most anxious about the company's capital preparations to pass the next annual stress test and annual review conducted by the Federal Reserve. Citigroup was blindsided in March when the Fed blocked the bank’s stockholder dividend payment and buyback proposal, resulting in a second rejection in just three years. Citigroup will submit its 2015 plan in December.