Yesterday was Citi's investor day. It was the bank's first such event in over nine years. While rivals like J.P. Morgan compel business leaders like Daniel Pinto to stand up annually and declaim their strategy to investors, Citi hasn't done this since the financial crisis.
It's not clear why as yesterday's presentation by Jamie Forese - president of the bank's Institutional Clients Group (ICG) - suggests things are looking good. ICG includes the investment banking and capital markets businesses, sales and trading, the private bank, securities services and treasure and trade solutions. Forese's presentation, which we've summarized below, explained how these all fit together and benefit Citi's salespeople and traders in particular. I
f you're wondering whether to work for Citi, this is what you need to know.
Citi's ICG group is expected to account for 49% of its revenues and 70% of its profits this year. While other banks have sought to reduce their reliance on investment banking businesses as a source of P&L, Citi is still fully tied-in to ICG as a profit-generator. If you're a salesperson or trader at Citi you should therefore have a degree of respect internally.
As the chart below shows, Citi looks unusually well prepared for Brexit. Alongside London, it already has trading floors in Ireland, France, Spain, Germany, Italy, Poland and Sweden. This is in contrast to other banks (eg. Barclays and RBS), which have spent the past few years pruning operations on continental Europe.
Corporate clients (companies) are all the rage. Goldman Sachs and Deutsche Bank are both targeting them instead of institutional clients (fund managers) because corporate clients need to trade all the time - even in calm markets, whereas institutional clients are more likely to trade in the kinds of volatile markets which have disappeared. As Oliver Wyman and Morgan Stanley pointed out in their report earlier this year, corporate-focused trading businesses are usually less capital intensive than institutionally focused ones. Corporate transactions are simpler and don’t require banks to risk their own balance sheets. Corporate clients therefore offer faster growth and higher returns.
Citi's institutional client group is already oriented towards the kinds of corporate clients that other banks are now chasing. As the charts below show, 40% of its revenues overall come from corporate clients, and 34% of its revenues in fixed income currencies and commodities (FICC) trading come from these groups - rising to over 40% in macro trading (rates and FX). The vast majority of Citi's corporate clients (84%) are global multinationals.
Overall client mix, Citi ICG
Client mix in fixed income currencies and commodities (FICC) trading, Citi ICG
Citi's presentation helps explain why other banks are so keen to chase corporate clients. As the chart below shows, corporate clients who use Citi's trade finance, treasury services and corporate lending businesses also use its foreign exchange and rates trading (macro) desks on a regular basis. This has helped maintain Citi's macro business in quiet markets where asset managers, banks and hedge funds don't trade much.
While Goldman is now trying to build its corporate client business, the chart below explains why this might be problematic. - Citi's corporate clients come to use suite of its "networked services." In order to win corporate clients in macro trading, you also need to be strong in trade finance, treasury services and corporate lending - areas which Goldman has traditionally avoided.
Thanks to these multinational corporate clients, Citi's macro business is benefiting from impressive growth. As the chart below shows, rates and currencies revenues combined are up 12% this year. By comparison, Goldman's FX business in particular has been struggling and its rates revenues were down "significantly" in the second quarter.
Goldman Sachs is a big fan of shunting staff to low cost locations as a means of cutting expenses. So, it turns out, is Citi. But while costs accounted for around 76% of revenues at Goldman in the first quarter, they were only 55% of revenues at Citi's ICG. This might be attributed to the different business mix of the two firms, but Citi lost no time in proclaiming itself as one of the most efficient investment banks in the market.
Citi spent much of late 2015 and all of 2016 building its equities sales and trading business. Yesterday's presentation suggested it's not done yet. - Citi wants to be a top five player in equities sales and trading and is currently ranked seventh globally. It plans to focus on the prime brokerage business as this has a multiplier effect on other equities revenues, to cross sell to fixed income clients, and to "optimize" its trading platform.
Even so, the cost cutting at Citi isn't over. The bank plans to continue migrating resources away from high cost locations (eg. London and New York) and to continue automating and simplifying its processes to achieve productivity savings. Ultimately, it wants costs in the ICG to account for 50% or less of revenues and to shave another 70 basis points off total expenses. For all CEO Michael Corbat's talk of restructuring being over at Citi, this clearly isn't the case. Front office operations account for 80% of costs at Citi's ICG. As the bank cuts costs further, it therefore seems highly likely that front office staff will be affected.