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By the time it reported its third-quarter numbers in October, Citi was showing year-to-date net income of $13.7 billion, 14% ahead of the first nine months of 2017.
Its big stock repurchase programme is now taking down a substantial percentage of shares outstanding – 8% lower by October than 12 months earlier – so earnings per share were ahead by an eye-catching 24% compared with the first three quarters of 2017.
With underlying revenue growth of 4% across its two main business divisions, global consumer banking (GCB) and the institutional clients group (ICG), and its efficiency ratio down to 57.3%, Citi, under CEO Michael Corbat, was running at an 11.2% return on tangible common equity for the first nine months, ahead of its target for the whole of 2018 of 10.5%.
That’s not too shabby for an institution whose long-serving chief financial officer, John Gerspach, wouldn’t even set a target for return on equity in the tough years of reshaping the bank after the crisis.
By 2014, Citi was still only returning 6%. Back then investors and management would have bitten your hand off for 11.2%. But as soon as you achieve it, no one is satisfied. What was once barely imaginable, starts to look merely steady-as-she-goes.
“It’s true that the performance of the company has been improving, and that’s reflected in our improved returns,” says Paco Ybarra, global head of markets and securities services and deputy head of the ICG.
It almost sounds as if there is a ‘but’ coming.
“The underlying returns of the franchise are better than what’s being reported today,” he says, “as we continue to hold capital against deferred tax assets, in particular, which constrict those returns. Importantly, we are committed to continued improvement in going forward.”
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| Michael Corbat |
Compared with peers such as Bank of America and JPMorgan, Citi has a much smaller US retail bank – a business where returns have been particularly strong. The ICG, an inherently lower and more volatile return business, is a big part of this bank and its performance is crucial. “If you look at the $85 billion in capital allocated to the ICG, it generated a 15.2% return in the first nine months,” says Ybarra. “That’s pretty strong.”
The division includes steady earners such as treasury and trade solutions, but attention will focus in 2019 on its markets trading businesses, as well as capital markets origination (CMO) and M&A advisory, where Citi has recently reshuffled management to bring them more closely together.
“Whenever there is an organizational separation, that brings inefficiency,” says Ybarra. “So, while bringing CMO and advisory together is hardly revolutionary, it is an important change. It’s one that may not be as easy to do as it first sounds, until you reach the right time with the right people. Partly, we have done this simply because those are areas we want to grow and we have to optimize the talent we have.”
In markets, the bank, which was historically renowned more as a rates, credit and debt firm, has been making a big effort in equities, across cash, derivatives and prime services. In the process, it has made some intriguing choices, notably in research.
“When adjusting to Mifid II [the EU’s second Markets in Financial Instruments Directive], we decided, unlike many others, not to reduce or divest our research expenses, taking the view that research is still very important not just for clients on the high-touch cash side of the business, where returns are coming down, but also for clients across the whole franchise, including delta one, derivatives and prime,” says Ybarra. “The early indications suggest that this was the right decision. Investors take research into account as part of our overall delivery and quality of service and that impacts other businesses as well.”
In fixed income, currencies and commodities, Citi, like every other bank, appears to be fighting for a bigger share of a shrinking revenue pool after the long ice age of rates repression and hoping that the right kind of volatility may boost client activity. Ybarra sounds optimistic.
“While the revenue pool may be smaller, remember that a lot of capital has been withdrawn from FICC,” he says. “In the US at least, there have been suggestions of rates normalizing and the regulatory environment improving. And while our asset management clients themselves are under fee pressure, there is still a need for highly capitalized intermediaries.
“Electronification will continue even in credit, and we can stay on top of that. Remember, it dominates where there are natural two-way flows. But there are instances where there are not two sides to the trade and intermediaries can facilitate some transformation to achieve risk transfer in size for clients. And that is not agency, that is a capital business. There is still a role for us.”
The ICG decided that, coming out of the crisis, it had taken on too many corporate clients for which it was not a particularly good bank because they were large but mainly domestic. While cutting these clients, Citi is on the lookout for newer, smaller companies that could grow quickly into good customers.
“There is a global effort with the commercial bank to identify young companies that are born with international ambitions or that expand quickly to require the international banking services we can provide,” says Ybarra. “We’ve become quite good at spotting those future clients.”
