World's best investment bank
Illustration: Jonathan Williams; additional reporting by Mark Baker, Graham Bippart, Rob Dwyer, Lucy Fitzgeorge-Parker, Kimberley Long and Chris Wright
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"No firm has a better global franchise than Citi.”
These could have been the words of Mike Corbat, Citigroup’s chief executive, or Jamie Forese, the firm’s president and head of its Institutional Clients Group (ICG), or of any of the many senior Citi executives that Euromoney interviewed over the course of two months preparing this article. But they’re not.
They are, in fact, a direct quote from the head of the financial world’s most important client.
Rob Kapito is president and a co-founder of BlackRock, the world’s biggest asset management firm, which has more than $6 trillion under management today. BlackRock’s enormous global operations mean it has a relationship with every leading bank in the world, and a lot of smaller ones besides. BlackRock has hundreds of counterparties, all of which compete furiously for its business and on whom BlackRock relies.
So to pick out Citi, publicly, in this way is a huge statement of belief in what the firm brings to the table. “The fact that they have boots on the ground all around the world gives them a tremendous advantage. They are true partners to BlackRock,” adds Kapito.
Procter & Gamble (P&G) is the very epitome of a global corporate client. It too is high up on every banks’ client list. The Cincinnati-based company sells its products to all parts of the globe and had revenues in 2017 of over $65 billion. That requires sophisticated financial services that cover everything from cash, payments, foreign exchange, risk management, credit facilities and funding, from south America to Asia and all stops in between. It also requires a particular type of banking partner.
“For P&G, Citi’s global footprint is unmatched and incredibly important,” says Doug Gerstle, vice-president and assistant treasurer at P&G. “We do business in just about every country in the world, and Citi is present in most of them.”
The last decade has seen an unprecedented boom in technology-based companies growing at enormous speed – developing as global businesses from their earliest days. Banks are desperate to have them as clients.
One such business is Berlin-headquartered Delivery Hero, started in 2011 by entrepreneur Niklas Östberg. Riding the twin horses of tech and takeaway food, today Delivery Hero has grown organically and by acquisition to operate in more than 40 countries across Europe, the Middle East, Latin America and Asia. It processed more than one million meal orders a day in the first quarter of 2018.
Citi has been with Delivery Hero every step of the way.
“They have been great. They care more and walk the extra mile,” says chief executive Östberg.
These are just three clients out of around 14,000 covered by Citi’s ICG, which is, in essence, its wholesale bank. But they tell a story that is increasingly hard to dispute. Citi operates in more places and offers more services to its clients than any other global competitor. It has managed to maintain the breadth of its operations while delivering a consistently high quality of service, generating real loyalty among clients who increasingly rely on the bank.
Citi has become the go-to global investment bank.
Consistency key for Citi
For someone who runs the world's most diversified investment bank, Forese is remarkably considered, understated and unflappable. He is not given to grandiose statements about domination and battering the opposition. But he exudes a quiet confidence about where Citi’s ICG is positioned today.
Jamie Forese, president of Citigroup
“If you look across the globe, we are not number one in everything,” he tells Euromoney. “We don’t need to be spectacular or to always beat our peers. But we contend in everything we do and we contend in more areas than our competitors. Our success has been based on steady and consistent execution. Our strategy is to be as good as we can be at what we do and deliver our network to our clients.”
Those clients value Citi’s consistency.
“Citi is very client-centric and has been the most consistent global partner for us over the past 10 years,” says BlackRock’s Kapito. “Even throughout the financial crisis and through every cycle, they have provided us with liquidity, balance sheet and ideas and have been tremendously supportive to our business and to our clients.”
Corbat, Forese’s boss, developed his career in Citi’s wholesale banking division as a capital markets specialist. His answers to questions are usually as sharp and focused as he wants his bank to be.
“We’re not everything to everyone,” he tells Euromoney. “We’ve focused our franchise on areas where we can make a difference and really compete. We have our resources, people and technology in the right places. We have invested in quality. And in the last few years, that has really started to pay dividends.”
Our banking team in Europe have done a spectacular job, making us the number one firm in the region through our consistent approach of delivering for our clients- Mike Corbat
Those dividends are clear in Citi’s reported numbers. For full year 2017, ICG revenues reached $35.6 billion, up 7% on the previous year. Transaction and Trade Services (TTS) were up 7% and investment banking up 14%, while markets and securities services remained relatively flat during a period where other firms suffered. The momentum continued into the first quarter of 2018, with the overall banking business rising 6% and equities climbing a remarkable 38%, delivering an overall year-on-year jump of 4% in revenues and 11% in adjusted net income.
Citi remains a remarkably balanced wholesale banking business. In that first quarter, banking delivered revenues of $4.82 billion and markets brought in $5.01 billion. In net income terms, no single geography dominates or accounted for more than 35% of the whole group: EMEA was the biggest net income generator in the first quarter at $1.1 billion and Asia even overtook North America in net income terms, at $868 billion versus $857 billion.
That shows the benefits of diversity. And for Forese there was nothing bold in the strategic decision to stay in countries that many of Citi’s competitors have exited, many of them in EMEA and Asia.
“For an extended period of time, the incremental 30 to 35 countries that we operated in historically on the wholesale banking side have been profitable with accretive margins,” he says.
|Jim Cowles, chief executive for EMEA|
Jim Cowles, chief executive for EMEA, oversees Citi’s widest regional network with operations in 55 countries. Each, he says, is profitable.
“We are in 98 countries globally, which is significantly more than any other bank,” says Cowles. “But just being in those countries does not bring success. We deliver our network in a fundamentally different way to anyone else.”
Cowles elaborates: “For all of our clients in those 98 countries, we leverage the value proposition of being global. We bring them capital markets, M&A, lending, transaction services and markets. We’re reliable, efficient and have local knowledge. And we deliver it all on a joined-up basis.”
Competitors have a more than grudging respect for Citi these days. The chief executive of a leading investment banking competitor says: “Citi’s done a great job and its franchise is still undervalued.” But, he adds in a common refrain: “I still think the business could be simplified. It’s hard for investors to understand.”
That has always been the charge against Citi – it is so big, it can’t really be joined up. But clients don’t see it that way.
“The culture of Citi is impressive,” says Kapito. “It starts at the very top, with a leadership group that has been at the firm for a long time together. The senior team are all synced up globally and its operations are too.”
Gerstle at P&G takes it a step further.
“I always imagine that if I have a conversation with my global relationship manager at Citi, it generates a call to action across the bank,” he says. “The internal empowerment – from global, to regional, to local – is particularly impressive at Citi.”
Client base and changing needs
Like most of the big investment banks over the last five years, Citi has undergone a fundamental review of its client base. In 2011, the ICG had 32,000 clients globally, it now has around 14,000. That is still a big number; in the equivalent unit at Bank of America Merrill Lynch, for example, there are fewer than 5,000 clients.
Forese says that he was pleasantly surprised when the review was undertaken that Citi had so many clients that needed, and were prepared to use, the full spectrum of services it offered. The 18,000 clients it cut represented just 2% of the division’s total revenues. The top 1,000 clients today account for around 60% of revenues. That focus only on clients that are true partners to Citi has helped the ICG maintain a very healthy cost-to-income ratio of around 57% – impressive for a business that carries not just global systems and coverage but also has costly local infrastructure to maintain.
As for those other 13,000 clients, Forese sees plenty of opportunities: “As well as clients who we have strong, consistent and profitable dealings with, within that group are a number of ‘acorns’ that we hope will be among our top relationships in the future.”
Those fast-growing global tech companies feature high on the list, no doubt. Think Delivery Hero, Uber, AirBnB and Grab.
To really understand Citi, however, you have to look closely at its different divisions both by product and geography. Let’s begin with its business lines. In the global corporate and investment banking division, run by Ray McGuire, Citi has had an outstanding year as the markets played to its strengths of breadth and scale.
Globally, Citi ended 2017 holding number-one positions in IPOs and in debt capital markets. Citi last held the top spot in IPOs way back in 2002.
Corbat points to Citi’s performance in Europe: “Our banking team in Europe have done a spectacular job, making us the number one firm in the region through our consistent approach of delivering for our clients.”
In the first quarter of 2018, Citi held the top spot for EMEA M&A, DCM and IPOs.
Tyler Dickson, global head of capital markets origination, notes that a rare period of globally synchronized growth presented an opportunity that the bank was well placed to capture. It helped Citi to also win Euromoney’s award for the world’s best bank for financing this year.
It also played to other Citi themes – sitting at the crossroads of financing old and new economy companies. As Citi’s bankers like to remind people, Uber’s payments are cleared through Citi pipes. But more often the disruption conversation is one that Citi is having with old economy clients, encouraging them to think differently about their approach to technology.
But it doesn’t have to be about tech. It can mean educating clients on how to respond to increased volatility, geopolitical uncertainty and even stimulative trends such as the changes in US tax policy. A firm like Citi can tell them how they might be affected because of the breadth of on-the-ground knowledge that it can bring to bear.
Its work for Naspers, the South African media group, in monetizing part of its stake in Tencent, showcased some of these elements, as well as Citi’s ability to straddle emerging and developed markets. The deal, in March 2018, was the Citi network in microcosm: a South African media company seller, a Chinese technology asset and a huge cross-border ECM transaction spanning the bank’s South Africa, New York and Hong Kong desks. At $10 billion, the deal was the largest-ever private-sector follow-on offer of secondary shares.
Citi has been with Niklas Östberg and his company Delivery Hero every step of the way
June 2017 saw the $5 billion IPO of Delivery Hero, for which Citi was joint global coordinator, having been key in the fast-growing company’s previous private funding rounds.
“For our fund raises, they walked the extra mile and generated more accounts than any other bank we worked with,” says Delivery Hero’s Östberg. “On our IPO, they did a great job on the sales side. They have a larger sales team than the others and their research is also very good.”
Transaction services is one of the crown jewels in Citi’s global business. Citi executives all play up the concept that it is not just a great division in its own right but is also vital to broader banking relationships with its clients.
There certainly isn’t another bank that can claim to have the global footprint Citi boasts in its transaction services business. But it also has regional excellence. It is a contender in every relevant regional category in Euromoney’s Awards for Excellence every year, and this year is the best bank for transaction services in Africa and central and eastern Europe.
Naveed Sultan, global head of treasury and trade solutions, says the focus on building a full network is the key to running a successful transaction banking business.
“We need to adapt to the changes in the environment and our client’s business and operating models to assist them in achieving their goals in a rapidly changing environment,” he says. “The bank needs to evolve into an ecosystem which provides a frictionless experience to its clients across a broad range of services.”
For big global clients, Citi stands out. “On the cash management side in particular, Citi’s commitment to continuous innovation in its technology and systems is very valuable to us,” says Gerstle at P&G.
Sultan says: “Innovation is no longer a choice, it is an imperative to be successful in a digital economy. Banks need to develop an approach and a framework which harnesses the ideas of the entire organization, thereby making innovation mainstream.”
And the proof of the success is in the numbers; the business has recorded impressive growth, seeing a 7% revenue increase from 2016 to 2017. In the first quarter of 2018, TTS revenues were $2.27 billion, twice those generated by investment banking. It remains the engine of the business.
The universal bank
By any measure, Citi has one of the world’s leading global markets franchises. Since the global financial crisis, it has overhauled its risk management systems, investing heavily in technology and developing a central risk book to optimize capital allocation. And although some areas of the business are still being restructured – investor services for one – its convalescence is broadly over and the bank is making the most of its newly recovered health.
Citi, already a fixed income powerhouse globally, has in the last few years been putting its back into building its equities business, investing in technology and making a series of hires. It seems to be paying off handsomely.
Citi’s equity markets business, ranked only between seventh and ninth in revenue globally in 2016 by Coalition (which ranks in three-place bands), popped into between fourth and sixth for the full year 2017, driven by futures and options trading. In the first quarter of 2018, Citi’s revenues in equities jumped sharply.
Being a top-five bank in equities markets is traditionally held to be necessary to turn a profit in a high-tech, low-margin business. Senior staff at Citi are optimistic they will be safely within that band in as little as one more quarter.
Overall, Citi’s markets business ranked number two, globally, in 2017, according to Coalition. A lot of that has been on the back of the intense surgery it has done on its risk infrastructure and tech investment, increasing overall cost efficiency.
Paco Ybarra, global head of markets and securities services at Citi
“We’ve gotten better and better at optimizing capital allocation,” says Paco Ybarra, global head of markets and securities services at Citi.
“There’s still room for improvement there, but we’ve done it well in a four- or five-year period when the overall wallet has been shrinking. And we’ve seen growth at a very complicated time for the industry, where you’ve had arms races in algo trading and non-bank competitors arising, as well as banks shifting strategies and pursuing different business models.
Ybarra adds: “We’re not just fighting for market share with other banks and non-banks, we’re dealing with sophisticated investors that want you to cater to their investment strategies. It’s not an easy environment.”
No investor is more sophisticated than BlackRock. Its head of trading, liquidity and investments platform is Richie Prager, whose annual review meetings with key bank counterparts are the stuff of legend in the financial services industry.
Citi, it seems, performs rather well in them.
“As a global fund manager, we have a lot of needs and hundreds of counterparties around the world,” says Prager. “Citi is pretty much part of every important conversation we have, regardless of product or geography.”
The relationship runs much deeper than trading execution.
“Citi is a valued partner in thought leadership for BlackRock,” says Prager. “They have been a very helpful ally in navigating the implications of Mifid II, for example. But they also help us understand the industry better, because they touch so many clients around the world.”
We’ve never closed down our markets operations in any countries. That’s become almost a principle of operations for us. It gives clients the conviction that they can count on us being there- Paco Ybarra
In equities, the drive stems from the bank’s existing clients, who want to diversify the banks they trade with, say senior Citi staff.
“In building our equities business, one of the advantages that we have is that we already have relationships with clients in other products,” Ybarra says. “So when we develop capabilities, it’s easy to gain new revenues because of those relationships.”
But it is also part of the bank’s overall philosophy to be universal.
“There are only two banks that have an investment in almost every area of banking, and we’re one,” says Ybarra. “However, we are the bank with the most extensive global network – it’s unique to Citi and impossible to replicate in today’s regulatory environment. It’s even more critical now to offer a full service model.”
The concept of the universal bank had been in peril since the financial crisis and many banks retreated from, and are still retreating from, various markets to focus on their strengths. But in recent years, those that have stuck with the model seem to be coming out ahead.
“Investors are becoming more global in their strategies,” Ybarra says, “but when it comes to the underlying infrastructure of markets, it’s not always the case. So making life easier for investors is as important as it has ever been.”
So is reach. Emerging capital markets across the globe are developing fast, especially as international investors continue to search for yield. Citi’s markets and securities services business has a physical presence in more than 80 countries, connections to more than 400 clearing systems and a proprietary custody network in 63 markets. Its public sector group also plays a key role in helping to grow frontier and emerging markets. The group has clients in around 160 countries.
“We’ve never closed down our markets operations in any countries,” says Ybarra. “That’s become almost a principle of operations for us. It gives clients the conviction that they can count on us being there.
“We are equally prepared to be a local bank as we are a global one. We’re present in a lot of countries with developing capital markets, and we want to be part of that process: an agent of change. The curve of development can be steep – they can develop quickly once they’ve started. The question is not whether they’ll develop, it’s when and at what speed. So the trend is a positive one for us and illustrates a fact of who we are as a bank.”
Citi's Asia network is a stand-out franchise, which at group level accounts for around a quarter of its annual profits. Corporate and investment banking is at the heart of that success.
There is a view that no investment bank in Asia improved more in the last 12 months than Citi. That view is expressed, among others, by the most formidable competitors in Asia’s tough markets.
Competitors are used to seeing Citi show strength in G3 debt, which it still does, and for being smart and targeted in advisory, but it is rarer territory for Citi to appear high in the ECM league tables. This was also a year when Citi raised its game in investment banking in China, often considered a weak point.
Asia provides one of the best examples of Citi’s various constituent businesses working together: its work on the acquisition of GLP by a consortium of Chinese investors.
At $17.9 billion, it was by far the largest sponsor buyout ever done in Asia. This was the sort of deal that every bank claims to have had a piece of one way or another, with advisers and underwriters bickering about who did what. But nobody disputes Citi’s central role: it was left lead joint financial adviser and joint mandated lead arranger and underwriter on the acquisition debt financing. It also provided FX forwards, was facility and security agent and share custodian.
Citi, in one form or another, was part of this deal from start to finish. The take-private marked the 13th transaction Citi had been involved in with GLP since its 2010 IPO, ranging from ECM and DCM work for GLP and its J-Reit, to follow-on equity offerings, acquisitions and disposal of assets.
In this deal, it was adviser to the buying consortium, including some of the most interesting names in the industry, Hillhouse and Hopu. This put Citi front and centre in one of the key emerging themes in the region, home-grown private equity.
“It took over two years to get to the announcement,” says Colin Banfield, head of advisory at Citi in Asia and one of the most articulate voices on the shifting patterns of the region’s M&A business. “It was a landmark for its size.”
Slow, steady and sustainable is the key to success in this business. I’d rather grow at 2.5% every year for four years than grow by 10% in year one but then flat line for the next three- Jamie Forese
It would be no surprise to see a future listing of the business, perhaps combined with other operations, and it would be even less of a surprise to see Citi involved in it.
This is what Citi has been promising to do for years: in Asia, it is really happening.
Elsewhere, Citi continues to outperform in central and eastern Europe. Cowles is understandably proud of Citi’s continued strong performance in the region – markets that most global players have long since left behind.
Speaking to Euromoney in June, Cowles had just returned from a trip to Kazakhstan to celebrate Citi’s 25th year of operations in the country. The bank employs 150 people there. It is a big operation that needs to deliver beyond local clients.
“We came to Kazakhstan because our client, Chevron, was setting up operations there,” says Cowles. “Today we are the key partner to all the multinationals operating in the country.”
That local knowledge in 98 countries is certainly appreciated by clients.
Gerstle at P&G says: “If we have an issue on the ground in a country, the chances are that Citi will have someone there who can help.”
Citi has been able to maintain its CEE franchise thanks to its huge flow business, particularly in global transaction banking, which also gives the firm a breadth of offering for multinational and local corporates that other banks cannot match.
This provides a unique platform for Citi’s capital markets franchise, which is only rivalled in the region by JPMorgan. Citi was top among international banks in DCM over the last 12 months and second for ECM. In the latter, Citi was particularly strong in IPOs – eight of its 14 deals last year were new listings. In M&A, Citi is making a virtue of being prepared to go further down the size spectrum than other bulge-bracket banks, which is where most of the action is these days in the region.
In Latin America, Citi is already benefiting from its recent shift in strategy. In recent years, the bank has sold its disparate chain of retail banks in the region and is now focused exclusively on ICG. The new approach has seen a radical refocusing on businesses and private banking clients who require a bank with a global network.
Jane Fraser, Citi’s chief executive in Latin America since April 2015, illustrates the scope of the new strategy: the number of ICG clients headquartered in Latin America has shrunk from around 8,800 to just 1,500 companies over the last five years. At the same time, the list of global subsidiaries in the region rose just slightly (up 5% to around 6,000) and the bank was able to maintain regional revenues at $4.2 billion, up from $3.9 billion in 2012.
The bank is looking to grow in Brazil – aided in part by the departure of one of its few real global rivals, HSBC – and building strong local teams elsewhere as it looks to go deeper with clients and not simply to leverage its global network.
The challenges ahead
What headwinds might Ciit face? Last year suited Citi perfectly, with its bankers describing a “unique” window of opportunity. Taken literally, it suggests that that opportunity will not happen again. Will it?
A period of global growth certainly suits a global franchise well, but it doesn’t automatically follow that more disturbed times must mean the opposite. It is tougher. In bad environments, being global is “not the best outcome”, in the words of one senior banker. After all, Citi makes a lot of money by helping clients raise capital in multiple markets, and that capital is generally raised to support growth. Take away that fuel and you are left with an expensive engine that does little.
Part of the reason why Citi’s prowess has been able to exert itself so widely is globally synchronized growth. But as the unexpected nixing of the Broadcom/Qualcomm merger showed, politicians can be capricious in the use of their power to disrupt business. And much as bankers insist that heightened volatility and uncertainty makes the advice they give all the more essential to clients, it is hard to see a way in which a bank like Citi really comes out a net winner from a global trade war.
That is the macro backdrop, but another big part of Citi’s success has been a banking regulatory regime that has not exactly fostered the development of new competitors. Nothing has helped fuse big banks into bigger banks – in fact quite the opposite. The response of many of the biggest names has been to reduce their geographic scope and often their product scope.
There is a third leg to this: arguably the only banks with the heft to challenge the US bulge brackets – the Japanese and the Chinese – have not launched any big global push, preferring to consolidate positions in home markets. And even competitors admit it will be hard, if not impossible, for any competitors to fully match Citi’s global franchise in the future.
Forese admits that Citi’s M&A business is one of the lesser-performing areas. It is top five globally, but not top three where it must aspire to be. For all that Citi’s deep relationships count, when it comes to the big, defining corporate decisions, the chief executives and boards will choose the firms that can give the best advice and execute on it – no matter how much they rely on a bank for other services such as transaction banking. Citi is not yet in Goldman Sachs’ or Morgan Stanley’s league – nor JPMorgan’s for that matter.
“We continue to leverage our strategic relationships, while investing in people at a measured pace,” says Forese. “We have to balance other demands for investment within the business and be mindful of our returns to shareholders.”
Selective hires have been made, such as Alison Harding-Jones as co-head of EMEA M&A and Douglas Paterson as global head of strategic shareholder advisory. But don’t expect a sudden, mass influx.
“Slow, steady and sustainable is the key to success in this business,” says Forese. “I’d rather grow at 2.5% every year for four years than grow by 10% in year one but then flat line for the next three.” It’s a mantra that applies across the ICG.
One competing area demanding investment is technology. In a lot of Citi’s best businesses – in transaction services or markets, for example – technology is a competitive advantage. Citi leads, but leadership can easily be lost if investment is not maintained.
Forese takes a disciplined approach.
“Technology is like cholesterol – some is good and some is bad,” he says. “Bad tech is when your spend does not improve systems. Good tech is when you provide new functions for clients. We have focused on getting this right and we believe we have done that.”
A position of strength
Forese points out that 2018 marks the 20th anniversary of the creation of Citigroup – the financial supermarket that Sandy Weill and John Reed created out of Citicorp and Travelers, aiming to be the world’s dominant financial services business. That didn’t work. In the intervening years, Citi sold off brokerage Smith Barney and its insurance and asset management businesses, and withdrew from various consumer finance franchises and international joint ventures.
“The Citi of today does not look much like the Citigroup created 20 years ago,” says Forese. “But we’re in a stronger position today than any time in our history in terms of our capital, liquidity and our client franchise.”
Citi today is a true global leader in wholesale banking.