Citigroup’s investment banking business is struggling more than its peers – should investors be concerned?

The big multinational bank Citigroup (C 3.12%) Overall, the company reported solid third-quarter earnings as the bank benefited from a higher interest rate environment and made further progress on a multi-year transformation plan.

A soft spot during the quarter, however, was the bank’s investment banking business, whose revenue fell sharply year-on-year after a spectacular performance in 2021.

Yes, the entire investment banking industry is struggling, but Citigroup seems to be struggling more than its peers right now. Let’s take a look at why this might be and whether investors should be concerned.

The size of the wallet has shrunk

Within investment banking there are three main sub-sectors: mergers and acquisitions (M&A) advisory, equity underwriting and debt underwriting.

M&A advisory is pretty much what it sounds like: helping companies buying or selling to another company. Equity underwriting has to do with helping companies raise capital through events such as initial public offerings (IPOS). Debt underwriting helps companies raise capital through various debt instruments such as bonds or certain types of financial obligations.

This year has been difficult for all of these companies, not only because of the harsh comparison to 2021, but also because the volatile market conditions have really taken a toll on these companies. (You may have noticed that IPOs are down a lot this year.)

Interesting, JPMorgan Chase Chief operating officer Daniel Pinto pointed out at a conference in September that the size of the investment banking wallet (total amount of available investment banking fees) has also been very volatile in recent years. Pinto noted that the size of the wallet was $79 billion in 2019, which was within the normal range over the previous decade. Then the size of the wallet jumped to $95 billion in 2020, and then a whopping $123 billion in 2021. This year, however, Pinto only expects it to hit about $69 billion, or $70 billion.

Citigroup has seen larger declines

Looking at some of Citigroup’s main competitors, it’s clear that the bank has seen a bigger drop in investment banking in 2022 compared to 2021.

Bank M&A advice Equity Underwriting debt assumption All Investment Banking
Citigroup -27% -79% -82% -64%
JPMorgan Chase -31% -72% -40% -47%
Bank of America -35% -80% -32% -44%
MorganStanley -46% -78% -35% -55%
Goldman Sachs -41% -79% -55% -57%

Source: Bank’s annual accounts.

Citigroup actually saw the smallest decline among its peers in M&A advisory, but it had the largest combined decline in equity and debt underwriting.

When asked by an analyst about the underperformance at the bank’s recent earnings release, Mark Mason, Citigroup’s chief financial officer, said that the reduced activity in underwriting is “actually more a reflection of low transaction volume across the board. And that’s really there.” There’s not much more to it than that.”

Should Investors Be Concerned?

Investment banking earnings can be both unpredictable and volatile, and Citigroup has a smaller investment banking business than most of its peers, potentially making it a bit more volatile.

But Mason said investment banking would be part of the bank’s strategy going forward. He also said the bank has indeed hired in the division and management likes the progress it’s seeing in hiring.

While it’s not nice to see Citigroup lagging behind its peers in investment banking, especially if it’s going to be part of the bank’s strategy for years to come, given the depressed and volatile environment, I’m not overly concerned right now. However, that should be watched over the coming quarters to see if Citigroup continues to lag its industry peers.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has positions in Bank of America and Citigroup and has the following options: long January 2024 $80 calls on Citigroup. The Motley Fool has positions in and recommends Goldman Sachs and JPMorgan Chase. The Motley Fool has a disclosure policy.


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