The largest international bank Citigroup (C 3.12%) It reported strong third-quarter earnings overall.
But one weak spot in the quarter was the bank’s investment banking business, whose revenue fell year-on-year after a stellar 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 if investors should be concerned.
The size of the wallet is reduced
In investment banking, there are three main businesses: mergers and acquisitions (M&A) advisory, equity underwriting, and debt underwriting.
M&A advice is exactly what it sounds like: helping companies that are buying another company or selling to another company. Equity underwriting is associated with helping companies raise capital through initial public offerings (IPOS). Debt underwriting is helping companies raise capital through various debt instruments such as bonds or certain financial notes.
This year has been tough for all of these businesses, not only because of the strong contrast to 2021, but also because volatile market conditions have taken some of these businesses away. (You may have noticed that IPOs are slowing down this year.)
Interestingly, JPMorgan Chase’s Chief Operating Officer Daniel Pinto said at a conference in September that the amount of wallets in investment banking (the total amount of investment banking fees) has been very volatile in recent years. Pinto in 2010. In 2019, the size of the wallet was 79 billion dollars, which was in the normal range in the previous decade. Then the wallet size will reach $95 billion in 2020 and a peak of $123 billion in 2021. But this year, Pinto expects only about $69 billion or $70 billion.
Citigroup saw a major decline.
Looking at some of Citigroup’s main competitors, It is clear that in 2022, the bank will see a major decline in investment banking compared to 2021.
| Bank | M&A advice | Proof of fairness | Debt writing | Total Investment Bank |
|---|---|---|---|---|
| Citigroup | -27% | -79% | -82% | -64% |
| JPMorgan Chase | -31% | -72% | -40% | -47% |
| Bank of America | -35% | -80% | -32% | -44% |
| Morgan Stanley | -46% | -78% | -35% | -55% |
| Goldman Sachs | -41% | -79% | -55% | -57% |
Source: Bank statements
Citigroup actually saw the smallest decline among its peers in M&A advice, but the largest decline in equity and debt underwriting.
Citigroup Chief Financial Officer Mark Mason said in response to an analyst’s question about this underperformance on the bank’s recent earnings call that lower bond activity “is generally a function of lower deal rates across the board. And there really isn’t.” So much for him.”
Should investors be worried?
Investment banking revenue can be difficult and volatile to predict, and Citigroup has a smaller investment banking business than most of its peers, making it somewhat more volatile.
But Mason said investment banking will be part of the bank’s strategy going forward. He said the bank has actually been hiring in the division, and management likes the progress it is seeing from the new hires.
While it’s not good to see Citigroup trailing its peers in investment banking, especially if it’s part of the bank’s strategy in the coming years, I’m not too concerned given the current depressed and volatile environment. However, this is something to watch in future quarters to see if Citigroup continues to underperform its industry peers.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Citigroup is the 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 at Bank of America and Citigroup and has the following options: Long January 2024 $80 on Citigroup calls. He has a spot in the Motley Fool and advises Goldman Sachs and JPMorgan Chase. The Motley Fool has a disclosure policy.
