Citigroup’s Investment Banking Business Is Struggling More Than Its Peers — Should Investors Be Worried?

The big multinational bank Citigroup (C 3.12%) reported broadly flat earnings for the third quarter as the bank benefited from the higher interest rate environment and continued to make progress on a multi-year turnaround plan.

But a weak spot in the quarter was the bank’s investment banking business, which has seen its revenue fall 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 worried.

The size of the wallet has shrunk

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

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

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

Interesting, JPMorgan Chase’s Chief Operating Officer Daniel Pinto noted at a conference in September that investment banking wallet size (the total amount of investment banking fees available) has also been highly volatile in recent years. Pinto noted that in 2019 the size of the wallet was $79 billion, which was within the normal range of 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 be around $69 billion or $70 billion.

Citigroup has seen bigger declines

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

Source: Bank’s financial statements.

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.

Asked by an analyst about this underperformance on the bank’s recent earnings call, Citigroup CFO Mark Mason said the lower debt underwriting activity “is really more a function of low business broadly across the board. And there’s really” a lot more to it than that. “

Should investors be worried?

Investment banking revenue can be both difficult to predict and volatile, and Citigroup has a smaller investment banking business than most of its peers, potentially making it somewhat more volatile.

But Mason said investment banking would be part of the bank’s strategy going forward. He also said the bank has actually been hiring in the division, and management likes the progress it’s seeing from the new hires.

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While it’s not good to see Citigroup trailing its peers in investment banking, especially if that’s going to be part of the bank’s strategy in the coming years, I’m not too worried right now given the depressed and volatile environment. However, this is something worth monitoring in the coming quarters to see if Citigroup continues to underperform its 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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