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Citi's i-bank revenue grows even as client list shrinks


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Citi's i-bank revenue grows even as client list shrinks

Citigroup Inc.'s investment bank is discovering that less is more.

Citi's total advisory and underwriting revenue increased to $4.9 billion for the trailing 12 months ended June 30, from $4.0 billion in full year 2012, according to a July investor presentation. During that same time period, however, the company reduced its number of corporate clients under coverage to 14,000 from 32,000.

Citi culled its customer list because not all of the clients were taking advantage of the product offering, and it was not cost effective to continue with the coverage, President James Forese said.

"The sum total of them didn't contribute a lot to our revenue in the first place," Forese said during the company's investor day. "So we sort of looked at it as, 'Why are we bothering with this set of clients?'"

Citi executives believe that reducing the number of clients enables its team to better serve and understand the needs of companies that remain under coverage. The benefits of a more narrow focus showed in the second quarter when Citi's total investment banking revenue jumped 22.3% year over year. The increase was off a low base, but CFO John Gerspach noted that efforts to build the business have been ongoing.

"We've worked the last three years to become an overnight success," Gerspach said according to a transcript of an earnings conference call in July.

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Gerspach added that the company has been looking to improve the business by adding talent, and the bank is still making investments to enhance coverage and increase wallet share of clients in such sectors as technology, financial institutions and energy.

The more-targeted focus makes sense to Sandler O'Neill & Partners analyst Jeffery Harte. "They were trying to be everything to everyone," he said in an interview.

Harte noted that one approach Citi has taken is reducing coverage of clients that have less international business. Compared to other investment banks, Citi has more global reach into areas such as emerging markets, developing Asia and parts of the Middle East and Latin America, he said.

"Citigroup touches so much more in those parts of the world than peers," Harte said. "That puts them in a good position to gain revenue."

Harte said the results of cutting client coverage has been better than expected, but also noted that some of the increased revenue is due to Citi taking back market share that was lost after the financial crisis.

"It's a nice growth story if you look back to 2011, 2012," he said. "If you look back to 2006, it's not as nice of a growth story."

For instance, Citi reported investment banking commissions and fees of $5.23 billion in 2007 and $4.09 billion in 2006, but that dropped to $2.45 billion in 2011. Harte said Citi lost some of its share after the financial crisis in part because it was more focused on survival rather than growth.

In the years after the crisis, Harte said Citi held on to much of its market share in debt underwriting, but ceded ground in equity underwriting and advisory. The company has since managed to gain back much of the lost ground, and its pipeline of deals looks healthy, Harte said.

Citi itself does not expect to see a significant increase in returns from its institutional client group, which includes the investment banking business. During the investor day, the company outlined growth goals for return on tangible common equity, or ROTCE. The goal for the institutional client group is to produce an ROTCE of at least 14% by 2020, and the business neared that target with a 13.1% ROTCE during the year ended June 30.

"They're only looking to push it up 1 percentage point because they are smart enough to realize that getting further than that is going to be really difficult," Atlantic Equities LLP analyst Christopher Wheeler said in an interview.

But even at 13%, the ROTCE is high, and the success of investment banking business is the reason why the business has reached that mark, Wheeler said, even though it has not received much attention in recent years.

"I think they made really good progress behind the scenes," Wheeler said.

Forese expects more progress and more refining of the client list. He said the top 1,000 clients account for about two-thirds of the revenue, but Citi is still looking to build relationships with the other 13,000 clients, many of which run growing businesses that are in emerging markets.

"We have plenty of bets for the future within our client base today, even as it likely comes a little smaller," the bank president said.