The large multinational bank Citigroup (C 2.82%) by and large reported solid third-quarter earnings, as the bank benefited from the higher interest rate environment and continued to make progress on a multiyear transformation plan.
But one weak point in the quarter was the bank's investment banking business, which has seen its revenue plummet on a year-over-year basis 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 if investors should be concerned.
The size of the wallet has shrunk
Within investment banking, there are three main sub-businesses: mergers and acquisitions (M&A) advisory, equity underwriting, and debt underwriting.
M&A advisory is pretty much what it sounds like: helping companies that are purchasing another company 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 is helping companies raise capital through various debt instruments such as bonds or certain kinds of financial notes.
This year has been tough for all of these businesses, not only because of a tough comparison to 2021 but also because volatile market conditions have really taken a bite out of these businesses. (You may have noticed that IPOs have been way down this year.)
Interestingly, JPMorgan Chase's Chief Operating Officer Daniel Pinto noted at a conference in September that the size of the wallet in investment banking (total amount of investment banking fees available) has also been very volatile in recent years. Pinto noted that in 2019, the size of the wallet was $79 billion, which was within the normal range during prior 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 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 Advisory | Equity Underwriting | Debt Underwriting | Total Investment Banking |
|---|---|---|---|---|
| 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 financial statements.
Citigroup actually saw the smallest decrease among its peers in M&A advisory but it had the largest combined decrease in equity and debt underwriting.
When asked by an analyst about this underperformance on the bank's recent earnings call, Citigroup's Chief Financial Officer Mark Mason said the lower debt-underwriting activity "is really more of a function of low deal volume pretty much across the board. And there really isn't a whole lot more to it than that."
Should investors be concerned?
Investment banking revenues can be both hard to forecast and volatile, and Citigroup has a smaller investment banking business than most of its peers, potentially making it slightly more volatile.
But Mason did say that investment banking would be part of the bank's strategy in the future. He also said that 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 great to see Citigroup trailing its peers in investment banking, especially if it will be a part of the bank's strategy in the years to come, I'm not overly concerned right now given the depressed and volatile environment. However, this is something worth monitoring in future quarters to see if it Citigroup continues to underperform its industry peers.
