Citi BCMA head wants to win trust and wallet share

Phil Drury

Citigroup has come a long way since the financial crisis. Just under 10 years ago, the once largest US bank by assets faced the possibility of being broken up after receiving about $45bn in a government bailout. 

Instead, it kick-started an aggressive divestment programme and gradually devolved toxic assets in ‘bad bank’ Citi Holdings. By 2011, Citi had paid back the American taxpayers with interest and in July 2018, it held its first investor day since 2008.

Chief executive Michael Corbat said at the time that “Citi has crossed an inflection point”,  heralding a new phase of turning its focus from streamlining towards growth and stronger returns. In this spirit, the US bank restructured its investment banking operations in September 2018 by merging its corporate and investment banking (CIB) and capital markets origination (CMO) departments into one division: banking, capital markets and advisory (BCMA). The move to combine advisory and origination brings Citi in line with most of its competitors.

It also prompted a reshuffle, with Citi veterans Manolo Falco and Tyler Dickson leading BCMA globally. In Europe, the Middle East and Africa (EMEA), Phil Drury, who had headed up the CMO unit in the region since 2015, has taken the reins. “We are in the best position today for us to put the full package solution together for the client,” he says.

Watching the wallets

The changes will tighten the already close relationship between investment banking and capital markets at Citi, according to Mr Drury. The creation of the CMO unit laid the groundwork by eliminating silos between the equity and debt product teams, in turn allowing the group to offer broad solutions to clients. “The goal is to be on the left-hand side as the trusted adviser for our clients for any strategic action they take,” he says.

A continuing objective is to increase Citi’s share of clients’ wallets. The investment banking and capital markets franchise is storming towards a third consecutive top three league table finish in EMEA, according to Dealogic data. Globally, the bank comes in fifth in terms of wallet share.

It was not always this way for Citi. A big driver was its leap up the rankings in equity capital markets (ECM). In EMEA, the bank took second place in 2017 from fourth in 2016 and seventh in 2015. It is no coincidence this meteoric rise started with Mr Drury’s stewardship. Having reached its goal of a top three finish for BCMA several times in a row, it is clear where Citi wants to go next. “We want to be in the top two, we want to be number one,” says Mr Drury.

Geopolitics is a significant driver not only of market economies, but also of the overall universe wallet. “Certainly when we see flashpoints of volatility in the market and clients want to understand what is going on in the world, Citi wants to be the first port of call for clients,” he adds.

Fuelling the engines

Citi is already top dog globally when it comes to debt capital markets, coming in first as of the end of September 2018, according to Dealogic. “This area is a real engine for us,” says Mr Drury, adding that the bank is doing well in both developed and emerging markets. Citi has a strong liability management business, run by Will Weaver, and a well-regarded structuring expertise.

“Leverage finance is where we saw a gap,” says Mr Drury, who adds that Citi has invested in this area to bring it up to level. 

Mr Drury appointed two new leveraged finance heads in EMEA in 2017: Simon Francis was poached from Credit Suisse and Toby Ali from Bank of America Merrill Lynch. Germany, the UK and France are key markets for the leveraged finance desk, alongside defending Citi’s strengths in central and eastern Europe, the Middle East and Africa region, according to Mr Drury.

The leveraged finance business includes both corporate high-yield debt and sponsor business. Mr Drury bulked up the sponsor coverage effort to build product expertise, hiring Alexis Maskell from HSBC and Anthony Diamandakis from Credit Suisse.

A great strength of the banks’ supranational, sub-sovereign and agency bonds business is its wide distribution network, according to Mr Drury.  “We’re physically present in 98 countries,” he says. “When someone wants to do a bond in Nigeria or Ukraine, they come to Citi because we are present and have relationships in these countries.”

At a time when many big investment banks are pulling out of emerging markets for fear of underperformance in an economic downturn, Citi is determined to maintain its presence on the ground in smaller markets on the periphery. “Citi takes a long-term perspective, rather than a shorter term cut-and-thrust approach,” says Mr Drury.  

Difficult market

Competition for the top spot in BCMA is fierce, not least because the ECM environment the past year has been much more challenging. This is reflected in Citi’s latest financial report for the third quarter of 2018, which showed a 17% decline in equity underwriting revenue. “The reality is that 2017’s overall wallet environment was higher than 2018’s,” says Mr Drury. Globally, EMEA ECM issuance in the third quarter of 2018 was down 55% on the same quarter in 2017 to the lowest level in seven years, according to Dealogic.

Citi’s latest financial results (for the third quarter of 2018) show better than expected earnings, but were mainly boosted by a lower corporate tax rate in the US. Underlying revenue was roughly flat year on year, with global investment banking revenue hit with a 8% drop to $1.18bn. Despite a relative richness in where equities trade today, Mr Drury believes this raises caution around trading resets, as opposed to a full-blown recession. “We’re in an environment where we can see some potential downside risk, but it is not as if we’re staring at a cliff edge,” he says.

A way to combat the inevitable swings in the overall fee pool for ECM is fostering what Mr Drury dubs a “global coordinator culture” internally, where the bank aims for the top spot on ECM deals, rather than more junior roles. “We are still gaining wallet share, but we must not get complacent now,” he says, adding that the focus will continue to be on quality over quantity to draw in clients, but also for repeat issuance.

The mergers and acquisitions (M&A) environment has been good throughout 2018, with several pockets of competing buying sources, according to Mr Drury. “There has been good competitive tension on the private and public side between corporate buyers, sponsors, sovereign wealth funds and pension funds through minority stakes,” he says. In the third quarter of 2018, the advisory business did well compared with the same period in 2017, increasing 9% to $262m. This brought the overall global figure for the first three quarters of 2018 to 4%.   

Citi ecosystem

Citi’s initial public offering (IPO) business plays into another key strategy at the bank: identifying opportunities at young companies early. “Working on an IPO has the advantage of getting companies into the Citi ecosystem early,” says Mr Drury. The bank can then provide other services to these businesses as needed, such as help with foreign exchange, the balance sheet, future M&A deals or debt. “Once they’re in house and they feel good about Citi, we’ve got an ideal global platform to represent them,” says Mr Drury.

Many early-stage leads come from Citi Ventures, the global corporate venturing arm, which caters for smaller and younger companies. Within ECM, the bank set up a privates business. “We’re raising capital for companies when they are private, so if they decide to go public, we are first in line,” says Mr Drury.

Through the commercial bank, Citi has set up private company pop-up conferences to introduce companies to investors in Tel Aviv and London this past year, with a view to rolling them out in Berlin and Stockholm in 2019. These are mainly targeting growth equity, according to Mr Drury.

Citi is working actively with clients to think about digitalisation and disruption, while also improving internal systems. “We want to become the best banking and capital markets advisory platform for our clients, giving the very best in terms of origination and execution,” says Mr Drury. “Putting everything together, we have a powerful proposition to offer a high-content, idea-driven, strategic relationship as trusted adviser and investment bank.”