Citigroup Loses Out on Record Debt Fees as Pandit Fortifies Bank
Richard Landgarten is one reason Citigroup Inc. (C) hasn’t regained its once-dominant position in the resurgent corporate lending market.
The investment banker left the company in 2009, ultimately joining Barclays Capital and taking relationships with clients such as Tenet Healthcare Corp. (THC) with him. Tenet, which had used Landgarten and Citigroup to advise on a $1.6 billion debt exchange in January 2009, went with Barclays to lead a $600 million bond sale last August.
JPMorgan Chase & Co. (JPM) now dominates the so-called league tables, reporting $971 million of debt underwriting revenue in the first quarter, almost double that of fourth-place Citigroup, the market leader for nine years before the 2008 financial crisis, according to data compiled by Bloomberg. The bank has dropped to fifth in U.S. speculative-grade debt, after ranking second in all but two of eight years before 2007.
“They definitely lost a lot of key personnel -- some of their best performers,” said Jonathan Hatcher, a credit strategist at Jefferies Group Inc. in New York who covers financial companies. “It’s difficult to get that momentum back once you lose it.”
While Citigroup is fighting to regain a top-four ranking in most markets, JPMorgan and Bank of America Corp. (BAC) have amassed such large lending franchises that Citigroup Chief Executive Officer Vikram Pandit has abandoned notions of retaking the top spot, according to a person familiar with the bank’s strategy, who asked not to be identified because it hasn’t been publicly discussed. Management has determined the staffing and capital costs of such an effort wouldn’t justify the returns on the bank’s equity, the person said.
Pandit, 54, has spent the last three years rebuilding a bank that took $141 billion in losses and asset writedowns as U.S. home prices plummeted and tipped the nation’s economy into the worst recession since the Great Depression.
The U.S. government injected $45 billion into Citigroup, the largest bailout, and taxpayers guaranteed more than $300 billion of the firm’s assets to prevent its failure.
Citigroup cut its overall staff by 30 percent to 260,000 in the three years ended in December as it hoarded capital, slashed pay and rebuilt its balance sheet, according to regulatory filings. Citigroup hasn’t disclosed a breakdown for the investment bank.
Landgarten, one of three executives in charge of investment banking for health-care companies at Citigroup, left for advisory firm Moelis & Co. before joining Barclays in late 2009. At Citigroup, he formed relationships with health care companies that were among the biggest borrowers in the high-yield debt market, including Quintiles Transnational Corp.’s Dennis Gillings, who along with private equity firms took the company private in a $1.7 billion buyout in 2003.
Quintiles, which tapped Citigroup to finance its 2003 buyout and two subsequent transactions, chose JPMorgan to lead its latest $2.23 billion loan refinancing this month. Barclays was added as a lender along with Citigroup.
Landgarten declined to comment through Brandon Ashcraft, a spokesman for Barclays Capital in New York. Phil Bridges, a spokesman for Quintiles, also declined to comment, as did Rick Black, a spokesman for Tenet.
A crop of Citigroup bankers left after 2008. Thomas King, Citigroup’s former head of banking in Europe, joined Barclays in 2009 as co-head of corporate finance. Reid Marsh, Citigroup’s former co-head of global industrials, also joined the London-based bank.
Vincent Lima, head of Citigroup’s high-yield syndicate for 18 years, left in 2008 for Christopher Street Capital before joining Moelis last year. Michael Brennan, who helped run the bank’s division that sold bonds and loans globally, left in 2008 and started advisory firm North Sea Partners LLC. Joining him was Jonathan Calder, who headed loan sales at Citigroup.
“We recognize the competitive environment and as we always have, will deliver best-in-class ideas, solutions and execution,” Danielle Romero-Apsilos, a spokeswoman for Citigroup in New York, said in a statement. “We will also continue to support our clients with access to our capital and balance sheet, as we’ve done in all market environments.”
Citigroup has been hiring investment bankers in Europe and filling in spots in the U.S. and Asia where it’s fallen behind. It hired a group of UBS AG energy investment bankers last year, including Stephen Trauber, the global head of the business and one of the Swiss bank’s top dealmakers. Mark Hobbs, formerly the co-head of energy for Europe, the Middle East and Africa at UBS, is joining Citigroup’s oil and gas team in Houston, Citigroup said this week. Earlier this month, Citigroup hired UBS’s Kevin Cox to become co-chairman of global industrials investment banking.
Citigroup’s decline in global underwriter rankings has come amid the biggest bonanza ever for banks. Companies have sold $8.6 trillion of bonds the past 29 months as the Federal Reserve pumped trillions of dollars into the financial system and held interest rates near zero, allowing treasurers to borrow at record-low rates, Bloomberg data show.
That has generated $4.1 billion of debt underwriting revenue in the past five quarters for both JPMorgan, the only major bank to make it through the financial crisis without a loss, and Bank of America, the Charlotte, North Carolina-based lender that bought Merrill Lynch & Co. in January 2009. JPMorgan has averaged $820 million a quarter during that period, up from $599 million during the previous 20 quarters, data compiled by Bloomberg show.
Big Europe Drop
Citigroup has averaged $535 million, down from its longer-term average of $578 million. Last quarter, it reported a 21 percent drop in debt underwriting revenue to $504 million.
In the U.S. junk bond market, where banks underwrite debt for companies with below investment-grade ratings and earn their biggest fees, Citigroup’s market share has declined to 8.4 percent this year and 7.7 percent in 2010, down from an average 12.4 percent in the nine years before the crisis, Bloomberg data show. The drop pushed it to fifth in the rankings.
High-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.
In the European corporate bond market, the bank dropped to 18th last year, with 2.1 percent of the market, after being third for all but two of the seven years before 2007, Bloomberg data show. It has climbed to eighth this year, with a 3.9 percent market share.
JPMorgan, the top corporate bond underwriter globally for the past two years, acquired Bear Stearns Cos. as the fourth-largest U.S. securities firm was failing in March 2008. It later bought the banking unit of Washington Mutual Inc. after the Seattle-based thrift was taken over by regulators.
Bank of America has emerged as the second-biggest underwriter for U.S. investment-grade and high-yield debt, grabbing 14 percent and 12 percent of those markets, respectively.
Citigroup is “not trying to be as aggressive as some others,” Jefferies’s Hatcher said. “They’re going to get their share. Capital markets are always going to be an important part of Citi, but that doesn’t seem to be the emphasis, strategically, as for some of the others.”
Barclays, which bought the North American business of Lehman Brothers Holdings Inc. after it filed for bankruptcy in September 2008, has made some of the biggest gains at Citigroup’s expense.
Barely a Player
Its Barclays Capital unit was barely a player in the U.S. speculative-grade bond market before the financial crisis, with 0.5 percent of market share or less before 2007, Bloomberg data show. Since the end of 2009, it has underwritten at least 6.6 percent of the junk-bond market, about one percentage point less than Citigroup.
“It seems strange to me that Citigroup would be backing away from a business that’s as important to investment banks as debt underwriting, especially banks that function as commercial banks,” said David Hilder, an analyst with Susquehanna Financial Group LLP. “They cut too many people or lost too many people and need to rebuild.”
After more than $29 billion in losses during Pandit’s first two full years in charge of the bank, it has since reported a $13.6 billion profit for the five quarters through the end of March. The bank’s shares are down 90 percent since Dec. 10, 2007, the day before Pandit was appointed CEO. They fell 17 cents, or 0.4 percent, to $40.33 in New York Stock Exchange composite trading yesterday.
Since the crisis, Citigroup has increased customer deposits while loosening its dependence on short-term capital markets that froze in 2007 and 2008. Deposits have grown to $865.8 billion, or 49 percent of total liabilities, as of March 31 from $738.5 billion, or 39 percent four years ago, Bloomberg data show. Short-term borrowings during the same period declined to $403.1 billion, or 23 percent of liabilities, down from $693.2 billion, or 37 percent.
At the same time, a measure of the bank’s financial strength almost doubled. Citigroup’s Tier 1 capital increased to 13.26 percent of its total risk-based capital from 7.12 percent in December 2007.
Tier 1 capital includes common stock, retained earnings and perpetual stock. Regulators from 27 nations last year agreed to more than double capital requirements for banks to help avert future financial crises.
As the economy and debt markets improved, Citigroup repaid $20 billion to the U.S. in 2009. The Treasury Department in December sold the last of the bank’s stock it received in exchange for the bailout, returning a profit of about $12 billion to taxpayers.
“Citigroup has not been in a position to lend a lot of money to a lot of companies in the last three years,” said Richard Bove, the analyst with Rochdale Securities LLC in Lutz, Florida, who cut ratings on the shares of banks including Lehman four months before its collapse.
“It has had to sell off businesses. It has been involved in management changes. It’s been involved in attempting to rebuild the liquidity of the organization,” he said. “When you’re doing all those things, you’re not, as your first priority, making money available so that someone can do a debt underwriting.”
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