Morning Coffee: Citi's most shiny division has jobs that look very precarious. UBS’s top bankers are facing irrelevance
A core belief, shared by all investor relations departments of the world’s biggest banks, seems to be that people hate banks and don’t want to invest in them. Consequently, whenever you get the chance to present to investors, you have to pretend to be something else. This is the likely source of the common delusion among bank management teams that they are “actually a retailer”, “actually a technology company” or “actually a utility”. If you can fool the market that you’re not really in the unpopular business of banking (or even worse, investment banking), they might assign a higher multiple to your earnings and the share price will go up. ✨
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Citigroup seems to be very well bought into this thesis – even though its investment banking fees are likely to be up 50% for the second quarter, the main focus of its investor day yesterday was instead the “Citi Services” division, a collection of money transmission, transaction banking and securities services businesses which could be called basically technology, basically utilities or both. Apparently, this division has a return on equity of over 20%, annual growth in high single digits and accounted for almost half of Citi’s net income last quarter.
It sounds almost too good to be true, and …. well, the allocation of divisional profits in banking groups is always a bit subjective. And although it’s a tech company and a utility, the economics of Citi Services are very much driven by its ability to generate cheap funding through deposits for the rest of the bank. Like Deutsche Bank’s Global Transaction Banking, it’s quite sensitive to interest rates and requires a lot of fixed costs and capex.
But is it a good place to
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