Senior Advisor, Citigroup Inc
Citi's Ybarra Says Banking Revenue Slump Will Turn
Paco Ybarra, Citigroup Institutional Clients Group CEO, tells Bloomberg's Sonali Basak that the slump in investment banking revenue can't get much worse. He talks about pressure on the sector and how banks could be impacted by new rules.
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About Paco Ybarra
In a July 2023 interview with Bloomberg, Paco Ybarra, then CEO of Citigroup's Institutional Clients Group, discussed the state of investment banking and trading revenues. He described the slump in investment banking revenue as one of the longest the industry has experienced, longer than the period following the financial crisis, and stated that he believed it was more likely to turn around than to worsen. Ybarra noted that while trading revenues appeared weaker compared to the 2021-2022 period, they remained healthy relative to 2019 and 2020 levels, and he pointed to ongoing uncertainty in interest rates as a driver of continued trading activity. Ybarra also commented on the impact of regulatory changes on bank operations. He stated that the final regulatory regime was still unknown and that banks would adjust once the rules were finalized. He attributed shifts in bank business models to capital constraints and the regulatory environment, saying that some activities banks previously engaged in no longer made sense. Regarding leverage in the financial system, Ybarra said that while leverage is always present when problems occur, the issues seen in the system had been "relatively well digested" and were not "gigantic." In a 2017 investor day presentation, Ybarra said that Citigroup was "very well positioned for whatever comes" and that the company had "done a lot of the hard work" to bring its businesses to leading positions.
Transcript (16 segments)
I
Interviewer0:11
I think it's worth talking about at this point in the market. There are a lot of questions about the direction of travel, particularly for trading and investment banking, where there was a boom time in 2021. So what does normal look like moving forward, particularly for trading? When we see some businesses, just a few minutes ago we had reported that Citadel Securities faced a 35 percent drop in the business. What does normal look like the rest of the year?
P
Paco Ybarra0:37
Well, the reality is that we don't know very well. I think we have to remember that trading businesses are still good. If you compare overall industry trading revenues to what they were in 2020 or 2019, the numbers are significantly higher. So it's not bad. They look worse if you compare them to 2021. But the situation is that there's a lot of trading and readjustment of portfolios that has to happen. So I don't think I have reasons to be very negative about what trading revenues are going to be in the coming quarters, but the truth is that I don't know.
I
Interviewer1:23
Now, some businesses say commodities have faced a fall off over the last several months. However, things like rates, how much of a structural headwind or tailwind is that to the industry now that we have a new economic regime across the world?
P
Paco Ybarra1:38
Yeah, I think rates is a positive part of the story because we have to remember that we've had many years with zero rates, with rates almost dead, very little uncertainty about what rates are going to do. And we have now a comeback of the rates business with uncertainty about what they're going to do, but with a lot of activity.
I
Interviewer2:10
Head count reductions that many Wall Street firms, including yours, at what point do you see the needle starting to turn? Or do you think it could be a lot worse before things start to get really better?
P
Paco Ybarra2:19
I don't think it can be a lot worse because it's limited by the need. The need is there, and the need is accumulating through months of inactivity. So at some point, even if the market situation is not great, the fact that needs have accumulated will take over and we'll start generating revenue. It's also been one of the longest slumps in investment banking revenues that we have experienced. It's longer than the one that followed the financial crisis. So it has to turn at some point because the reason for those activities to happen has not gone away. We cannot say exactly when, but I think it's more likely to come back than to go in the other direction.
I
Interviewer3:11
But if you look at the reductions overall in the industry, they are small compared to this slump in revenue. So people have been holding back and are trying to keep capacity for when the turn happens. I think things would get worse if that turn doesn't happen, but as I just said, I think it's more likely to happen than not. What I think is that there have been a number of departures in trading over the last year or so. When you look at Citi, really there has been a lot of competition from hedge funds and private equity firms for every bank in this industry. What does that look like? Is this a matter of competition or a matter of how you're managing the business differently?
P
Paco Ybarra3:47
I think it has to do with the regulatory regime, capital constraints, and what are banks good at given the regulatory regime. I think this week we're going to have a better sense of what the treatment of trading revenues and trading activities is going to be. But until we get that, we will not be able to know more definitively what the trading business of a bank should look like.
I
Interviewer4:26
Well, let's talk about that a little more. You're talking about the Basel III end game final proposal here that's going to come out. There will be a comment period for the banks to really push back on some parts of that. It'll be a while before it takes effect, but they are pretty drastic, these rules. How significantly can it change the businesses that you're operating in now?
P
Paco Ybarra4:47
It could. Although I am more optimistic than that. I think these businesses have shown many times that they can adjust. And I think we will see some migration of activities from banks to non-banks, and the system will find a new balance on this thing with banks still playing a significant role. That's what I think will happen. But the rules themselves can have a significant impact.
I
Interviewer5:20
What are some of the businesses more specifically that you might have to take a look at? Whether it's in the mortgage area where there will be higher capital requirements, or certain parts of trading. Are there areas that you can see having to take a look at if these rules were to take effect?
P
Paco Ybarra5:34
There are. I mean, we have to wait for the rules and see how the rules impact their areas. For instance, exotic derivatives may be much more costly to run from a capital standpoint. Financial income may change as well. Businesses like prime could be seen differently. The market will adjust to that as well. So we don't know what the final impact will be, but anything to do with financing with leverage is going to be impacted.
I
Interviewer6:10
This is the concern that is under the market, that treasury intermediation could be significantly impacted from some of these rules. Do you think that is an area that might face further pressure at a time where there are concerns under the surface about liquidity?
P
Paco Ybarra6:25
I'm not sure that the new rules are going to impact that very much. That is already impacted by the existing rules. Sometimes, depending on which constraint you're under as a bank, you may be limited in your ability to do very almost risk-less transactions with treasuries because of the leverage ratio or other capital constraints. That is already a factor. I'm not sure it is going to get worse with these regulations, but we will have to see.
I
Interviewer6:51
You mentioned leverage. When you look across the system, there have been a lot of instances in which... to the extent that you're still concerned about leverage in the system after such a long set of prolonged low interest rates, what are you still worried about?
P
Paco Ybarra7:22
Well, you know, it's true that leverage is always present when you have something going wrong, but it's not just leverage plus market move. What you had with interest rates was a massive move in rates after a very, very long period of very low interest rates. And you would have expected that to cause some problems. You know, if you look at the problems, they are not that gigantic. I mean, it's not like the system came down, right? There are problems that have been relatively well digested up to this point. But if you take a look at spreads right now and certain kinds of...