Why Citi's 2018 results are bad news for Goldman Sachs

You knew it was coming. - Citi cautioned that things weren't going great back in early December and today's fourth quarter results reflect that. The bank blamed, 'volatile market conditions and widening credit spreads, particularly in December,' for a fall in its fixed income sales and trading revenues. They were down 21% year-on-year in the fourth quarter and 19% for 2018 as a whole.

The chart below reflects the performance of Citi's investment banking businesses in 2018 versus the previous year. M&A professionals and equities traders came out on top. Equity and debt capital markets professionals and fixed income traders came out beneath them.

While the equity capital markets (ECM) and debt capital markets (DCM) businesses at Citi fared worse in terms of their percentage decline in 2018, it was the 6% annual decline in Citi's $12bn fixed income sales and trading business that really hit the bank's top line. Citi's ECM revenues fell by $130m last year. DCM revenues fell by $407m. Fixed income currencies and commodities (FICC) trading revenues fell by $716m.

Citi's 2018 FICC hit was evident in both spread products (ie. credit) trading, where revenues fell by 8.4% or $292m, and in macro products trading (rates and currencies), where revenues fell by 4.8% or $484m.

If you work for Goldman Sachs, this should give you a frisson of fear. As Goldman chases an additional $1bn in FICC revenues under the strategic plan set out by Harvey Schwartz in September 2017, it's trying to copy Citi's business model and to focus more heavily on corporate clients in the belief that corporate clients are less frightened by volatility and more likely to trade irrespective of market conditions. Citi's results suggest this isn't entirely the case. Aspersions have already been cast on the likelihood of Goldman achieving its FICC targets and as the bank undertakes a review of its business lines under its new CEO, its traders might want to watch their backs.

At Citi, meanwhile, profits in the institutional clients group (the investment bank) were up 35% last year. However, this is unlikely to generate higher pay - pre-tax profitability flat-lined and it was only a near-halving of income tax payments that delivered the boost.

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