Analysis: Citi reaps profits from hiring rainmakers 2-3 years ago

In the summer of 2010, senior executives at Citigroup Inc told the board of directors the bank needed to hire more dealmakers to have any chance of snagging underwriting assignments and rich takeover advisory fees.

Competitors, including JPMorgan Chase & Co and Morgan Stanley, had picked off the company's rainmakers during the financial crisis, when Citigroup's stock fell more than 95 percent. After the U.S. government rescued the bank, it took a more direct role in setting Citigroup's pay.

If Citigroup did not hire more dealmakers, the executives said, the bank would lose more and more market share. The board, despite some naysayers, approved the hiring campaign. On Monday, the bank showed how its investment is paying off.

Citigroup reported that its investment banking revenue from advising companies on mergers rose 84 percent to $204 million in the first quarter. It was the third consecutive period of big gains in investment banking revenue.

"They've picked up people who have produced results," said Michael Holland, founder of money manager Holland & Co, which owns warrants on Citigroup shares. The results bode well for Michael Corbat, who took the reins at Citigroup in October, Holland added.

The improvement in investment banking is emblematic of the larger healing happening at the bank, which the government bailed out three times during the crisis. Citigroup is slowly improving results in its Citi Holdings unit, which houses the assets the bank is looking to shed, and its lending margins are holding strong even as they weaken at other banks.

Not everything is perfect at the bank. Revenue in its transaction services unit, a processing business that generates stable earnings, shrank in the first quarter. In its consumer bank, revenue was flat in the first quarter and has been little changed for some time.

But in investment banking, the hires are bearing fruit.

In 2010, Citigroup hired Stephen Trauber, a UBS AG energy banker reputed to be among the best-connected in Houston. Hiring him was not cheap: The Wall Street Journal reported that his pay package could hit $30 million over three years. Trauber hired more bankers, telling Reuters in June 2011 that the bank had added around 50 to its energy business.

Such hires are initially costly, and the revenue that results can take one to two years to appear in a bank's financial statements.

The investment banking operation came under considerable criticism within the bank because of its high compensation costs, said a company insider who declined to be named. And the numbers sometimes did not look good. In 2011, revenue fell 9.5 percent, while expenses rose 7.5 percent.

But the bank's revenue rose faster than expenses in the first quarter of 2013, boosted in part by higher deal activity. One example: Trauber's team helped advise China's CNOOC Ltd on its $15.1 billion takeover of Canadian oil and gas company Nexen Inc.

CLIMBING UP THE LEAGUE TABLES

Looking at deals that closed, the best measure of how mergers and acquisitions contributed to a bank's bottom line in a quarter, Citigroup was usually in the top three in global rankings before the financial crisis. It started falling in 2010 and sank as low as 11th in the first quarter of 2012. In the first quarter of 2013, however, the bank was ranked fifth, Thomson Reuters data show.

In North America, the bank fell as low as 14th in the first quarter of 2012 but was fifth in the first quarter of 2013.

The bank is making gains in equity underwriting rankings, too. Citigroup fell as low as ninth globally in the third quarter of 2008, and as recently as 2011 was seventh for several quarters. In the first quarter of 2013, the bank ranked second.

"The revenues have been increasing fairly steadily in investment banking for several quarters now," Chief Financial Officer John Gerspach said in a conference call with journalists after the latest results were announced.

The gains are the result of the hiring campaign, Gerspach said, pointing to decisions to rebuild banking teams that specialize in energy, healthcare and technology industries.

At least some of that benefit has come because of the weakness of European rivals, competitors said. As big Continental banks grow less willing to lend to companies, Citigroup can step in and win back business. Citigroup's corporate lending profit - from loans made to big companies - rose in the first quarter of 2013 to $309 million from $12 million in the same quarter a year earlier.

More deals have closed in April and will contribute to deal revenue and profits that Citigroup reports in the second quarter.

Citigroup advised Elan Corp PLC in its $3.25 billion sale of its interest in Tysabri, a multiple sclerosis drug company, to Biogen Idec Inc.

Citigroup also advised Discovery Communications Inc in its $1.7 billion acquisition of the Nordic television and radio operations of ProSiebenSat.1 Media AG.

(Editing by Dan Wilchins and Edmund Klamann)