The Triumphs — and Troubles — of Citi Research

Illustration by II

Illustration by II

Citi rapidly built one of the world’s best research departments. Was it built to last?

The story of Citi’s research department seemed like one of a triumphant comeback.

In just four years, Citi had risen rapidly up the rankings of investment research houses, defying the regulatory burdens and shrinking client wallets that threatened the larger sell-side industry. By the end of 2019, Citi was recognized as the No. 2 equity research provider globally by money managers and allocators surveyed by Institutional Investor.

It looked like the successful revival of what had been a leading research franchise before its near-bankruptcy in the 2008 financial crisis. That success was no accident: Citi’s improvement in the II rankings reflected an intentional investment on the part of the bank’s equities leaders, who had a stated goal of making Citi into a top-three research provider.

But even as Citi analysts racked up votes in II’s surveys, cracks had started to form in the bank’s research division.

In the fall of 2019, Citi laid off a number of analysts in a wave of job cuts across the bank. It had been a tough year for trading and investment banking globally, with revenues for the 12 largest banks falling to a 13-year low in the first six months of 2019, according to analytics firm Coalition Development. Other banks also slashed jobs in 2019, with Coalition reporting a 10 percent reduction in equities roles by year-end.


At Citi, the cuts included a restructuring of the bank’s U.S. equity research team that eliminated some coverage and consolidated other sectors under fewer analysts. The changes occurred after voting had closed for the All-America Research Team, II’s long-running ranking of Wall Street analysts.

That year, Citi placed third in the U.S. — its best ranking since before the financial crisis.

But this year, Citi is down to seventh place.

Citi’s decision to slim down the research division was a reversal after a large — and largely contrarian — investment into the platform over the preceding years.

Between 2015 and 2018, Citi had made significant upgrades to its research division, expanding stock coverage and investing in analysts at a time when other banks were actively cutting back. The thinking, as global research head Andrew Pitt described to II at the time, was that the top-three research firms globally would have the advantage following the 2018 implementation of the second Markets in Financial Instruments Directive, MiFID II, a European rule that requires investors to pay separately for research and trading services.

“We made the decision to strengthen the platform going into MiFID,” Pitt said in a 2018 interview with II. “We were probably one of the only firms that was actively stabilizing and building our research business.”

The investments paid off — at least in the short term — in II’s annual rankings of research teams, where Citi shot up in most major markets. In addition to Citi’s third-place finish in the 2019 All-America Research Team, the bank earned high marks last year for its stock coverage in Asia, Europe, and Latin America, as well as its global fixed-income research.

When all these results were added up, Citi ranked as the No. 3 investment research provider in the world — No. 2 if you only count equity research. It was an impressive feat for a bank that industry observers rate as second tier in cash equities, the trading business that supports equity research at most banks.

That’s because until very recently, sell-side research was not sold as a separate product but offered as a free enticement for trading clients. MiFID II may have done away with that practice in Europe, but research and trading remain “largely bundled” everywhere else, according to Michael Turner, head of competitor analytics at Coalition. This means that research coverage is “very attuned to success in cash,” he adds.

“You’ve got about five big cash houses in the world,” Turner explains. “Four of them also have very good research houses.”

Take, for example, JPMorgan Chase & Co. The largest investment research provider in the world by coverage footprint, JPMorgan is also the current leader in equity trading. Last year, JPMorgan reported almost $6.5 billion in equity trading revenues, the highest such earnings of any bank.

Citi, by comparison, reported a little over $2.9 billion in equity trading revenues in 2019. Yet even after last year’s layoffs, Citi maintains that it has the second-largest coverage footprint of any research provider.

As a former investment bank consultant describes it, Citi was “punching above its weight in research.”

In restructuring the research department last year, Pitt explains that the main change was to combine similar company and economic sectors under lead analysts, who are supported by analyst teams.

“We created a number of combinations where we thought product quality wouldn’t suffer,” the research boss adds.

Of course, this also meant losing some analysts — including a few members of the 2019 All-America Research Team. These included airlines expert Kevin Crissey and food producers analyst David Driscoll, both of whom were runners-up in their respective sectors. Another runner-up, healthcare technology specialist Stephanie Demko, also left Citi at the end of 2019.

Put into the context of the 2020 All-America Research Team, these departures meant fewer team positions for Citi. II awards points to firms based on the total number of team positions they accumulate, so fewer team positions means a lower overall score.

By a similar logic, Citi’s move to consolidate sector coverage may have also contributed to its lower ranking in 2020. There are 60 economic and industry sectors included in the All-America Research Team, and each of those sectors represents a shot at a team position. A bank with a dedicated analyst in each sector, for example, is likely to win more positions overall than a boutique that only covers half of them.

As Pitt explains, “There’s two large players in the U.S.” — JPMorgan and Bank of America. These firms “have materially more analysts than the chasing pack,” he adds. “We’re reasonably similar in headcount to the next tier.”

Aside from these more “mechanical” details, as Pitt describes them, there was one other reason why Citi fell so far in this year’s All-America Research Team: The departure of star consumer analyst Greg Badishkanian, who left early in the year to join Wolfe Research.

“Apart from the fact that Greg is very good, he became a classic example of key-person risk,” Pitt says. “He was covering multiple historical II sectors and getting top-ranked in all of them.”

Last year, for example, Badishkanian earned a top-three position in three consumer sectors, including a No. 1 ranking in the leisure sector. Pitt estimates that Badishkanian accounted for 10 percent of all the votes that Citi earned in the 2019 survey.

“If you look at our vote drop [in 2020], about two-thirds of it is Greg,” Pitt adds.

In a normal year, some of these exits might have been counteracted by new hires. But hiring has proven difficult during a global pandemic, when a combination of economic uncertainty and remote working have made bank analysts and other professionals more reluctant to take career risks.

“It’s been very tricky hiring through the Covid period, trying to persuade people to move, trying to even do interviews,” Pitt says. However, the research boss says the bank still has plans to rehire in the U.S. and reinitiate coverage in a few areas.

“We are aiming to invest in the U.S.,” Pitt adds.

It helps that 2020 has been a better year overall for equities businesses, thanks to a surge in trading during the pandemic. Coalition reports that equities revenues for the 12 largest banks were up 5 percent year-over-year at the end of the third quarter.

At Citi, equities revenues for the first nine months of 2020 totaled more than $2.8 billion, an 18 percent increase from the same period the previous year.

But the challenges facing equity research are much larger than any one year.

In late 2017, Mike Kronenberg saw a “tectonic shift” coming for equity research in the form of MiFID II.

That’s when he founded Analyst Hub, a platform for individual analysts to launch their own research boutiques. The regulation, as Kronenberg describes it, was the “straw that broke the camel’s back” for an industry that was already under pressure from declining trading commissions.

These commissions got a short-term boost from the market turmoil earlier this year, the CEO explains.

“The pandemic obviously led to a spike in volumes because of volatility — no surprise around that,” says Kronenberg. “When trading commissions go back to pre-pandemic levels, it will be hard for banks that use trading to pay for research.”

As Coalition’s Turner explains, these commissions have been shrinking due to investors moving away from high-touch trading toward cheaper low-touch and electronic trading — a trend that has accelerated during the pandemic.

“Typically, research used to get paid out of the high-touch commissions,” Turner says. “That revenue pool is flat to shrinking.”

Given MiFID II and the increased adoption of low-cost trading, both Kronenberg and Turner see the gap between the top four or five banks and everyone else continuing to widen, as the dominant players claim larger shares of a shrinking pie.

“Unless you’re able to monetize it in cash,” Turner says, “there’s no point in competing in research.”

Citi’s research team has proven it can compete. The question, then, is whether Citi can stay competitive.

For Pitt, the answer is a resounding yes.

“The platform should absolutely be top three — no doubt about it,” the bank executive says. Citi continues to have among the broadest and most even coverage of stocks globally, despite spending less on research than its closest competitors, he says.

“I think we are smart in how we deliver coverage,” Pitt adds. “What we’ve tried to do is eliminate noise products.”

Instead, Citi focuses on areas where it thinks it has an edge: Big, thematic research and global expertise. Even before the pandemic, Pitt says, Citi was using virtual technology to connect clients with analysts in different parts of the world. With virtual meetings and remote work becoming more normalized this year, the research head views travel and events as areas where Citi can cut costs while preserving jobs.

“We think we can remove material costs from research that don’t require us to reduce headcount,” Pitt says. “For example, we may be able to permanently move to a travel budget that is 50 percent of what it was in 2019 and maybe lower. That’s a lot of dollars.”

Similarly, the research head sees “significant savings” in restructuring corporate access events to a hybrid format where some programming is virtual.

“We’re learning in real time this year,” Pitt says. “The goal is [to] take the lessons of this year and permanently put them into our planning.”

Research, for example, has proven to be “quite suited” to remote work, Pitt notes. “Research productivity measured by what we publish hasn’t been impacted at all,” he says. Time spent interacting with clients, meanwhile, has gone up — something that market volatility has certainly played a role in, as Pitt points out.

How Covid-19 impacts Citi and other research providers over the long term, however, likely comes down to the pandemic’s impact on their clients: asset managers.

“I said at the time of MiFID II that it was accelerant on a fire that was already burning,” Pitt says. “MiFID caused challenges, but MiFID itself wasn’t a game changer. The deflator was the ongoing trends in the asset management industry. I do think Covid-19 creates more challenges there.”

Citi’s best bet, according to Pitt, is to keep the current research team intact — to the best of the bank’s ability.

“If I can keep the team as stable as possible, that’s going to be one of the best things for us,” Pitt says. “Some of our best years were when our staff turnover was lower than the competitors’.”