How Citigroup Has a Leg Up on Wells Fargo in Investment Banking



WFC’s trading business

Wells Fargo relies less on investment banking and trading revenues than its peers J.P. Morgan (JPM), Citigroup (C), and Bank of America (BAC). While J.P. Morgan and Citigroup derive 15%–20% of their non-interest income from trading activities, Wells Fargo derives only 1% from this segment.

Trading revenues constitute ~27% of Citigroup’s total income. In the second quarter, financial markets improved and trading volumes picked up post-Brexit as traders reshuffled their portfolios to adjust their exposure to the United Kingdom.

Citigroup’s trading and investment-banking business is more robust than Wells Fargo’s. This is because Citigroup has a wider international presence that could provide it a significant advantage, as much of the growth in this segment will likely come from international markets.

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In 2Q16, Citigroup’s fixed income, currencies, and commodities trading revenues rose 14% to $3.5 billion while equity trading revenues were up 21% year-over-year to $788 million. Citigroup’s earnings forecast, given at an investor conference in June, proved conservative for Citigroup’s investment bank. The bank predicted total trading and investment-banking revenue would be “up slightly” compared with the first quarter. It rose 17% from that period. Analysts at Deutsche Bank had predicted declines of 4% in fixed income and 6% in equity.

Trading revenues for the industry improved slightly as credit markets improved. However, equity trading revenues continued to suffer even though stock markets gained. Speculation following Britain’s European Union referendum, tight regulations, and low trading volumes hurt equity trading during the quarter. Further, trading revenues were extremely strong during the same period last year.

Investors looking for exposure to the banking space can invest in the Financial Select Sector SPDR ETF (XLF) or the iShares US Financials ETF (IYF) (IYG).


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