The benefits to banks of having their staff work from home will “erode over time”, Citigroup’s investment banking boss Paco Ybarra warned as he made the case for offices hollowed out by the coronavirus pandemic.
Even with most staff working from home, investment banks have been able to complete deals such as the £31bn Liberty Global Telefónica merger and profitably navigate some of the most volatile and active markets in recent memory. That has prompted some executives including Barclays’ boss Jes Staley to predict the demise of the industry’s iconic skyscrapers.
“I am very cautious about this,” Mr Ybarra said in an interview. He argued that banks had been able to make the most of remote working because of “capital that we have accumulated before” when people met face to face.
“At some point, you would see depreciation of that capital and then you would start seeing problems,” he added, pointing to the potential for difficulties with on-the-job learning and people’s ability to relate to each other. “Some of the feeling that we have about how well this thing works, I think will erode with time.”
The longtime fixed income trader said there was “definitely still a need for the office”. Still, Citi will consider having some staff work from retail branches and satellite offices rather than its main offices in London and New York, which Mr Ybarra said would welcome just 5 per cent of staff back during their first phase of reopening.
The banker, whose division generates two-thirds of Citi’s profits, also predicted more flexible arrangements, such as staff working two days from the office and three days remotely. “It will be trial and error,” he added. “This is like an experiment that no one signed up for but we all go through.”
The back-up offices, Citi’s traditional Plan B in the event of a major business disruption, are under review. “We will have to rethink . . . maybe we don’t need that,” Mr Ybarra said, adding that the regulatory requirement was to have “operational resiliency” which could also be achieved through people working from home.
Citi grew trading revenues faster than any other Wall Street bank in the first quarter, partly as a result of Mr Ybarra’s efforts to boost Citi’s equities business, where first-quarter revenues rose 41 per cent. Across the Institutional Client Group, which Mr Ybarra runs, risk weighted assets increased by around $100bn to around $900bn. Analysts have argued that big banks will benefit from the crisis by picking up share from weaker rivals.
“I don’t think I would describe it as we’re seeing this moment of weakness out there and we are going to go in for the kill,” said Mr Ybarra, who was promoted to run the investment bank last year. “Going through one of the worst recessions in history you have to be careful.” He believes that while periods of high volatility will persist because of coronavirus, the peak for banks was the first quarter, when investors were doing their most significant repositioning.
While he expected Citi to gain share over the crisis, he was also conscious that some of the market gains won by big banks in the first quarter could recede over time, as volatility calms.
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He is fixated on how negative rates — already “one of the biggest problems European banks have” — could affect his business. “It’s not like anyone said, this is a great tool we want to use. Negative rates happen when nothing else works,” Mr Ybarra said. “The US appears much more determined to avoid negative rates (than the UK) and have been very clear when they have talked, but I would not take that as a guarantee that it will not happen.”
For Mr Ybarra’s business, the upshot of negative rates was “lower returns”.
Against that backdrop, he will continue to target growth in “key areas of investment” like transaction banking and securities services, while “gradually building” its equities and investment banking divisions and ramping up the rollout of digital solutions across all of its businesses.
Mr Ybarra said the outlook for investment banking, where Citi’s revenues were flat in the first quarter, was improving. “Our level of equity capital markets (activity) is higher than what we thought it was going to be,” he said, adding that investment bankers would also win business from the wave of M&A and other restructurings that would stem from the crisis.