Citigroup and US banks that hunkered down following 2008 bailouts are expanding into new businesses and markets, bringing higher expenses that may erode profit margins before they yield shareholder returns.
Citigroup Chief Executive Officer Vikram Pandit is adding 7,500 staff in China over the next three years. He also plans to recruit 100 commodities traders and double private bankers in North America to almost 260. The company last month promised $9 million to a Houston-based investment banker to lure him from UBS, according to a person with knowledge of the matter.
Banks are loosening budgets this year as they seek to compensate for shrinking loan books, caps on credit-card charges and overdraft fees and a ban on trades with their own money. With returns yet to come on new investments, the added expenses are rising faster than revenue.
“Investors would not be big fans of banks bringing down near-term returns on the promise that they’ll grow revenue in the future,” said Thomas Brown, CEO of hedge fund Second Curve Capital in New York, which oversees about $250 million in bank stocks, according to a regulatory filing. “They’d rather see revenue growth out of the existing franchise.”
First-half operating expenses at the six biggest US financial firms by assets — Bank of America, JPMorgan Chase & Co, Citigroup, Wells Fargo & Co, Goldman Sachs Group and Morgan Stanley — grew by $7.92 billion, or 5.9 per cent. Revenue fell by $5.6 billion, or 2.2 per cent.
Third-quarter results
The toll of rising operating costs may become clearer over the next two weeks as the six banks announce third-quarter results. JPMorgan, based in New York, is scheduled to report tomorrow, with the rest to come next week. A bank’s operating costs include personnel, as well as office space, equipment, marketing, advertising, consulting fees, data processing and telecommunications.
