As we wrote on Friday, news recently leaked out about Citigroup’s secret “Focus Five” list of top clients that get preferred treatment from the bank’s equity research department. While this practice is followed by a number of Wall Street banks, buy-side customers who find themselves excluded from these lists are understandably upset. However, there may be no real reason to worry.
Focus Five List
Bloomberg revealed a secret list of Citigroup’s top clients who get preferred treatment from their research department called the “Focus Five”. The clients on this list purportedly include Carlson Capital, Citadel, Millennium, Point72, and Surveyor Capital who together own $120 bln in U.S. equities.
Citigroup’s “Focus Five List”
These most lucrative clients get the research department’s best service, including top trade ideas, extensive time with Citigroup analysts, financial models, and limited access meetings with company management.
Others Also Target Best Clients
However, Citigroup is not the only Wall Street bank focusing on its most profitable customers. Morgan Stanley, HSBC, Credit Suisse, and Deutsche Bank have either been reducing their client list to focus on their most profitable customers or else tiering their clients to appropriately allocate research resources to those who generate the most equity commissions. Consequently, many Wall Street firms have been focusing on serving their best customers versus trying to provide broad coverage to a large swath of clients.
HSBC recently said that it was “reducing the number of dormant and low-revenue clients” to help the firm build a more sustainable business. We have written in the past how Deutsche Bank has announced that it will slashed its institutional customer base by as must as 50% in an effort to shore up its profitability.
Of course, most buy-side customers are not happy to learn that others are receiving better service and unique research inputs they don’t get. This includes not getting return calls from the most popular sell-side analysts, missing out on key management meetings, or not getting access to specific financial models.
A Move That Makes Sense
This trend is not surprising given the earnings squeeze many banks have felt as they battle weak trading revenue, plunging commodities prices, rock bottom interest rates, and increased regulatory pressure. Consequently, many Wall Street banks are continuing to struggle to achieve the minimum 10% “return on equity” target that many think is necessary to appease investors.
Ultimately, this has prompted many banks to try to generate increased earnings by focusing their business on a smaller number of their most profitable customers. Simultaneously, these firms are trimming their costs as they don’t need the same infrastructure to serve a smaller client base.
Wall Street’s focus on serving their top clients at the expense of the others is a clear response to the more difficult market environment that most banks are currently experiencing. While some buy-side clients bemoan the fact that they can no longer get access to the best research and trading ideas from the top investment banks, we think this response is overblown.
In fact, this winnowing of clients creates a real opportunity – for regional and boutique investment banks and independent research firms – to step in and provide the research coverage that the large banks can no longer afford to offer. We also suspect this could be a real win for mid-sized and smaller asset managers as they are likely to receive an increased level of service from these research providers that they never received from the bulge firms. Yes, it must be a real blow to the egos of these buy-side firms to be dropped by the bulge bracket banks. However, we doubt they will lose access to high quality research if they are open to receiving it from other extremely credible sources.