All is not well at Citigroup’s investment bank. The bank’s third quarter results revealed a 27% quarter on quarter and 35% year on year reduction in revenues.

This was partly due to a $535m loss in ‘principal transactions,’ but Citi also confessed to, “diminished trading opportunities during the quarter, particularly in equity derivatives, credit and securitised products”.

Given the strength of Goldman Sachs and JP Morgan in the last quarter, this doesn’t leave Citi in a particularly happy place. As we noted yesterday, Citi has hired 300 people for its investment bank in Europe since the start of this year. It may be in danger of losing a lot more.

If Citigroup wants to keep its people in the long term, it will need to pay them. Needless to say, the bank knows this. In response to repeated comp-related questions on yesterday's conference call Citigroup controller John Gerspach said, ‘we are committed to paying competitive compensation and we look at our results and we just adjust our accrual rates accordingly.’

However, with the results not looking good and Citigroup 34% owned by the US government, its freedom to reward staff in line with the rest of the industry is likely to be constrained. Remember, that Feinberg is still floating around with proposals to defer salaries and reveal the names of high earners. And as today’s Lex column points out, it’s quite possible that Citi’s poor results are down to risk aversion borne of government ownership. If this is so, it’s likely to continue losing market share and performing poorly.

RBS Coutts revisited?

The worst case scenario for Citi would be a mass exodus of investment bankers in the style of the 70 person RBS Coutts Asian walkout earlier this week.

Is this a possibility? Maybe, if hiring picks up next year. Headhunters in London say Citigroup’s investment bankers are particularly jittery following last month’s exit of Tom King.

“Tom was the glue that held people together, but the real issue now is whether Citigroup wants to be a major league investment bank or just a plan vanilla and debt focused business,” says the head of one London headhunting boutique. “That’s what everyone there is asking.”