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Citigroup Inc: A Notch Above Peers in Commodities

Citigroup Ranks Itself Up In Commodity Trading Amid Declining Commodity Prices

Citigroup ranks itself up in commodity trading amid declining commodity prices. Citigroup Inc. (NYSE:C) has proudly announced to bank on trading raw materials, as opposed to peers that have been hesitant amid declining commodity prices. The bank’s gross profit from commodity trading increased 50% year-over-year (YoY) in 2015, according to the Financial Times (FT).

Citigroup generated a gross profit of $850 million in commodities last year, despite a slump in oil prices and turbulent markets. According to Coalition, Citigroup is ranked second for trading in commodities in terms of revenue, alongside JP Morgan. The financial institution was also among top three banks in 2014 for trading in commodities. Goldman Sachs has been the most-experienced entity in commodity trading and has consolidated its top spot over the years.

Citigroup has not disclosed the exact commodity revenue from fees and trading for 2015, but confirmed in the earnings release that it has seen a stronger year in commodities. Fixed income revenues were down 11% YoY, to $3.1 billion. Rates in currencies grew 5% YoY, particularly pumped by the improved markets conditions in March after a terrible start in 2016.Total market and securities services revenue was down $4.1 billion in 2015, against comparable year. Consequently, growth was offset by lower trading activity as the environment was less favorable for securitized products and commodities. Citigroup was still able to squeeze and increase profits in raw materials. According to Coalition, FICC revenues dropped to $65 billion at the 10 largest global investment banks, the lowest level seen since 2008 financial crisis.

Stuart Staley, global head of commodities stated: “A volatile commodity price environment during 2015 led to increased client activity and strong returns for our business…for 2016, we are expecting that range-bound markets will result in a more challenging revenue environment.”

Citigroup has cautioned investors that 2016 is already shaping up to be a very difficult one. The first-quarter results have been the poorest since the financial crisis, adding to the uncertainty for corporations amid declining oil prices. Oil prices have been a huge theme for banks in the past quarters, for several years, as the majority of them have exposed loans to the energy sector. Along with oil prices, commodity prices have also slumped creating trading opportunities for investment bankers

The industry performance, owing to trading issues, has been well below par. Market sensitive products suffered the most as investor sentiments deteriorated. Lower client activity went against the typical trends of 1QFY16. Banks such as JP Morgan and Morgan Stanley have scaled back its commodities’ business due to higher capital requirements and increasing regulations. Citigroup, on the contrary, has been expanding its London-based unit. It has around 230 employees in commodities as it has grown its operations to expand trading in precious metal, natural gas, oil, industrial, coal and iron ore.

Citigroup was amongst the first to post its earnings in the ongoing quarterly season, beating estimates. The profits were still down 28% YoY. Extreme volatility seen in the first two months of the quarter weighed on capital market activities that fell 15% YoY. The trading revenue clocked in low and so were the efficiency ratios.

Citigroup anticipates its operating efficiency ratio to be around 58%, as the bank expects fixed-income markets to generate flat revenue with decline in the last quarters of this year. It is worth noting that Citigroup claims to have identified greater efficiencies in various regional models. In the past three years, the bank has exited from different markets, such as Columbia, Brazil, and Argentina, the latter in 2022. The shifting and derailing of staff is expected to drive the total headcount at the bank, claims CEO Mike Corbat.

Recall that Citigroup had the cleanest pass in 2015 stress test and was the only SIFI bank to pass requirements. Investors remain optimistic about Citigroup’s stress test results that are expected to be announced by the Fed in June.

Post-quarterly earnings release results from the comprehensive capital analysis and review (CCAR) are expected to be the biggest catalysts. Secondly, the central bank is also likely to introduce two rate hikes in 2016 – this is also projected to be the biggest tailwind for bank stocks and their financial results. Business Finance News believes that Citigroup will be the biggest beneficiary; boosting its net interest income and margin. The bank continues to hold a sound financial position despite lower earnings.

Citigroup stock has rallied since the rebound from mid-February this year. However, the stock is still down 10% year-to-date (YTD).

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