Citigroup Closing Proprietary-Trading Unit

By Donal Griffin - Oct 18, 2011 6:17 AM GMT+0700

Citigroup Inc. (C), the third-biggest U.S. lender, said it’s closing a proprietary-trading unit that incurred losses in the third quarter, as regulators prepare to restrict banks from making bets with shareholder cash.

The company is almost “two-thirds done” winding down the Equity Principal Strategies unit, Chief Financial Officer John Gerspach said yesterday in a conference call with analysts. Market turmoil caused a revenue decline for the unit, which suffered losses as it exited trading positions, Gerspach said.

Chief Executive Officer Vikram Pandit, 54, is shutting the business as lawmakers draft the so-called Volcker rule, which aims to restrict banks from making bets with shareholder money. Other firms including Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) already have exited similar businesses. New York-based Citigroup partly blamed Equity Principal Strategies for a 73 percent slump in third-quarter revenue from equities-trading.

“Equity Principal Strategies is a de minimis part of Citi’s overall trading operation,” Danielle Romero-Apsilos, a spokeswoman, said in an e-mailed statement. “As it does not fit with Citi’s business model under the impending Volcker rule, it is in the process of being wound down.”

The proprietary-trading unit is headed by Sutesh Sharma, who’s based in London and previously worked for New York-based Morgan Stanley and Old Lane Partners LP, a hedge fund that Pandit part-owned before selling it to Citigroup in 2007. Sharma intends to leave the bank and start his own hedge fund, two people familiar with the matter said in August. The team manages about $2 billion, one of the people said. Sharma didn’t comment.

Revenue Tumbles

Sharma’s team is part of Citigroup’s equities-trading business, run by Derek Bandeen. The division’s revenue, excluding an accounting gain, tumbled to $289 million in the third quarter, from about $1.04 billion in the same period a year earlier. Moshe Orenbuch, an analyst with Credit Suisse Group AG, had estimated revenue of $825 million for the three months ended Sept. 30.

Equity-trading revenue at JPMorgan Chase & Co. (JPM), the second- biggest U.S. bank by assets as of midyear, fell 15 percent for the same period, excluding a similar accounting benefit, the New York-based firm said in an Oct. 13 statement.

Citigroup’s proprietary-trading and equity-derivatives units were “largely responsible” for the slump and “difficult market conditions” drove the decline, the company said yesterday in a statement.

Regulators published the Volcker rule last week for public comment. Named for former Federal Reserve Chairman Paul Volcker, the rule would ban banks from trading for their own accounts. The firms would be allowed to make short-term trades for hedging and market-making. Pandit said last week that the rule may have struck “the right balance” between the two.

“It’s a volatile business they’re getting out of,” Gerard Cassidy, an analyst with Royal Bank of Canada who has an “outperform” rating on Citigroup shares, said in a phone interview. “If you’ve got a holding company that’s being regulated by U.S. bank regulators, being involved in higher-risk businesses may not be the best use of the bank’s capital.”

To contact the reporters on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.