Citigroup Closing Proprietary Unit After Equity Trading Rout

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.

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. The bank posted a $3.77 billion third- quarter profit, including a $1.9 billion accounting gain.

Citigroup advanced $1.65, or 5.9 percent, to $29.58 at 2:24 p.m. in New York trading. The shares had dropped 41 percent this year through yesterday.

Underperformed Peers

“Citigroup has unwound only two-thirds of its principal strategy business, unlike other banks that started the process late last year, suggesting that there may still be losses ahead,” David Hilder, an analyst at Susquehanna Financial Group LLLP who has a “neutral” rating on the bank’s shares, said in a note to clients today.

Bandeen’s unit underperformed Wall Street peers in the quarter, excluding accounting adjustments. Equities-trading revenue at Goldman Sachs Group Inc., the fifth-biggest U.S. bank by assets, rose about 8 percent to $2.18 billion from a year earlier. JPMorgan Chase & Co. (JPM), the largest lender, posted a 15 percent drop to $1.05 billion and Bank of America Corp. (BAC), the second-biggest, reported a 21 percent decline to $757 million.

Morgan Stanley, owner of the world’s biggest brokerage, may increase equities-trading revenue to $1.26 billion, compared with $1.12 billion last year, according to Roger Freeman, an analyst at Barclays Plc. Morgan Stanley is scheduled to report third-quarter results tomorrow at 7:15 a.m. in New York.

Volcker Rule

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.”

Bandeen previously worked for Morgan Stanley as head of European equities. Pandit and Citigroup Chief Operating Officer John Havens also held executive roles tied to equities trading at the New York-based brokerage.

Bandeen restructured Citigroup’s equities unit in April, promoting Mike Pringle to a new position leading global equities trading and placing him in charge of risk, trading personnel and use of capital, according to an internal memo.

“Clearly trading is something that from a performance perspective and a profitability perspective, it’s just nowhere near where it needs to be to compete effectively,” said Todd Hagerman, an analyst with Sterne Agee & Leach Inc. who has a “buy” rating on Citigroup shares. “You want to be a global player.”

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.

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