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Citi Reports Second 70% Drop in Equities Trading

Citigroup Inc. (C), the U.S. bank led by a former equities-trading chief, said revenue from that business dropped more than 70 percent for the second straight quarter.

Stock-trading revenue fell to $232 million in the fourth quarter from $808 million a year earlier, excluding so-called credit valuation accounting adjustments, New York-based Citigroup said today. It declined to $289 million in the third quarter from $1.06 billion a year earlier.

The slump pushed Citigroup, led by Chief Executive Officer Vikram Pandit, further behind competitors. The bank generated less than 30 percent of the equities revenue JPMorgan (JPM) Chase & Co. produced in each of the past two quarters, after reporting at least two-thirds as much in the previous six periods. Pandit, 55, was the former head of equities at Morgan Stanley. (MS)

“Sometimes when you underperformed, it’s just because you underperformed,” Chief Financial Officer John Gerspach said on a conference call with journalists. “The decline year over year in equity derivatives is partly from the markets but it also reflects a certain amount of underperformance on our part. That is an area where we are focused on improving.”

The result missed the expectations of analysts including JMP Securities LLC’s David Trone, who predicted $571 million in revenue for the quarter. Richard Staite, a London-based analyst with Atlantic Equities LLP, had estimated $700 million, while Credit Suisse Group AG’s Moshe Orenbuch predicted $475 million.

Derivatives Business

Citigroup’s annual equities-trading revenue plunged by $1.3 billion to $2.4 billion, mostly from the bank’s equity derivatives and proprietary-trading units, Gerspach said.

Half of the annual revenue decline, about $600 million, came in the equity-derivatives unit, which trades in contracts whose values are derived from underlying equities, according to Gerspach. The decline was driven in part by “difficult market conditions” which also hurt the firm’s cash-equities business, the bank said.

“I wouldn’t characterize the entirety of equity- derivatives reduction in revenue as being performance driven, clearly the markets have got some level of impact on it,” Gerspach said. “There’s clearly some impact of underperformance when you take a look at a $600 million revenue drop year over year.”

Gerspach attributed the other half of the decline to the Equity Principal Strategies unit, which buys and sells stock with shareholders’ money, known as proprietary trading. The bank is shutting the business as regulators draft the Volcker rule, which restricts the practice. The head of the unit, Sutesh Sharma, intends to leave and start a hedge fund, two people familiar with the matter said in August.

Derek Bandeen

Derek Bandeen, who leads the equities unit, last year promoted Mike Pringle to head trading and Adrian Faure to become global head of emerging markets in an attempt to earn more from growing markets abroad. Bandeen also hired former Citadel LLC senior executive Brad Kurtzman in April to lead U.S. equity- derivatives trading.

While the Standard & Poor’s 500 Index rose 11 percent in the quarter, the biggest jump in more than two years, average daily volume on major U.S. exchanges dropped 15 percent from the third quarter.

To contact the reporters on this story: Donal Griffin in New York at dgriffin10@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net

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

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