Citigroup Bets on Commodities as Rivals Consider Retreat

Citigroup Inc. plans to hire more commodities salespeople in a multiyear effort to add revenue and market share while some of its biggest rivals scale back.

“We have made great progress in the last couple of years and expect that positive trajectory to continue,” Jose Cogolludo, global head of sales, said in an interview. New York-based Citigroup, the third-largest U.S. bank, will increase its sales staff about 15 percent during the next year from the 80 people it has now, he said.

Four years after selling its Phibro LLC energy-trading unit, Citigroup is reasserting itself in commodities while the Federal Reserve decides whether banks should give up owning physical assets such as mines, oilfields and tankers. JPMorgan Chase & Co., the biggest U.S. lender, and Deutsche Bank AG plan to exit some commodities businesses.

Cogolludo, 43, wouldn’t say how much his company makes from the business or how much growth it’s targeting. The top 10 global investment banks took in about $4 billion in commodity trading revenue through the first nine months, according to data from Coalition Ltd., a financial industry research firm. Citigroup ranked sixth in the first half, up from 10th in 2010, according to a person briefed on the data who asked for anonymity because the figures are confidential.

The lender, run by Chief Executive Officer Michael Corbat, 53, brought in $546 million from trading commodities and other holdings through the first three quarters of this year, an increase from $113 million in the comparable period of 2012, according to Federal Reserve filings.

Starting Small

“Markets have of course remained challenging, with low volatility and increased regulatory pressure,” Cogolludo said. Still, the bank has seen increases in client activity and revenue, he said. Citigroup employs about 250 people in total at its commodities business, run by Stuart Staley from London.

One key piece of the strategy is to do more lending, either by financing inventories of metals like copper or aluminum or by taking control of materials such as oil in return for funds -- essentially a secured loan, Cogolludo said.

“We are only willing to do these transactions in situations where we feel comfortable owning that physical commodity if ultimately the client doesn’t buy it back,” he said. “It makes no sense to own oil in a location where we have no ability to sell it.”

While banks trade derivatives related to commodities from oil to corn to gold, they often accept delivery of those assets to support the business and settle trades. In some cases they will even store the materials. The activities that have drawn scrutiny at other banks include permanent ownership and operation of facilities that create, ship and store the materials in ways that more directly affect industrial users.

Customer Base

About two-thirds of Citigroup’s business is selling to corporate clients for use in hedging prices on raw materials, such as oil or corn, Cogolludo said. The remaining business serves clients such as hedge funds.

The Fed stepped up scrutiny of the businesses earlier this year, after U.S. lawmakers raised concerns banks might abuse their roles in physical commodities markets, or that market gyrations and catastrophic industrial accidents might pose risks to their financial stability. The central bank said it’s reconsidering its landmark 2003 decision to grant lenders such as Citigroup and New York-based JPMorgan permission to expand into raw materials. U.S. law restricts banks from owning non-financial businesses unless they get special exemptions.

Fed Decision

Industry groups such as the U.S. Chamber of Commerce have said driving banks from that business would hurt industrial firms. Cogolludo said he’s confident regulators won’t outlaw all physical ownership of commodities.

“Our business model is well-suited to the new regulatory environment,” he said.

Cogolludo joined Citigroup in November 2012 from BNP Paribas SA, and he’s based in London. Earlier this year, the firm hired UBS AG’s Rick McIntire as global head of base-metals sales, reporting to Cogolludo.

Citigroup’s expansion comes as the ranks of commodities traders, salespeople and analysts at the 10 biggest banks shrink to the lowest in at least four years, or 2,290 at the end of September, according to Coalition data.

Deutsche Bank said Dec. 5 it would cut about 200 jobs and exit dedicated energy, agriculture, dry bulk and base metals trading. Morgan Stanley cut 10 percent of its workforce in the commodity division this year and is in talks to sell its global oil business to OAO Rosneft, Russia’s largest petroleum producer.

JPMorgan’s Plan

JPMorgan said in July it plans to get out of trading some physical commodities. In addition to the regulatory scrutiny, firms are grappling with slow growth prospects and low returns. Commodities revenue is set to grow 3 percent a year on a compound basis through 2015, Kian Abouhossein, a JPMorgan analyst, told clients in April. Morgan Stanley has said its commodities business had a return on equity of less than 5 percent in 2012, lowest among its trading businesses.

Goldman Sachs Group Inc. generated $3.6 billion in 2006 and $3.4 billion in 2007, according to documents submitted as part of the probe into the New York-based firm’s role in the mortgage crisis conducted by the U.S. Senate’s permanent subcommittee on investigations.

Chief Financial Officer Harvey Schwartz said in October that Goldman Sachs doesn’t plan to sell its three-decade-old commodities business, which is driven by client needs for managing revenue, timing cash flows and financing receivables. “Those are all normal corporate treasury functions,” he told analysts.

Salomon Roots

Citigroup’s history with commodities has roots in Salomon Brothers, the firm where current leaders including Corbat got their start. Salomon was sold to Phibro in 1981 and three years later, as commodities markets tumbled and Phibro’s profit fell, Salomon’s rose and its traders sought control. John Gutfreund, Salomon’s head, engineered a coup and became chief executive of the combined company. The firm was acquired by Travelers Group Inc. in 1997, and a year later Citicorp merged with Travelers.

The 2009 sale of Phibro, a proprietary-trading unit, allowed the company to focus on serving clients, Cogolludo said. Subsequently, regulators moved to curtail proprietary trades, and the final version of the Volcker rule’s ban on such activity is due within days. The sale also averted a clash with the Obama administration over a potential $100 million payout to the unit’s CEO, Andrew J. Hall.

“While some might say it’s better to be lucky than good, I like to think that we are good, too,” Cogolludo said.

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