Citigroup is requiring some of its least-profitable trading clients to post more collateral and is even dropping some of them to help boost returns in its markets business.
Clients that don’t meet internal profitability thresholds are being encouraged to trade more products with the bank, Chief Financial Officer Mark Mason told investors on a conference call Thursday. When that’s not possible, Citigroup has stopped trading with certain clients, he said.
“It ranged from everything like requesting more collateral from clients to considering higher initial margin posting and the like, as well as — as I mentioned in some instances — deciding to trade away,” Mason said, adding that the firm has seen improvement in how it’s using risk-weighted assets in its equities, rates and commodities trading businesses already.
The moves have helped the unit make progress on its efforts to improve the ratio of revenue to risk-weighted assets, according to the CFO. That’s a key focus at New York-based Citigroup, which is trying to boost returns under a strategy unveiled by Chief Executive Officer Jane Fraser during an investor day earlier this year.
Citigroup’s return on tangible common equity, a measure of firmwide profitability for banks, was 11.2% for the second quarter. That compares with 17% at rival JPMorgan Chase.
Citigroup’s shares slipped 0.3% to $52.22 at 3:42 p.m. in New York. The stock has dropped 14% for the year, the second-best performance among the six-largest US banks.
Continuous effort
Citigroup has also been focused on boosting capital levels to help meet higher requirements for its common equity Tier 1 ratio starting next year. Mason said earlier this month his firm is seeking to increase that ratio to 13% by the middle of next year, after it ended the first six months of this year at 11.9%.
That complicates the task for Andy Morton, who leads the trading business, because Citigroup will be hoarding more capital to meet the new requirements. The bank has said it’s seeking to increase its ratio of revenue to risk-weighted assets for the markets business to 5.5% in the medium term, up from 4.5% last year.
“We’re in our capital-building mode,” Mason said. “That’s going to require that we look across the entire franchise to make sure that how we’re using the balance sheet and how we’re using our RWA is in a way that leverages the franchise and what it has to offer to clients, but also allows for us to build to that return profile that we have.”
Mason said he expects the work in the trading business to continue through the second half of the year and into 2023.
“They’ve actually been making very good progress against that,” Mason said. “As they look across clients and as they look across products and identify opportunities where that metric is lower than what the target is, they’re constantly working through how do we either improve that by getting these clients to do more business with us across the franchise or how do we take a decision to exit that particular product with that particular client.”
