After four straight quarters of declines, Citigroup's fixed-income revenue a major income source for its investment banking arm is stabilizing, the bank's chief financial officer said Monday.
The third-largest U.S. bank expects to report third-quarter revenues "roughly in line" with the same period a year earlier, John Gerspach said at the Barclays Global Financial Services Conference in New York.
The declines began a year ago when uncertainty over the Federal Reserve's rate policy slowed U.S. bond trading to a pace now believed to be improving. Citi's fixed income business accounts for nearly 80% of revenue at the bank's markets group.
"A number of trading desks will have better revenue at the margin from inventory positions that have appreciated, given the modest move lower in rates," Jeff Davis, a managing director at Mercer Capital, said by email.
An unexpected rally in July has pushed the 10-year Treasury yield to 2.4% from 2.6% a year ago, spurring stronger trading among clients who believe rates should be trending higher, Davis said. "Nevertheless, fixed income continues to be a tough business vis-à-vis a few years ago."
Fixed income revenue growth remains modest but is improving industrywide, according to JPMorgan Chase's division heads for high-grade, interest-rate and asset-backed strategies in a client conference call Monday.
It could be too early to tell if Gerspach's comments will bode well for the bank and for others heavily dependent on fixed income sales, such as JPMorgan, said James Strecker, a director at Wells Fargo. JPMorgan saw a 15% slide in second quarter bond and equities trading.
"On the face of it, Gerspach's comments are encouraging," Strecker said in an email. "But, I think you have to see another data point or two before making any real conclusions Depending on how you look at it, Citi had a bit of a lackluster quarter in 3Q13."
Nearly a month before its second-quarter earnings report in July, Gerspach cautioned investors that the fixed-income division's revenue could be down as much as 20% to 25%. Revenue was down 18% in the first quarter from a year prior, and down 15% in the second quarter. The bank will report third quarter results October 14.
In the third quarter of 2013, Citigroup reported fixed income sales of $2.78 billion.
Gerspach also said Monday to expect modest growth in Treasury and trade solutions and consumer revenues, which will result in improved operating leverage.
He also forecasted lower fees from securities underwriting, where volumes are seasonally lower, and higher expenses than in the second quarter due to costs incurred preparing for stress tests, which the bank failed its last go-round. Citigroup is very focused on passing the qualitative aspects of the Federal Reserve's Comprehensive Capital Analysis and Review, Gerspach said.
"If anyone asked what the priorities are of the firm, priority one would be CCAR, priority two would be CCAR and priority three would be CCAR."