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Citi Builds Commodity Trade Finance

C DB WFC

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Witnessing a retreat by its European counterparts, Citigroup Inc. (C - Analyst Report) is set to begin commodity trade finance business in the market, according to a Financial Times report. Citi would initially involve itself in financing deals for the energy sector but would later consider venturing into other sectors such as metals and commodities like wheat.
 
Amidst the Eurozone crisis, European banks are scaling down their presence in commodity trade financing business. This comes as they restrict their requirement for scarce dollars. Also, the need to comply by the stricter capital norms is a major reason. As a matter of fact, European banks such as BNP Paribas and Crédit Agricole have already trimmed down their finance business for commodity trade.

This retreat by the European banks is opening up avenues for their U.S. counterparts like Citi and Wells Fargo & Co. (WFC - Analyst Report), who are capitalizing on the deleveraging activities. In fact, Wells Fargo is active on this front and has been making a number of strategic asset acquisitions from the European counterparts.    

Additionally, Citi has made such deals in the past, although on an ad hoc basis. But this time, the company wants to improvise a notch higher. Van Broekhoven, who was previously employed at Deutsche Bank AG (DB - Analyst Report), has been hired by Citi to lead this unit. Within the next three years, Citi aims to generate over $200 million in net income from this new business.

Citi has already implemented strategic reengineering efforts in its business and has been shedding non-core assets over the past few years. Strengthening its core franchisee is a priority and trimming of assets frees up of its resources so that they can be deployed in its core business.

We believe that capitalizing on the deleveraging activities of the European banks is a strategic fit for Citi and its expansion of commodity trade finance business would offer opportunities to augment its top line. It is an attractive business opportunity and this environment furnishes it with significant scope to increase its scale and strengthen its market share and hence we remain encouraged.

Citi currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering its fundamentals, we have a long term Neutral recommendation on the stock.

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