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While the European banks are seeking to reduce their balance sheets, Citigroup Inc. (C - Analyst Report) has strengthened its European distressed-debt sourcing arm, according to a Bloomberg report.

The unit, which consisted of only one employee in the prior month, now has strength of   six employees who are involved in searching for distressed assets from other European banks. Of the six, two are solely committed to this effort.

The strengthening of Citi’s team would assist banking clients with their deleveraging process. Amidst the Eurozone crisis and the need to build up capital levels to satisfy regulator’s stricter capital norms, European banks are slashing their balance sheet.

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.

Citi has already implemented strategic reengineering efforts in its business and has been shedding non-core assets over the past few years. Solidifying its core franchisee is a priority and trimming of assets frees up 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 European distressed-debt sourcing arm 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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