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Citigroup (C) to Shut Distressed-Debt Trading Amid Volatility
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Citigroup Inc. (C - Free Report) is likely to exit its global distressed-debt trading business. The move is in line with the company’s efforts to withdraw from businesses that are no longer viable, and focus on growth in wealth management and personal banking space. This is expected to enhance efficiency and generate higher returns for the company in the upcoming period.
Per a person familiar with the matter, the decision by C is likely to impact 20 job positions.
Markedly, returns in the distressed-debt trading business is quite volatile. Also, operational challenges and inherent business risk adversely impact this business. Distressed-debt investors mostly rely on traders and analysts to provide their opinion on when a discount is sufficient to warrant the risk undertaken by them.
The investors invest in such trading activities with an intention to generate profits by reselling the distressed debt obligations at a higher valuation than their purchase price. However, this entails the risk of the debt valuation moving further south, thereby resulting in a loss for investors. It also requires an in-dept analysis and understanding of both the financials and legal agreements to determine the amount that would be paid in case the firm files for bankruptcy.
Apart from these difficulties, such trading activities are capital-intensive business and operate under stringent regulations. Regulatory requirements aim to ensure that the banks can withstand major hits given the risk factor involved. Further, implementation of any new rules and regulations would impose a greater capital burden on such business.
Given these challenges, we believe Citigroup’s reported plans to close the distressed-debt trading unit is a strategic fit. Last week, per an internal bank memo, the firm disclosed its plans to dismantle its municipal bond business by the end of March 2024. The move is expected to affect around 100 employees.
Through such business exits chief executive officer, Jane Fraser, intends to revamp the bank's operations as well as its organizational structure.
Particularly, since April 2021, the bank has been emphasizing growth in core businesses by shrinking international operations. It remains on track to exit the consumer banking business in several international markets.
Citigroup’s efforts to simplify governance structure involve eliminating various management layers to increase efficiency. Accordingly, the leaders of each of C’s five main businesses will be members of the Executive Management team and report directly to Fraser, thus increasing accountability and ensuring a swifter decision-making process.
In line with the organizational realignment, in November 2023, Citigroup commenced the elimination of various jobs. Per a Yahoo Finance article quoting Bloomberg, the job cuts involved approximately 10% of Citigroup’s senior manager roles, which aggregated to around 300 managers.
Citigroup’s shares have gained 8.2% in the past six months compared with the industry’s 20.5% growth.
Earlier this month, BOK Financial Corporation (BOKF - Free Report) announced the sale of its risk management and employee benefits insurance brokerage and consulting business — BOK Financial Insurance, Inc. — to USI Insurance Services.
BOKF expects the transaction to result in a pre-tax gain of $28 million post-transaction-related expenses. The bank intends to use this gain to realize an equivalent loss on its available-for-sale securities portfolio and will rotate into higher-yielding securities. This will result in a net benefit to BOKF’s recurring earnings in the upcoming years.
Cadence Bank (CADE - Free Report) closed the sale of its insurance business, Cadence Insurance, Inc., to Arthur J. Gallagher & Co. (AJG - Free Report) in a cash deal worth $904 million. The amount is subjected to certain customary purchase price adjustments.
The deal between CADE and AJG was announced on Oct 24, 2023, and was expected to have a positive impact on CADE’s earnings per share. The company projected that the transaction would result in an immediate net capital increase of approximately $620 million and net cash proceeds would amount to around $650 million. Both estimations are made on an after-tax basis.
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Citigroup (C) to Shut Distressed-Debt Trading Amid Volatility
Citigroup Inc. (C - Free Report) is likely to exit its global distressed-debt trading business. The move is in line with the company’s efforts to withdraw from businesses that are no longer viable, and focus on growth in wealth management and personal banking space. This is expected to enhance efficiency and generate higher returns for the company in the upcoming period.
Per a person familiar with the matter, the decision by C is likely to impact 20 job positions.
Markedly, returns in the distressed-debt trading business is quite volatile. Also, operational challenges and inherent business risk adversely impact this business. Distressed-debt investors mostly rely on traders and analysts to provide their opinion on when a discount is sufficient to warrant the risk undertaken by them.
The investors invest in such trading activities with an intention to generate profits by reselling the distressed debt obligations at a higher valuation than their purchase price. However, this entails the risk of the debt valuation moving further south, thereby resulting in a loss for investors. It also requires an in-dept analysis and understanding of both the financials and legal agreements to determine the amount that would be paid in case the firm files for bankruptcy.
Apart from these difficulties, such trading activities are capital-intensive business and operate under stringent regulations. Regulatory requirements aim to ensure that the banks can withstand major hits given the risk factor involved. Further, implementation of any new rules and regulations would impose a greater capital burden on such business.
Given these challenges, we believe Citigroup’s reported plans to close the distressed-debt trading unit is a strategic fit. Last week, per an internal bank memo, the firm disclosed its plans to dismantle its municipal bond business by the end of March 2024. The move is expected to affect around 100 employees.
Through such business exits chief executive officer, Jane Fraser, intends to revamp the bank's operations as well as its organizational structure.
Particularly, since April 2021, the bank has been emphasizing growth in core businesses by shrinking international operations. It remains on track to exit the consumer banking business in several international markets.
Citigroup’s efforts to simplify governance structure involve eliminating various management layers to increase efficiency. Accordingly, the leaders of each of C’s five main businesses will be members of the Executive Management team and report directly to Fraser, thus increasing accountability and ensuring a swifter decision-making process.
In line with the organizational realignment, in November 2023, Citigroup commenced the elimination of various jobs. Per a Yahoo Finance article quoting Bloomberg, the job cuts involved approximately 10% of Citigroup’s senior manager roles, which aggregated to around 300 managers.
Citigroup’s shares have gained 8.2% in the past six months compared with the industry’s 20.5% growth.
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C presently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Divestures by Other Companies
Earlier this month, BOK Financial Corporation (BOKF - Free Report) announced the sale of its risk management and employee benefits insurance brokerage and consulting business — BOK Financial Insurance, Inc. — to USI Insurance Services.
BOKF expects the transaction to result in a pre-tax gain of $28 million post-transaction-related expenses. The bank intends to use this gain to realize an equivalent loss on its available-for-sale securities portfolio and will rotate into higher-yielding securities. This will result in a net benefit to BOKF’s recurring earnings in the upcoming years.
Cadence Bank (CADE - Free Report) closed the sale of its insurance business, Cadence Insurance, Inc., to Arthur J. Gallagher & Co. (AJG - Free Report) in a cash deal worth $904 million. The amount is subjected to certain customary purchase price adjustments.
The deal between CADE and AJG was announced on Oct 24, 2023, and was expected to have a positive impact on CADE’s earnings per share. The company projected that the transaction would result in an immediate net capital increase of approximately $620 million and net cash proceeds would amount to around $650 million. Both estimations are made on an after-tax basis.