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Citi Might Record $180M Loss, Reshuffles Prime Brokerage Unit

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Citigroup (C - Free Report) will likely reshuffle its prime brokerage business following anticipated losses of $180 million on loans provided to an Asian hedge fund, Bloomberg reported. Some foreign-exchange trades are expected to be on the downside leading to losses. Notably, discussions are ongoing between the hedge fund and Citigroup to minimize the eventual losses after squaring off the positions in a sound way.

The current issue reflects the brunt banks will bear due to unfavorable impact on hedge fund industry from current geopolitical tensions. The asset prices in the industry have been affected due to global issues this year. Therefore, per the source, the industry may record its worst performance since 2011, with Asian hedge funds taking the maximum financial hit.

Earlier this month, at the 2018 Goldman Sachs U.S. Financial Services Conference in New York, Citigroup’s chief financial officer — John Gerspach — commenting on the fourth-quarter outlook, noted that market revenues are likely to be low on a year-over-year basis, impacted by reduced fixed-income market revenue as rates and currencies trading momentum has not continued.

Per the source, on the reorganization front, the bank is planning to shift the FX prime brokerage unit from the existing currency trading division to the prime finance and securities services unit. Citigroup, with the aim of expanding the prime finance business, which focuses on aiding hedge funds in borrowing stocks, funding, transactions and risk management, is on the verge of reshuffling the unit.

Though lending through prime brokerage is risky in terms of revenue generation on a consistent basis, notably, at the investor day last year, Citigroup reported that balances from prime brokerage clients were up 40% since 2014. Moreover, revenue generated from the business doubled as compared with the peers.

Citigroup, with its global footprint and attractive core business, seems to be well poised for growth. Additionally, backed by an improving domestic economy amid rising rate environment, as well as anticipated potential ease of regulations, the bank is likely to continue delivering strong results in the quarters ahead.

Amid troubled financial currents, Citigroup is likely to gain some financial flexibility from reorganization moves. We believe the company is well poised to address its internal inefficiencies and setbacks. Further, we expect that the company’s streamlining initiatives will boost its capital position, reduce expenses and drive operational efficiency.

Citigroup currently carries a Zacks Rank #3 (Hold). The company’s shares have lost around 27.8% over the past year compared with the 17.1% decline recorded by the industry.



 

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