Citi Worth $56 as it Redoubles Asian Sales and Trading Push
Citi’s (NYSE:C) Asia-Pacific Head of Markets, Rodrigo Zorrilla, recently revealed that the division plans to boost its presence in Asian commodities, equities and foreign exchange markets by increasing the breath and depth of its product offering in the region. Asian markets have delivered a strong performance over the last few years driven by the strong economic growth in these nations. Citigroup has traditionally lagged some of its competitors like UBS (NYSE:UBS), JPMorgan Chase (NYSE:JPM) and Morgan Stanley (NYSE:MS) among others in Asian markets. [1]
We estimate Citigroup’s sales and trading division to be the most valuable line of business as it contributes to about 35% of our $56 price estimate for the company’s stock, which is a 40% premium to the market price.
Overall the company employed $255 billion of debt capital to finance its sales and trading operations in the year 2010. We expect the capital employed by this division to increase to $275 billion in 2011 and grow to $390 billion by the end of our forecast period.
In the equities space, the company is expanding its brokerage trading to cover markets in Indonesia and Malaysia. Business expansion has been driven by the bank’s move to combine its primary markets and equities operations with the fixed-income, currency and commodity trading platform to create a single “Markets” unit which is bringing in more flow business from existing customers. Citigroup now covers over 18 foreign exchange, equities, credit and interest rates markets in the Asia Pacific region.
Pressure on Margins
Driven by the high growth in Asian countries, banks are increasing their operations in these markets driving up competition in the sales and trading business. The intense competition in the region is driving down margins; however, Citigroup is benefiting from the launch of the CitiFX platform which applies high-frequency trading algorithms to currency market and has helped the bank gain volumes in the highly competitive foreign exchange space.
On the downside, the company is looking to increase its hiring in the region by adding more than 150 employees in 2011 which will add to the costs of operations. Overall we expect the margins in the sales and trading division to increase to 57 – 58% by 2012 and to remain at that level.
See our full analysis for Citigroup
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