Credit Suisse Sells Commodities Trading Book To Citigroup

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In keeping with its near-term plan of improving leverage ratios and boosting profitability by shrinking investment banking operations, Credit Suisse (NYSE:CS) has sold its commodities trading book to Citigroup (NYSE:C). [1] The second largest Swiss bank announced its decision to implement another round of cuts to its investment banking operations earlier this year, after having spent more than two years shoring up its balance sheet and tweaking its business model in response to various regulatory changes (see Credit Suisse Announces Strong Q3 Results, Plans To Shrink Investment Bank Further). The sale of the bank’s commodities positions comes within weeks of Credit Suisse’s decision to scale down its prime brokerage unit.

At the same time, the sale highlights Citigroup’s determination to grow its commodities trading business over recent years even as most of its peers are shrinking or shuttering these operations. The diversified banking group acquired Deutsche Bank’s (NYSE:DB) commodities trading book just two months ago, and has been eager to garner a larger share of the commodities market even as U.S. banks remain under strict scrutiny from regulators for their involvement in the physical commodities business. [2]

See the full Trefis analysis for Credit Suisse | Citigroup

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Over the last few years, Credit Suisse has been walking a tightrope to ensure that its goal of shrinking its balance sheet and cutting costs across its business units does not end up eating into its top-line numbers in the long run (see Credit Suisse Announces Simpler Organizational Structure To Focus Business, Cut Costs). While the bank has made significant progress in meeting its targets, investors have questioned Credit Suisse’s decision to retain a full-fledged investment bank on several occasions – especially since rival UBS has shrunk its fixed income trading business to a fraction of its original size. In an attempt to ease investor concerns while also opening up avenues to improve leverage ratios, the bank is now looking to exit various investment banking units.

Credit Suisse first announced plans to exit the commodity trading business in July. The bank’s commodities trading book includes positions in base and precious metals, coal, iron ore, freight, crude oil, oil products as well as U.S. and European natural gas – all of which will be transferred to Citigroup. Credit Suisse intends to retain its U.S. power trading book, and will continue to provide commodity investor products to its clients. Notably, the business has had a poor run for the year, with the bank reporting a loss of CHF 63 million ($64 million) from commodity, emission and energy products for the first nine months of the year. [3] In comparison, these operations churned out a profit of CHF 269 million ($273 million) for the first nine months of 2013. With global commodity prices tanking over recent months, there is not likely to be an improvement in the full-year revenue figure.

As for Citigroup, the deal is another big step towards its long-term strategy of becoming one of the largest players in the commodities trading industry. Other banking giants – including JPMorgan (NYSE:JPM), Barclays (NYSE:BCS) and Deutsche Bank – have exited the business, which is capital-intensive and has been unable to generate good returns over recent years. Besides acquiring Deutsche Bank’s commodities trading book earlier this year, Citigroup has also been hiring more sales personnel for its commodities business. [4] We believe that the bank’s decision to focus on the commodities market will make it an important source of revenue for its investment banking operations in the long run.

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Notes:
  1. Citi buys Credit Suisse commodities trading book, Reuters, Dec 19 2014 []
  2. Citi buys Deutsche commodities trading book in expansion push, Reuters, Oct 20 2014 []
  3. 3Q14 Earnings Release, Credit Suisse Earnings Releases, Oct 23 2014 []
  4. Citigroup Bets on Commodities as Rivals Consider Retreat, Bloomberg, Dec 7 2013 []