- Citigroup reported strong third-quarter earnings Friday, beating analyst expectations and growing profit by 12%.
- Trading revenues were robust in aggregate, but equities momentum slowed, growing just 1% compared to the same period in 2017.
- Cash equities was fingered as the culprit, with losses overshadowing gains in the prime and derivatives businesses.
- "We just didn't do as good a job navigating the choppy trading environment in cash equities," CFO John Gerspach said.
- The stock-trading business, which had experienced growth in recent periods, was reorganized in March.
After a hot start to the year, Citigroup is showing signs of weakness in one its equities business lines.
Citigroup reported third-quarter earnings on Friday, and overall the bank posted strong results, beating analyst expectations and growing profit by 12%.
The bank's trading revenues were robust in aggregate, with fixed-income leading the way with a 9% jump to $3.2 billion— lapping rival JPMorgan Chase by $400 million.
In equities, it was a different story.
The business, which has historically lagged the firm's powerhouse bond-trading operation but has shown progress in recent periods, was up 1% to $792 million.
But performance was mixed. Prime finance and derivatives gave a solid showing, but those gains were offset by losses in cash equities, "reflecting a more challenging trading environment and lower commissions," the bank said in its earnings statement.
When asked on a call with analysts, CFO John Gerspach provided more color, noting that prime, derivatives, and delta one products were up 15-16% year-over-year while cash equities lost ground.
"We just didn't do as good a job navigating the choppy trading environment in cash equities," he said, compared to the bank's strong performance in rates and currencies on the fixed income side.
At JPMorgan, equities revenues increased 17%, and the bank specifically cited strength in cash.
"We're sort of gaining share, most notably in cash and prime," CFO Marianne Lake said on the company's call with analysts Friday.
For Citi, it's a reversal of momentum as it aspires to break into the top-5 on the equities league table, which is dominated by JPMorgan, Morgan Stanley, and Goldman Sachs.
The stock trading business got off to a strong start in 2018, earning praise from CEO Michael Corbat in the first quarter after posting its best quarter in years — a 38% year-over-year gain. In the second quarter, the unit had a 19% gain, with growth across products.
The bank shook up management in its equities division in March in an effort to better align its cash, electronic, and central risk strategies, promoting Peter Lambrakis to global head of electronic cash and central risk after the departures of Young Kang, previously US head of electronic trading, and Armando Diaz, the global head of cash equities.
We don't have visibility into how cash equities specifically performed in the first half compared to the other businesses, as it wasn't specifically highlighted in earnings statements. But the business had been showing progress.
Citi's cash equities business, while smaller than competitors at the top of the league tables, grew by more than 7% in 2017, according to industry sources. That happened amid an overall decline in the business line — cash equities fell 3% to $9.2 billion across Wall Street last year.
Citigroup declined to further comment on the performance in equities beyond Gerspach's remarks during the earnings call.
