Citigroup Inc.’s chief financial officer on Monday said he expects a steep slump in trading revenue to mitigate, while emphasizing that the New York bank’s primary focus remains on passing its stress tests.
John Gerspach said he expects fixed-income and equities-trading revenue to be roughly flat in the third quarter with the year-ago period, when Citigroup and its rivals saw trading revenue hammered by investor expectations that the Federal Reserve could move to raise interest rates.
Mr. Gerspach also said he expects quarterly investment-banking revenue to be stronger than the year earlier, but said it would likely be down from the second quarter due to a seasonal decline in underwriting volumes.
Mr. Gerspach, speaking at the Barclays Global Financial Services Conference in New York, was peppered with questions from the audience on the bank’s progress on preparing for the next round of stress tests. In March, Citigroup failed to get Federal Reserve approval to reward investors with higher dividends and stock buybacks. The bank’s chief executive, Michael Corbat, has since said the stress testing–the “Comprehensive Capital Analysis and Review,” or “CCAR,” process–is the bank’s most important goal.
On Monday, Mr. Gerspach reiterated that sentiment. “Priority one is CCAR, priority two is CCAR and priority three is CCAR,” he said. In response to an audience member who accused him of striking a similarly optimistic tone before Citigroup failed its stress tests, Mr. Gerspach said the bank’s understanding of CCAR has since deepened.
“A year ago, we had a false set of understanding coming out of the previous year’s CCAR,” he said. “We didn’t grasp totally the need to ingrain the qualitative aspects in everything that we do.” The Fed’s March rejection of Citigroup’s capital plan was based on qualitative aspects, namely deficiencies in how the bank plans for a future recession, including its ability to project revenue and losses across all of its operations under a scenario of sustained economic stress.
Mr. Gerspach said Citigroup now has “a much greater appreciation of the need to have a bottom-up approach” to CCAR.
The bank’s expenses will likely be up in the third quarter from the second, driven by rises in costs related to preparing for the stress tests.
Mr. Gerspach expects consumer revenue to grow modestly both on a year-over-year and a sequential basis, and treasury and trade-solutions revenue to be up from a year ago.
He said trading revenue ultimately depends on how September plays out, noting that he expects the month to be better than August, which in turn was weaker than July.
Citigroup’s trading results, like those of rival investment banks, have seen a string of sharp declines beginning in the third quarter of last year, amid uncertainty about the Fed’s plans to taper its bond purchases. In the third quarter of 2013, Citigroup reported its fixed-income trading revenue fell 26% from a year earlier to $2.78 billion, while equity-market revenue rose 36% from the prior year.
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