Citi's Drop in Trading Revenue May Make Traders Nervous

Citigroup fourth-quarter results spotlight the caution flag waved by recent indications that profit opportunities from trading might be slipping industry-wide. Still, it's too early to know whether a steeper-than-expected fall in trading activity at the end of 2009 was merely seasonal, or something more.

Citi says revenue from securities and banking (excluding credit valuation adjustments, or CVA) dipped to $5.4 billion in the fourth quarter from $6.6 billion in the third quarter, "primarily driven by lower revenues in fixed income and equity markets reflecting lower market volatility and a decline in market volumes." Ex-CVA fixed income markets revenue dropped to $3.0 billion from $4.7 billion the prior quarter, while equity markets revenue fell to $700 million from $1.3 billion.

Weaker trading results at Citi follow JPMorgan's announcement last Friday that its fixed-income markets revenue also shrank from the third to the fourth quarter due to lower volumes and tighter spreads. (Fourth-quarter equity markets revenue at JPMorgan, however, rose slightly from the third quarter.)

Fixed-income trading was a top money-maker for many institutions last year. That made it a sought-after skill, as both bulge-bracket and mid-size dealers moved to expand corporate and government bond trading teams. Hiring prospects for traders this year rest in part on whether activity will remain stagnant or bounce back.

Meanwhile, increased M&A advisory and equity underwriting business drove a 25 percent sequential rise in investment banking revenue to $1.5 billion.

Firm-Wide Compensation Fell With Headcount

For all of 2009, company-wide compensation expense at Citi declined 20 percent to $25.0 billion from $31.1 billion in 2008. Unlike JPMorgan, Citi doesn't break out compensation expense by business segment - so its release gives no insight into how well its investment bankers, traders or other market professionals were paid. Citi executives on the conference call rebuffed an analyst's request for details, saying only that Treasury Department pay czar Kenneth Feinberg approved its compensation structure before the bank repaid its TARP bailout aid last month.

As a fraction of revenue, Citi's company-wide compensation dropped to 31 percent last year from 60 percent in 2008.

Media reports late last week indicated Citi employees, including market professionals, might receive minimal cash in their 2009 bonus packages. Reuters said individual cash payments may be capped at $60,000 and even after adding stock-based payments, bankers' bonuses would be "similar to 2008 levels." The Financial Times said individual bonuses would be capped "below $100,000." Both news organs cited unnamed sources close to the company.