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Citigroup significantly cuts lending to buyout firms

The Wall Street giant Citigroup Inc. has heavily reduced its lending to buyout firms, to improve returns in the market business and to adhere to the strict new capital regulations. 

Private equity funds use subscription credit facilities to shorten effective investment period, viewed for banks as a low-margin business with buyout firms. Photo: Bloomberg

The Financial Times (FT) reported last September that Citigroup planned undertaking drastic cutbacks on lending, called “subscription-line financing, to private equity firms from $65 billion to $20 billion in the months. 

Citigroup “pretty significantly” reduced its portfolio of subscription credit facilities, CFO Mark Mason said July 14, based on the profitability of some facilities and the fact that some of the clients weren’t using the bank’s other products.

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The bank’s Q2 profit drops 36% to $2.92 billion, or $1.33 per share. Given those low or subpar returns from some of facilities, it requires more collateral from the least-profitable trading clients and ready to drop some of them.

The bank ended the second quarter with Common Equity Tier 1 capital requirement of 13.3% and it has been preparing for a higher 12.3% this October.

As part of the plan to improve its ratio of revenue to risk-weighted assets, the bank has managed to reduce risk-weight assets by $120 billion in the past two years, Mason said July 14.

Mason regards these proactive efforts as critical when facing the pending regulatory changes, especially Federal Reserve’s new capital requirements, set to go into effect Oct. 1.

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