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Citi Finds New Revenue Stream in Crisis-Ridden Europe

John Grgurich
September 10, 2012

In the last few years, big American banks have left few stones unturned, and few continents unexplored, in their search for new revenue streams: Post financial-crash regulation has forced them to. But, of all the places you'd expect them to find a new source of revenue, crisis-ridden, recession-plagued Europe is probably the last. But that's exactly what Citigroup (NYSE: C  ) has done.

The art, and profit, of the commodity deal
Financial Times is reporting that the super bank is hopping the pond to open a commodity-trade-finance business there. As the name suggests, commodity-trade finance helps trading houses that deal in commodities -- be it corn, coffee, or precious metals -- finance their deals. Since commodity-trading houses tend to be lightly capitalized, this is a critical service, especially for big deals.

Say a trader wants to purchase $100 million worth of soy beans in the hopes of finding a buyer later. A bank will step in, fund the deal, and carry the $100 million on its balance sheet until the trader can find a buyer and make the sale. The bank then collects a tidy profit on the deal. It's a simple, straightforward way to make money: potentially, quite a lot of it.

According to Kris Van Broekhoven, the Deutsche Bank (NYSE: DB  ) executive Citi poached to head up the new unit, the bank expects to make $300 million in net profit from commodity-trade financing over the next three years. Nothing to sneeze at, even for a leviathan like Citi.

One regulation to rule them all
For starters, Citi says it will stick to financing energy deals, eventually moving into other, more typical commodities. That's smart: Move slowly, learn the business, then scale up. Clearly, this enterprise has been thought through on Citi's end, which isn't always the case when a business decides to try something new.

And new is the name of the game right now in banking. It has to be. The 2010 Dodd-Frank banking legislation changed everything. Even the old-line investment banks have started to move back into safer, more traditional lines of business. Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: