Citigroup announced this week that it is exiting the municipal bond market by closing down its public finance division, ending its long history as a major underwriter in the $4 trillion state and local government debt market. This move comes as part of new CEO Jane Fraser’s ongoing efforts to streamline Citigroup and improve shareholder returns.
Background
Citigroup has been a leader in municipal underwriting and trading for decades, known for its large share of deals and strong trading operation. As recently as 2021, Citigroup was the third largest underwriter of municipal bonds behind Morgan Stanley and JPMorgan.
However, the business has faced profitability struggles in recent years amid fierce competition from major banks and independent municipal-focused firms. Lower trading commissions and narrowing bid-ask spreads have made it difficult to generate substantial profits from municipal bond market-making and underwriting.
Citigroup’s municipal bonds division shutdown impacts over 200 employees in trading, syndicate, and public finance banker roles.
Citigroup Dropped from Major Alabama Sewer Deal
The closure comes shortly after Citigroup was dropped from participating in a $2.5 billion sewer bond issue from Jefferson County, Alabama. Citigroup had originally been set to serve as senior manager on the deal, the largest municipal bond issued so far in 2023.
However, according to reporting from The Bond Buyer, Jefferson County made the last-minute decision to remove Citigroup as senior manager after hearing rumors of an impending exit from the municipal bond market:
“County officials said they decided to drop Citigroup from the senior manager role after hearing rumors through industry sources Friday that the firm was shuttering its municipal bond operation.”
This high-profile removal from a mega bond deal likely accelerated Citigroup leadership’s decision to go ahead with closing down the municipal bonds division. Being dropped from such a large transaction also signals that issuers have concerns about Citigroup’s capabilities going forward.
Winding Down Municipal Bond Positions
As part of its exit from the market, Citigroup will be working to wind down its existing book of municipal bond positions. This could take some time given the bank’s large presence as a trading counterparty in the market.
Citigroup has tens of billions in municipal bonds currently held in inventory, posing some risks if the bonds are unloaded too quickly. Its withdrawal as a market maker may impact liquidity for some issues.
Analysts expect that Citigroup will be highly selective in deciding which bonds to sell based on current pricing and liquidity conditions:
“I imagine Citi will be very patient in terms of winding down that portfolio,” said Nicholos Venditti, Thornburg Investment Management’s head of fixed income. “Just given liquidity dynamics, they’re not going to wholesale liquidate that portfolio.”
The closure of its municipal bond division marks Citigroup’s third major business exit in the last week alone, following the announced shutdowns of its consumer banking franchises in Mexico and Russia/Ukraine/12 other markets across Europe and Central Asia.
Part of Massive Business Restructuring
The municipal bonds closure reflects Citigroup CEO Jane Fraser’s strategy to exit non-core operations and focus on higher-return businesses. Fraser’s turnaround plan aims to boost Citigroup’s profitability after years of lagging peers.
Just a day before the municipal bond announcement, Citigroup also confirmed it is shutting down its distressed debt trading desk globally. The distressed debt desk was reportedly struggling to generate profits amid calmer credit markets:
“The business has been ‘fighting against the tide’ in recent quarters amid low volumes and as central bank support props up troubled companies that might otherwise default.”
These exits from municipal bonds and distressed debt trading are estimated to impact around 500 positions across both businesses. They build on a long list of over 15 business sales and exits orchestrated by Fraser since taking over as CEO in early 2021.
Citigroup has been described as having one of the most extensive ongoing business revamps among large U.S. banks. Fraser’s restructuring plan has prioritized improving returns from wealth management in Asia and institutional services for multinational corporations.
Costly Write-Offs Possible from Unloading Assets
While closing non-essential businesses allows Citigroup to reallocate capital towards more profitable units, analysts caution the bank may have to take significant write-downs when selling certain assets:
| Business Unit | Estimated Write-Down |
|---|---|
| Consumer banking exits | $1.2 billion |
| Russian consumer business | $170 million |
| Distressed debt trading desk | $100-200 million |
These write-offs could put a dent in near-term profits but ultimately streamline operations. Citigroup has suggested the consumer unit exits could generate $8 billion of capital over time for redeployment.
The shutterings of consumer banking and municipal bond operations in quick succession shows Fraser’s cost-cutting agenda accelerating into year-end. More asset sales or business closures could be forthcoming as Citigroup works to hit an overall profitability target of above 10% return on tangible capital.
Impact on Municipal Bond Market
Citigroup’s exit leaves a hole in municipal bond underwriting capacity that is unlikely to be fully filled by remaining players anytime soon.
With one fewer competitor, the bank withdrawals also give more pricing power to remaining large underwriters like Morgan Stanley, JPMorgan and Bank of America. These banks could potentially capture larger shares of bond issuances and increase fees charged to state & local government issuers.
A report from Bloomberg Intelligence analysts even warned Citigroup’s closure creates significant systemic risks for the wider municipal securities market:
“A dangerous reduction of management bandwidth is unfolding in the $4 trillion municipal-bond market just as governments nationwide must finance urgent needs.”
If other banks follow Citigroup’s lead in deprioritizing municipal bond underwriting, it could jeopardize financing availability for state and city infrastructure projects.
Going forward, stakeholders will be monitoring whether regional banks or non-bank municipal bond specialists can step in to fill the gap over time. But capacity constraints make it unlikely they can immediately cover all the demand.
For now, the exit of a top-3 underwriting player creates renewed uncertainty for municipal financing markets that are still recovering from extreme credit volatility during the early COVID crisis.
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