Citi to slash lending to buyout funds as new capital rules bite

Citigroup is dramatically scaling back the amount it lends to asset managers, including private equity firms, as the US bank races to meet tough new capital rules, according to people familiar with the matter.

The type of lending that Citi is backing away from is known as subscription-line financing, a niche but important business for Wall Street banks that want to develop deep ties with dealmaking clients, especially private equity groups.

Citi’s existing book totals roughly $65bn and the bank is preparing to slash that to about $20bn in the coming months, one of the people said.

There is high demand for the lending from buyout groups in particular, which use money pledged by fund investors as collateral for the short-term bank loans to close deals in advance of receiving cash from their backers.

Citi declined to comment.

Citi’s move underscores the impact of new capital requirements implemented by the Federal Reserve that threaten to curtail lending by large US banks. This week Jamie Dimon, chief executive of JPMorgan, warned the rules posed a “significant economic risk” that would restrict the flow of credit to American companies and consumers.

Citi, like JPMorgan and Bank of America, is being forced to increase its buffers this year because it has been designated as a global systemically important bank, requiring it to hold more capital relative to its risk-weighted assets.

Banks can meet the requirements by retaining more profits or raising new equity, but most are opting to reduce the amount of assets on their balance sheet.

It comes in the middle of a restructuring of the bank under chief executive Jane Fraser, who is also exiting many of the bank’s retail operations overseas. The lender is grappling with a 2020 consent order with US banking regulators under which it agreed to upgrade its processes and technology.

Citi has started to alert some of its biggest private equity clients about the impending changes, according to people briefed on the conversations.

One top private equity said that most large Wall Street banks are still committed to subscription-line financing but that Citi — which has been a top-three player in the business — is scaling back.

Another buyout executive interpreted the move as a sign that Citi may be embarking on a broader reconsideration of its role in the lucrative but risky market for providing credit to private equity groups.

Subscription lines carry minimal risk but do not tend to generate high returns. Instead, they are offered by banks to cultivate relationships with buyout firms in the hopes of winning more lucrative business later, the executive said.

“Citi was an outlier,” they said, adding the bank had a big subscription line business but a smaller presence in financing buyouts.

“As a ‘loss leader’ or low-profitability safe business to establish relationships, it’s a great business. But as a standalone with no follow-up business, it’s mediocre,” they said.