Citigroup Inc (C.N) and rivals in the commodity trade finance sector are facing headwinds of weak oil prices, sanctions on Russia and stiff competition, which have pressured fees.
The U.S. bank, which launched its business in the sector three years ago, has shifted attention from China, where fees are weak, to Africa and Latin America, said Kris van Broekhoven, global head of commodity trade finance.
"It's still a tough environment," he told Reuters.
"China is not an easy market. It's very competitive and pricing is low. We want growth, but not at any cost."
Citi started off with oil, added metals last year and plans to include agricultural commodities by the end of 2015.
The bulk of its business has come from financing deals with big trading houses and this is being expanded to include the next tier of mid-sized traders, Van Broekhoven said.
But the sharp drop in oil prices means that the value of business in the sector available for financing has tumbled.
"For the same number of barrels, for the same cargos that move from one place to another, the value is half of what it was before," he added.
"That means that banks have to fight to get their credit lines utilized, which drives pricing down."
RISING COSTS
At the same time, costs are rising due to a heavier burden of compliance and regulations.
In certain cases, Citi has refrained from certain business when the returns were not enough.
"When the costs are increasing, at a certain point it no longer makes sense to do something at the price the client is paying," he said.
"I do believe the moment will come when banks will reprice a bit upwards. That's one thing I would expect over the next 12 months."
Citi, the third-biggest U.S. bank by assets, is pressing on with its expansion in commodity trade finance and is still growing its revenues in the sector every year despite the challenges, Van Broekhoven said.
According to a report in the Financial Times in 2012, Citi aimed to make more than $200 million in net income from the business within three years. Van Broekhoven declined to give specific revenue figures or to comment on the reported target.
Sanctions on Russia due to the Ukraine crisis have also had an impact on Citi's business since it has been a big player in the region, Van Broekhoven said.
To help counter the challenges, the commodity trade finance business, which has a headcount of 14, plans to expand into Latin America this year. Citi plans to add staff in that region and is also recruiting someone to run agricultural trade finance globally, he said.
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