Even at the height of the financial crisis, when Citigroup was reeling from billions in subprime losses and needed government funds to survive, Hong Kong trading tycoon Victor Fung says he never thought about abandoning his family company’s 100-year-old relationship with the bank.
Within weeks of receiving a $45 billion bailout from the U.S. government in October and November 2008, Citi was aggressively seeking new business from Asian companies, including Fung’s conglomerate, Li & Fung Group. In May 2009, Citi teamed up with Goldman Sachs (Asia) to arrange a HK$2.
7 billion ($348 million) share placement for Li & Fung Ltd., the group’s consumer goods trading company. Last October, Citi worked with J.P. Morgan Securities to help the group’s Trinity menswear subsidiary raise HK$773 million in a public listing on the Hong Kong Stock Exchange. And in May of this year, Citi was joint lead manager, along with HSBC Holdings and J.P. Morgan, on Li & Fung’s $400 million, ten-year bond issue, which was later increased to $750 million.“The global problem was something you would expect a large commercial bank of that type could face,” says Fung, chairman of the group, which had sales of $13.4 billion in 2009 and is the world’s biggest supplier to retailers like Wal-Mart Stores and Target Corp. “Frankly, they didn’t skip a beat in Asia. We didn’t feel it.”
CEO Vikram Pandit is betting heavily on Asia in his attempt to restore the bank to its former profitability and prominence, and comments like Fung’s are music to his ears. Citi’s presence in the region is rivaled only by that of HSBC among global banks and spans corporate and investment banking, retail banking and wealth management. In stark contrast to its woes in the U.S, the bank remained solidly in the black in Asia during the worst of the crisis, generating approximately $15 billion in net profits from 2007 through 2009. The bank reported $2.54 billion in net income in Asia in the first half of this year — 28 percent of its overall net income from continuing operations. Before the crisis, Asia contributed only 16 percent of the bank’s global profits.
“We were always open for business,” says Stephen Bird, co-CEO of Citigroup’s Asian operations. He points out that although Citi did sell its Japanese brokerage, Nikko Cordial Securities, to bolster its capital last year, the bank has retained other key assets in the region, including stakes in China’s Guangdong Development Bank and Shanghai Pudong Development Bank Co., and its most recent Asian acquisition, Taiwan-based Bank of Overseas Chinese, which it bought for $426 million in April 2007.
Now Pandit is looking to grow Citi’s Asian footprint. Over the past year he has reorganized the bank’s sprawling operations in the region so that each of its three main business lines — consumer banking, corporate and investment banking, and transaction services — report to Bird and his co-CEO, Shirish Apte. The move aims to generate new synergies among the divisions and eliminate overlaps. Citi has also been hiring selectively for the investment bank and opening new branches,with an emphasis on China.
“We have a platform that spans the world. As Asia looks outbound for growth and more companies look to Asia to expand, our priority is ensuring we are in the middle of those trade flows,” Apte says. He and Bird sat down with Institutional Investor for an interview in the 50th-floor conference room of Citibank Tower in Hong Kong, the bank’s regional headquarters.
Bird and Apte face plenty of challenges in trying to grow Citi’s Asian business. The bank has lost significant market share in investment banking across the region, a consequence of its own internal turmoil over the past three years. Moreover, the idea that Asia is central to the group’s growth prospects is hardly a unique one. Citi faces sharper competition across the region from international competitors eager to grab a slice of the fast-growing market. HSBC and Standard Chartered are investing heavily to build up their investment banking and retail operations in Asia, while most global investment banks — including Bank of America Merrill Lynch, Barclays Capital, Credit Suisse, Deutsche Bank, Goldman Sachs Group, JPMorgan Chase & Co. and Morgan Stanley — are adding staff and looking to grow market share. “All major international banks are trying to position themselves in Asia. Japanese banks are all vying for market share. Even local banks are expanding,” says Neil Katkov, the Tokyo-based head of Asian research at financial services consulting firm Celent. “Competition is heating up.”
“I think Citi still has a great business and a great network in Asia,” says a former Citi executive, who spoke on condition of anonymity. But, he adds, “the events in the last couple of years have weakened Citi in some respects.”
Even in its crisis-humbled state, Citi boasts an enviable Asian franchise. The bank has more than 700 branches across the region, 200,000 cash collection points at post offices and convenience stores, 32 million active retail accounts and tens of thousands of corporate accounts. The bank had a record $220 billion-plus in deposits in Asia at the end of June: approximately $120 billion from corporations and $100 billion from retail customers. That regional deposit base was up more than 20 percent from 2007. Citi has also grown its assets in the region, to $307 billion at the end of June, up 18 percent from a year earlier and up 23 percent from the end of 2007. The bank employs about 50,000 people in Asia — roughly one fifth of its global workforce.
“I think Citi has a really good franchise in Asia, is profitable and is doing the right things to stay that way,” says Paul Schulte, a former Asia equity strategist at Nomura International who now heads the financial sector research team at CCB International Securities in Hong Kong. “Citi Asia’s primary weakness is that even a small write-off in the U.S. can easily wipe out its profits in Asia.”
The Asian growth strategy is part of a much wider revamp that Pandit is orchestrating. Since taking over as CEO in December 2007, he has moved to disassemble the financial supermarket created by former boss Sanford Weill, by splitting the group’s core retail, commercial and investment banking operations from its noncore activities, which range from insurance to consumer lending. The bank sold a 51 percent stake in its Smith Barney brokerage unit to Morgan Stanley for $2.7 billion in January 2009. Earlier this year it reduced its holding in insurance company Primerica to less than 50 percent by selling a chunk of the business to private equity house Warburg Pincus and floating a stake through an initial public offering. Citi is looking to sell or wind down the remainder of its noncore operations.
The bank raised $17 billion with a secondary stock offering last December and paid back the $45 billion it had received under the U.S. government’s Troubled Assets Relief Program. The Treasury Department, meanwhile, sold 2.6 billion shares of Citigroup stock between April and June, reducing its stake to 5.1 billion shares, or 18 percent. It aims to dispose of the rest of its holdings by the end of this year.
“Pandit came in with a very large task. One of the areas he got right was carving Citi into core and noncore businesses and assigning a team to write down the noncore businesses and sell them,” says Joseph Scott, a New York–based senior director with Fitch Ratings. The agency boosted its rating on Citi from C/D to A+ following the TARP repayment in December.
The reorganization, combined with a revival in securities markets and a decline in bad-loan losses, has had a big impact on the bank’s bottom line. Citigroup increased its net income by 21.3 percent in the first half of this year, to $7.1 billion.
“Citi today is fundamentally a very different company from what it was only two years ago,” Pandit says in a written response to questions from Institutional Investor. “With our financial strength, strategic clarity, efficiency, world-class business talent and unique global footprint, Citi is well positioned to benefit from the key drivers of economic growth in developed and emerging markets in Asia and across the globe.”
The bank still has a long way to go before it can return to anything near its former glory, though. For a group of critical business indicators, including compound annual returns, valuations and nonperforming loans, the bank ranks 20th out of 32 global banks, according to CCB International’s Schulte. He says Citi should consider spinning off its Asian division to help shareholders realize maximum value.
Citi executives reject that notion out of hand. The bank’s key attraction for investors and clients is its vast global network, which includes a presence in 160 countries around the world. “All of these regions — Asia, the Middle East, Africa, Europe — are a totally integral part of this entity we called Citicorp,” says Apte. “Many clients today look for a bank that operates globally and also has the ability to service locally. There is no possibility of breaking this entity up.
Pandit’s effort to reorganize Asian operations didn’t go smoothly at first because of management turmoil. In July 2008 he appointed Ajay Banga, a 13-year Citi veteran, as regional CEO to spearhead the integration of the bank’s operations in Asia. Banga served only 11 months in that role before jumping to credit card payments company MasterCard in June 2009 to become chief operating officer and, more recently, chief executive officer. Citi also lost its top investment banker in the region when 23-year veteran Robert Morse left in August 2008 to set up an Asian-based financial services company, Primus Financial Holdings.
Last year, Pandit named Bird and Apte as co-CEOs to finish the job that Banga began. Bird, a 43-year-old Scot, worked as an executive with GE Capital in the U.K. before joining Citi 12 years ago as regional head of operations and technology, based in Singapore. He served as head of operations for Latin America, then rose to head Citi’s Asian consumer businesses before being named co-CEO. Apte, 57, an Indian national, joined Citi 28 years ago as a relationship manager in Mumbai, then worked his way up the ranks in corporate and investment banking in Europe to become CEO of the bank’s operations in Central and Eastern Europe before his return to Asia last year.
The two executives divide the region geographically, with Bird in charge of northeast Asia while Apte looks after the southeast.
The two men have overseen a radical restructuring of Citi’s Asian operations, designed to integrate various business lines and increase cross-selling opportunities. The move is part of Pandit’s broad strategy of ending the silo culture of the old Citi. Previously, the bank’s divisions operated almost as independent entities and often competed with one another as much as with rival banks. Different bankers from each of Citi’s major divisions would descend upon the same clients week after week — a phenomenon known as “the Citi swarm” — often causing confusion and frustration among customers.
Under the new setup, the heads of Citi’s consumer, investment banking and transaction banking operations in Asia all report to Bird and Apte as well as to their divisional bosses in New York. The unified strategy is organized around serving client needs rather than pushing specific products. It encourages communications and cross-selling of all products and services among retail banking; investment banking; private banking, which caters to the region’s wealthy investors; and transaction banking, including corporate treasury services.
“There is no Citi swarm,” says Aamir Rahim, head of private banking for Asia-Pacific. “We don’t have different silos calling the same client and falling all over each other. That had to stop, and it has.” Anthony Nappi, head of global transaction services for Asia, says the new approach is helping to drive growth in Asia. “We are now constantly talking about how we can work together across the bank to offer better services to help our clients grow in the region,” he says.
Many customers appreciate the new strategy. “Citi’s staff members now have the ability to provide us a 360-degree service. That impresses us a lot,” says Aaron Chan, president of Taiwan-based Pou Chen Corp., the world’s largest athletic shoemaker, with more than $6 billion in sales in 2009. The company works with more than 30 banks, including HSBC and Standard Chartered, but Chan says his executives always call Citi first because of the range of its services. “They give us good advice on risk management, on foreign exchange trading, on hedging,” he says.
One example of the new integrated approach involves Citi’s corporate and consumer banking operations. In some countries in the region, the bank has opened branches and installed ATMs on the campuses of some of its corporate clients, giving it direct access to employees, says Jonathan Larsen, head of consumer banking in Asia. Citi has been particularly aggressive in Singapore, where it has opened branches on the campuses of such major companies as Chartered Semiconductor Manufacturing, MediaCorp, Singapore Airlines and Singapore Press Holdings. “We are offering consumer banking services to corporate customers, including payroll accounts, credit cards and wealth management services across the region,” says Larsen. “It helps grow our client base and also helps broaden the relationship with the corporate.”
Profits in Asian consumer banking more than doubled in the first half of this year, to $1.15 billion. The region accounted for 52 percent of Citigroup’s overall consumer banking profits in the period. In addition to providing 32 million customer accounts, Citi is the largest credit card issuer in Asia, with 15 million cards outstanding; it boasts a No. 1 or No. 2 market-share position in eight of the 12 countries in which it issues cards.
The bank is looking to drive growth by opening new branches across the region and upgrading technology throughout its network. The Asian consumer unit added 27 new branches in the first half of this year and now has 710 branches in the region. Citi has also launched so-called smart banking branches in Japan and China in recent months. These high-tech outlets contain Citi Work Benches equipped with touchscreens that allow customers to apply for debit cards and other services, conduct banking transactions without the help of a teller and review and confirm details of their accounts.
The biggest potential for growth is in the region’s two largest economies, China and India. In China, Citi currently operates 30 branches in ten cities, compared with 25 branches for its chief rival, HSBC; in August, Citi opened the first full-service branch in the Shanghai subway, a transit system that serves more than 7 million commuters a day. Citi is also entering second-tier cities in its drive to expand. In December it opened a branch in Chongqing, a sprawling municipality of 31 million near the Three Gorges Dam in the country’s southwest. Citi has ambitious expansion plans, aiming to open eight more branches by the end of this year and to enter one more city, Guiyang, a city of 4 million that is less than an hour’s flight south of Chongqing. Over the next three years, the bank is looking to triple its Chinese workforce, from the current 4,500 to nearly 12,000, with much of it devoted to retail banking, Bird says.
Citi is also competing neck and neck with HSBC in India. It has 42 branches in 27 Indian cities, compared with HSBC’s 46 branches in 25 cities. Citi has $24 billion in assets in India and employs nearly 8,000 people in the country, says Pramit Jhaveri, the bank’s CEO in India. “It’s a very large footprint, including global banking, a securities business, retail and private banking and global transaction services,” says Jhaveri, who was formerly Citi’s head investment banker in the country.
In contrast to its thriving consumer operations, Citi’s investment banking business in Asia has suffered, falling significantly in the main league tables, as it has globally.
In equities, Citi ranked eighth globally in the first eight months of this year, serving as a book runner on deals worth $18.1 billion, well behind top-ranked JPMorgan’s $37.5 billion and No. 2 Goldman Sachs’ $32 billion, according to data provider Dealogic. In Asia the bank stood in ninth place with volume of $6.4 billion, well behind Goldman’s market-leading $15.2 billion and No. 2 Nomura’s Holdings $14 billion. As recently as 2008, Citi ranked fourth globally and in Asia as an equity underwriter.
In debt capital markets, Citi ranked seventh globally, with $187 billion in bonds underwritten year-to-date through August, far behind the $289 billion of market leader Barclays Capital. In Asia the bank ranked 18th, serving as a book runner on deals woth a total of $7.8 billion, lagging No. 1–ranked Mizuho Corporate Bank’s $45.8 billion. In 2008, Citi ranked fifth globally and 23rd in Asia.
Citi ranked eighth globally in mergers and acquisitions, advising on 128 deals worth a combined $206.7 billion year-to-date through August, trailing top-ranked Goldman’s 208 deals worth $391 billion. The bank ranked 15th in Asia, advising on 33 deals worth $17.7 billion; market leader Morgan Stanley advised on 51 deals worth $54.8 billion in the same period. In 2008, Citi ranked fourth globally and sixth in Asia in M&A.
In a bid to regain lost ground, Pandit tapped Alasdair Morrison, a former Morgan Stanley colleague, to join Citi in January to recruit banking talent and strengthen relationships with corporate clients. Morrison served as Morgan Stanley’s CEO in Asia from 2000 to 2007; before that, he was group managing director of Jardine Matheson Holdings, a Hong Kong–based conglomerate that once dominated the colony. “Citi is trying to strengthen its bench in the more traditional banking areas,” he says.
Morrison has worked with Farhan Faruqui, head of Asia-Pacific global banking, the unit that combines Citi’s corporate and investment banking businesses, to lure a number of prominent bankers. Among the bank’s top hires are Colin Banfield, who joined Citi in June from Nomura to head up M&A in Asia. Banfield spent 16 years as a banker with Credit Suisse First Boston before leaving in September 2007 to head Lehman Brothers International’s M&A business in Asia ex-Japan. He joined Nomura when it acquired most of Lehman’s Asian business after the latter’s bankruptcy in September 2008, and led the Japanese firm to the top of the Asian M&A league tables in 2009, the first time Nomura had achieved that status.
Earlier this year, Citi hired Jason Johnson to head its natural-resources team. Johnson previously spent 14 years at Credit Suisse and helped advise China Petroleum & Chemical Corp. last year on its $8.4 billion acquisition of Addax Petroleum Corp. Another recent recruit is Rodney Tsang, who joined from Bank of America Merrill Lynch to be co-head of investment banking for China. Tsang specializes in industrial and real estate plays and has worked on such deals as a $230 million equity placement for Chaoda Modern Agriculture (Holdings) in June 2009 and a $230 million secondary offering by Melco Crown Entertainment, a Hong Kong–based casino operator, in May 2009.
Morrison’s new recruits have their work cut out for them, and some doubt whether they can return Citi to its former position.
“I don’t know if their new strategy of ending the silos is going to work,” says the former Citi executive. “I think it’s very hard to compete against Goldman Sachs without well-trained investment bankers, and to compete with local banks without well-trained retail bankers. To mesh everyone together doesn’t give you best-in-class bankers. Clearly, if you look at the league tables, it hasn’t been a success.”
Another way Citi is trying to generate more banking business is by increasing the number of Asia-focused desks outside the region. These desks provide a full range of services to corporate clients — everything from treasury and transactional services and foreign exchange to trade financing, lending and advisory help. The bank currently has 23 Asia desks, of which 13 are located outside the region, in places like New York, London, Moscow and São Paulo. The bank plans to double the number of such desks outside Asia in the next year, with a particular emphasis on emerging markets, says Asia-Pacific global banking chief Faruqui. “A priority is ensuring that we are in the middle of the increased flows between emerging markets,” he says.
Chan of Taiwan’s Pou Chen says the company uses Citi’s Asia desks in North America and Europe, the primary export markets for its shoes, and appreciates the fact that Citi employs many Taiwanese at its Asian desks outside the region. “Citi provides services globally, more than anyone else we bank with,” he says.
The Asia desks underscore the breadth of Citigroup’s global banking business, a key competitive advantage, says Faruqui. “A monoline investment bank can only sell equity or debt capital market products,” he says. “We have a franchise that can literally offer any solution to a client, and with our local presence can be either an international capital markets solution or a local capital markets solution. We can also support clients with balance sheet as needed.”
In addition to its consumer and investment banking businesses, Citi is ramping up its private banking efforts in a bid to capture a share of Asia’s fast-growing wealth. The bank is one of the leading wealth managers in the region, with some 6,000 private banking customers and some $165 billion in assets.
Citi has created new tiers of service to attract and retain high-end clients. Before the crisis all customers with $130,000 or more on deposit were categorized as “Citigold” clients, regardless of how much money they had with the bank. Today the bank offers a full range of private banking services to Citigold Private clients, who have between $1 million and $10 million of liquid assets on deposit. At the top end, Citigold Private Bank clients have more than $10 million on deposit and can get access to the bank’s expertise, including its investment bankers, wherever in the world they happen to be.
“Many of the 6,000 or so who we cover are Asia’s wealthiest, who also run business empires,” says Asian private banking head Rahim. “They have initial public offering needs and company-specific needs alongside the traditional wealth management services. We can serve their companies just as well as we serve them individually, and we are working in partnership with many other areas of the bank.”
Notwithstanding the reorganization and renewed focus on Asia, there is no shortage of skeptics who doubt whether Pandit can succeed in restoring Citi to its former glory. “I would like them to succeed,” says the former senior executive. “I’m still a shareholder. I hope the shares go way up from their current prices, but I don’t believe it’ll ever get close to $50 again.” Citi’s stock was trading at about $3.90 late last month. Recent weakness in the U.S. and European economies makes it all the more crucial that the company generate strong growth in Asia and other emerging-markets regions.
CEO Pandit says he is confident the bank is on the right track: “We are capitalizing on both our strong presence in emerging markets and our global capabilities to generate growth.”
At Li & Fung, chairman Fung is planning to continue the group’s relationship with Citi — one that began when his grandfather and company founder, Fung Pak-liu, opened an account at Citi’s branch in Guangzhou (then Canton) in 1911 — for a long time.
“I’m very confident Citi will be around another 100 years,” says Fung. “Both of us are planning our relations on very firm ground.”
