How is Citi faring so far in Asia in 2012?
Despite all the volatility and the endless headlines out of Europe that have dented corporate and investor sentiment, the business is holding up well. The public numbers for the first three months showed revenues were up 9% and net income was up 18% year on year with Asia accounting for close to 40% of global net.
Asia’s mega trends of a fast growing emerging affluent sector who want innovative retail banking services that embrace modern technology and the rise of corporate champions who want to raise capital and seek advice on acquisitions plays to our strengths.
Importantly we are also delivering positive operating leverage across all our business units meaning revenues from investments are outpacing expenses.
This is important as it shows the billions of dollars we have invested into this region over the last decade to support our clients are generating results. These investments are why we have a well balanced business — split roughly 50/50 retail and institutional with a portfolio of 17 markets with no one country generating more than 10% of revenues. It is this balance which is important in these tough markets, we are not reliant on one country or two or a certain business unit.
What businesses have been most affected in Asia by the concerns in Europe?
The global volatility is underlining that you need a well-balanced business — or a model for all seasons — in this day and age.
The likes of cash and treasury management, credit cards and other retail banking services are performing well and have been less impacted by the concerns in Europe. But you have understandably seen a slowing in investment sales to retail or high net worth customers.
Some episodic event driven transactions are also being put on hold. But regional debt issuance is actually up 30% year to date and M&A is down just 20% but the main slowdown has been in equities underwriting.
But Asia’s resilience was proved when recently in one of the worst weeks for euro headlines we advised GE on a $500 million investment into China and advised AMC as Wanda in China spent $2.6 billion to buy AMC and thus create history with the largest private sector investment into the US by China. But these are exceptionally challenging markets for banks and our clients — one good quarter does not make a year.
It is though worth noting that when we were formed as a bank, that same year the US declared war on Britain and its neighbour Canada. And the British prime minister was assassinated. I would still take 2012 over 1812 for now.
What would you say is Citi’s biggest achievement during the past 200 years?
Making 200 in itself is a remarkable achievement given all the events over the last two centuries — mostly external but also some of our own making. Not many institutions get to celebrate their 200th birthday — and we beat football and the automobile car to it. History is littered with companies that did not make it.
For any company who makes 200 there are of course dark days alongside the good days and we have our fair share of scars that have healed. But in many ways the issues of recent years forced us to rethink our strategy and forced us to change not only our business strategy but also our culture.
The transformation of Citi from a siloed financial supermarket trying to be all things to as many people as possible, to a slimmer and fitter global bank with a strategy of serving the institutional and retail clients we want to bank around the world is perhaps the biggest achievement. It ranks alongside the fact that during this transformation we also turned our balance sheet, our liquidity and capital ratios into a competitive advantage during one of the most volatile periods in financial market history.
Where will Citi be in 100 years from now in Asia?
The last few decades have really been about bringing global companies to Asia, especially US companies given we bank over 95% of the Fortune 500. We have also expanded our network in the last decade in Asia from 100 to 700 branches and completed major acquisitions or investments across the region — so we have built up a business that has scale.
This means we think we well positioned to support the next wave that will dominate the next century — taking Asian clients global and also supporting and banking the emerging affluent sector in Asia.
Research conducted by Citi has concluded that China and India will be the world’s largest economies by around 2030 — that’s about two decades earlier than some other forecasts — recovering the role they had in the world two centuries ago.
Trade within the emerging markets — transactions that never cross an EU or G7 border — has risen sharply, from 6% of total world trade to 15% between 1995 and 2011. Emerging market trade with advanced economies is still bigger than intra-EM trade but the gap is closing. The advanced economies’ share of global trade is now 65%, down from 79% in 1995.
Brazil, South Korea and China help to illustrate the trend. Brazil’s trade with Asia represented just 6% of its total in 1995. In 2011 it was 20% — a tripling in less than 15 years. In 1995, South Korea’s trade with China was 9% of that country’s total. By 2011 it had more than doubled to 20%.
In addition, the growing emerging market consumer base has the power to drive global GDP. Around the globe, millions of people rise above poverty and enter the middle class every year — by one estimate, some 70 million in 2011 alone. According to another estimate, by 2020, three-quarters of incremental consumer spending will come from emerging markets.
If that estimate is correct, then by that year consumer spending in Asia will overtake North America to become the world’s biggest consumer bloc. What does that mean for Citi’s clients?
To me the answer is clear. The companies that succeed in this new environment will be the ones that understand how to tap these different trade flows and serve the emerging markets.
So what does it mean for Citi as a bank?
Successful banks will be the ones that help their clients navigate this new reality. Banks need to understand the emerging markets, understand their unique needs and challenges, and be able to help their clients navigate this new world that will dominate the next century. We think we are well placed and have a competitive advantage with our global network but we are taking nothing for granted. The emerging markets will be the banking battleground for decades to come.
Any plans to list in Asia at all in your next century?
With the plans we have and the growth we are seeing we see currently no pressing reason to list in Asia and turn over our future earnings and growth to someone else. But having said that there are wider reasons, its provides a strong show of commitment and support to a region that already is around 40% of our earnings. So while it is ruled out for the immediate future and there are no plans currently, it's something that could not be ruled out over the course of a generation or two.