Citigroup Bets On Overseas, Underserved Markets
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Citigroup (NYSE: C), the nation's third largest bank by assets, and among the Financial Stability Board's listing of 29 banks “Too Big to Fail”recently hosted its Technology Clients Conference. At that conference, Chief Financial Officer John Gerspach delivered a detailed glimpse of the company's present and thoughts regarding upcoming business and regulatory trends.
The first thing one notices is that the big bank's revenues were over $93 billion in 2009, and fell to $76.5 billion in 2011. No matter how aggressive cost cutting might be, that sort of revenue stream collapse is a sure sign of a troubled profit stream. Revenues for the first half of the year, driven exclusively by core banking operations are expected to be $40.2 billion through the first half of this year. One must walk before one runs, and any improvement in that revenue number is a good thing. To be fair, one big reason for the historical decline in the banks' revenues was its creation of Citi Holdings, which when first created actually held over $800 billion of the bank's questionable, and many non questionable loans, and has spent the last several years unwinding those positions.
While revenues had been falling year by year, expenses have slowly but steadily been rising from a little under $48 billion in 2009 to about $51 billion last year. With one month to go in the period, the Citigroup estimates first half expenses at $24.6 billion. If maintained through the second half of the year, and leveraging with the increased revenues, it will have been a real year of progress for the bank.
That does not mean I expect Citigroup to be hugely profitable; far from it. Profits the past several years were strictly the results of turns in the management of the bank's loan loss reserve. In 2009, it reserved for $52 billion, and suffered a net loss of $1.3 billion. In 2010, reserves declined by half, to $26 billion, and Citigroup managed to eke out earnings of $11 billion. In 2011, the provision fell another $13 billion to $12.8 billion, but Citigroup could only post $9.9 billion in profits. There will be no big drop in loan provisions going forward, and Citigroup will have to make its money on its interest margins, fees, and investment bank earnings. Analysts are looking for about $3 billion in earnings per quarter. I believe that if Citigroup does no more than match last year’s earnings without the impact of a lower loss provision, it will have been a good year. I don't expect much more than $10 billion for the year, or $3.42 per share.
Citigroup has made a decision, essentially, to bet its future on overseas, underserved markets. Its specific marketing plan is to invest to create a core presence in the world's 150 largest cities. Statistically, only sixteen of those are in America, and most are in the developing world in Africa and East Asia. What is somewhat curious is a lot of the assets that Citi Holdings has sold have been the organization's stakes in large, and often highly profitable European and Asian banks.
Citigroup likes to point out that worldwide, there are 4.8 billion cell phone users, and 1.8 billion bank account holders, and the United States is the only country in the world with more bank account holders than cell phone users. You might recall that JPMorgan (NYSE: JPM) is seeking to get out of the business of checking accounts with modest balances because there is no money to be made in that market. Yet, that seems to be the very market Citigroup will be courting overseas.
It was scarcely over three years ago when the CEO of Citigroup, Vikram Pandit, promised to shrink the bank, and get it back to basics as a consumer driven institution. Well, the shrinking has largely been accomplished, but no one really believed the consumer bank would be focused outside the borders of this country, and largely out of the reach of the Federal Reserve and other regulators. Is this what taxpayers gave Citigroup $45 billion to do? Pull up domestic stakes and replant them in Asia? This week it sold half its stake in Turkey's Atbank for $1.15 billion. While Citigroup took a loss on the sale, it still represents a nice bump to Citigroup's capital ratios. Earlier this year, Citigroup also sold its stake in Indian mortgage giant Housing Development Finance. This was curious as it had been a solid investment for Citigroup and promises far more growth than most of Citigroup's units going forward.
All things considered, Citigroup went from the staid, conservative reign of John Reed as CEO, to the Wild West days of Sandy Weill. I did not know until today that Reed joins me and many others in wishing for the reinstatement of Glass Steagall, which prohibited banks from owning investment banks. The post-recession years were to have brought back the Reed styled corporation, but the foray of the bulk of Citigroup's branches, assets, and holdings overseas seems little more than an attempt to avoid domestic regulatory environments. I do not like it at all.
While Citigroup gropes for profits around the globe, the most highly profitable large banks do not seem to have trouble making their money domestically. Wells Fargo (NYSE: WFC), from whom I expect 2012 earnings of about $3.35 per share, or $17.8 billion, has over 9,000 branches, a whopping 30 of them overseas, and 3% of its assets overseas. US Bank (NYSE: USB) has less than a quarter of the assets of the slimmed down Citigroup, but in 2012, I expect US Bank to earn about $5.5 billion, or $2.90 per share. It has some 3,000 retail branches, one of which is outside the United States, and only one percent of its assets are outside the United States. For comparison's sake, Citigroup at year end 2011 had 46% of its assets overseas, “only” 1037 domestic branches and 347 foreign branches.
Good bye Citigroup, and good riddance. Enjoy being an American bank without an American presence.
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