Treasurers’ concerns about Citi’s global transactions services should now be officially gone.
“External audiences are starting to give us the recognition we have earned,” wrote Citi CEO Vikram Pandit in a memo to colleagues this week. “Our credit spreads have tightened, analysts increasingly like what they see, and the public is starting to acknowledge the many signs of real progress.”
With these comments Mr. Pandit marked the end of a critical year for his bank, a year where it posted three straight quarters of positive earnings, the sale of all remaining shares held by the US Treasury, and otherwise showed progress with its turnaround strategy. Two big parts of this strategy are a renewed commitment to global consumer banking and a focus on Asia-Pacific, which has been the largest contributor to Citi’s net income.
Another part of the strategy might include Citi’s Global Transaction Services (GTS) Business that Mr. Pandit also mentioned in his memo. As an example of the external recognition Mr. Pandit alluded to, Nomura Banking Analyst Glenn Schorr recognized GTS as the bank’s “least understood and most underappreciated business” in a research report a month ago. The Wall Street Journal profiled it under the headline, “The Overlooked Gem Inside Citigroup.”
As Mr. Schorr wrote:
“While the IB, Cards and Retail Banking get most of the attention, GTS is a $10bn-a-year revenue business with low capital requirements (just 6 percent of Citi’s assets reside here), generous 40-50 percent pretax margins, very attractive returns (ROAs of around 500bps), and is a critical source of liquidity for the rest of the Citi franchise (45 percent of the firm’s deposits are generated here)….
As few companies have GTS’s scale and cutting-edge platform, which is able to handle an increasingly complex and more global world, we think it can accumulate more market share and produce double-digit growth.”
Mr. Schorr went on to note how the GTS business did well even as other part of the bank struggled during the financial crisis. Since 2006, the compound annual growth rate (CAGR) for GTS revenue was 13 percent and net income grew at 24 percent. Mr. Schorr believes further growth can come from increasing Citi’s market share, on a base of roughly 5,000 customer relationships (said to be about 4 percent of a $250bn annual market).
This bodes well for Citi as a whole, as the outlook on profits from FICC (Fixed Income, Currencies and Commodities) trading business, which have sustained banks in the post-crisis recovery, isn’t expected to be as great for any of the major banks. Further upside from GTS will take time show up in Citi’s results, however, as low interest rates are a drag on the business and further consolidation is needed.
What a difference a few years make
The improved Citi outlook and spotlight being put on the GTS business represent a dramatic shift from the situation two years ago. Then, treasurers at multinational corporations that were big Citi customers shared a concern that their global treasury operations were at risk—given the crisis impact on the bank that might cause it to fail, split up, or at least severely curtail its global transaction services. As time wore on, many, if not most treasurers grew more comfortable with the risk—helped by a US government bailout that was at least partly premised on the systemic risk of its GTS unit.
At the margin, some treasurers did act on their concerns to shift business to other global players, but most found it to be not worth the trouble. Now, with Citi back on the come and GTS in the limelight, its competitors will find it even more difficult to lure away customers. Treasurers’ Citi concerns, at least regarding treasury operations, long a receding issue, should now be officially gone.