In the wake of Citigroup’s (C) cost-cutting announcement yesterday, which hit the bank’s international branch network very hard, Bloomberg’s Christine Harper and Yalman Onaran have a very good overview of how international banking is becoming increasingly difficult and expensive. National regulators at both the subsidiary level and at the corporate-parent level are becoming much more aggressive, compliance costs are rising fast, and the whole business rapidly begins to look like it’s much more trouble than it’s worth. According to Citi’s press release, it will save about $1 billion of expenses per year by paring back, while reducing revenues by less than $300 million per year.
The potential problem here for Citi is that while the cost-benefit analysis undoubtedly makes a lot of sense on a branch-by-branch basis, there are second-order network-effect and reputational consequences which are much harder to quantify. Jeff Horwitz and Maria Aspan at American Banker have a story headlined “Citi’s Latest Cuts Target International Identity”, which cuts to the chase:
More than 6,000 of Corbat’s layoffs and reductions will fall on the global bank, which Citi has long argued hitched its success to those of affluent urbanites in emerging markets. The bank plans to limit or shutter its consumer operations in such places as Turkey, which posted an 8.5% GDP in 2011, and Uruguay, which grew by 5.6% last year. In Turkey, Citi will curtail a 37-year relationship; in Uruguay, almost a century of doing business.
The same is true in Paraguay, and Romania, and Pakistan, as well as second-tier locations in key markets like Hong Kong, Korea, and Brazil. And the result is that Citi risks losing much of its future.
Citi’s branches in far-flung parts of the world have massive long-term value to the bank in ways which can’t be found on any income statement. For one thing, they’re a constant reminder of the bank’s ubiquity. They’re a bit like The Economist like that: if you’re part of the international cosmopolitan classes, then wherever you go in the world, you’ll be able to find the British newsweekly at a local newsstand, and a branch of Citibank somewhere reasonably near your hotel. You might not buy that local copy of The Economist — you probably have it on your iPad — and you almost certainly won’t enter that Citi branch. But just seeing them, knowing that they’re there, targeted at people like you, is a very powerful brand message.
Part of that message is that the bank is so big and international that it’s a notch or three above any purely local institution. During the financial crisis, when Citigroup was insolvent, the vast majority of its $773 billion in deposits was uninsured, held outside the country. If those depositors were rational, they would have moved their money somewhere much safer. But they didn’t: Citi’s storied history and massive international branch network helped to reassure them that their money was safe, even when it really wasn’t. In many emerging markets, Citibank has had a banking relationship with a plurality of the most important local families for many generations: it’s a baked-in part of the architecture of power. That kind of thing ends up having value in all manner of places: when a scion rises up the corporate ranks in some other country entirely, he’ll still feel that in a weird way he has known Citi since before he was even born.
The world is changing, of course, but not as fast as you might think: emerging-market economies are often still dominated by old families, and rich Brazilians and Argentines still like to know that they have access to their bank in Uruguay, even if their main branch relationship has moved to Miami. And while it’s incredibly easy to make fun of former Citigroup CEO Vikram Pandit and his love of what he liked to call “globality”, the fact is that there are really only two banks in the world which can claim a genuinely global branch footprint. If Citi is shrinking, that leaves just one, and I can’t imagine that anybody would be well served by HSBC becoming a complacent and rent-seeking monopolist for the kind of people who don’t really consider themselves of any one nationality at all.
Pandit was right that you go to war with the army you have, and the only area where Citibank is clearly superior to nearly all of its competitors is in its history and international reach. Mike Corbat, who has spent most of his long Citi career working with non-US clients, knows this better than anyone, so I don’t think we’ll see a wholesale dismantling of the model. And I’m pretty sure that the two big national banks that Citi owns outside the US — in Poland and Mexico — are also safe. Citi is big enough to be able to shoulder the costs that the Bloomberg article talks about, and will be smart to do just that. But it has sold off its entire branch network in other countries, like Germany, and it hasn’t placed its entire brand identity behind its global status in the way that HSBC has. As US and international regulators continue to breathe down its neck, there will be continued temptation to keep on shrinking in far-flung nations. And it’s hard to do that without the risk of damaging Citi’s priceless long-term international franchise.