Citi’s co-heads of banking in Europe, the Middle East and Africa explain how the depth of post-crisis transformation carried out under outgoing CEO Vikram Pandit has left the business in a strong position in the regions.

Nobody at Citi would deny that the timing of Vikram Pandit’s departure from his post as CEO in October 2012 came as something of a shock. But the identity of his successor, Mike Corbat, was not a bolt from the blue. And for senior bankers in Europe, Mr Corbat’s likely agenda should not contain too many surprises either, after working with him for nine months in his previous role as head of Europe, Middle East and Africa (EMEA).

“We are all very excited about where Citi is in terms of leadership and the direction the firm is going in. Our core activities have been identified and now it’s time for execution at the highest possible level,” says James Bardrick, co-head of banking for EMEA alongside Manolo Falco.

That may sound relatively confident from a bank that needed a government bail-out in 2008, but it is perhaps justified. According to financial services analytics company Coalition, Citi was third worldwide for investment banking revenues in the first three-quarters of 2012 and one of the two most improved performers year on year. Citi has been involved in many of the transformative deals of 2012, including the Glencore/Xstrata and Rosneft/BP-TNK acquisitions, Taminco and Orange Switzerland leveraged buyout financings, Bank of Ireland’s €1bn return to the covered bond market and Barclays’ $3bn contingent convertible.

Efficiency has certainly been Mr Corbat’s first priority, with the announcement in December 2012 of 11,000 job cuts across the company, but more than 80% of these are in Citi’s consumer and branch-based banking. By contrast, the institutional client group is losing 1900 positions, of which more than half are back-office functions.

Emerging market success

Mr Falco says Citi continues to examine the corporate and investment banking activities that he runs with Mr Bardrick across a network of 48 countries. Some markets offer growth potential, while others will need to be examined more closely. In breaking down responsibilities, Mr Falco focuses on investment banking and Mr Bardrick on corporate banking.

The country priorities for this segment may be very different from those of the consumer banking division already identified. Citi is scaling back its consumer lending in Turkey, but this has been a particularly successful country for capital markets activity in 2012. Citi was one of two global leads on the sovereign’s debut $1.5bn sukuk and the only global lead on the $2.5bn secondary public offering from state-owned Halkbank.

“A global bank needs to have something in which it aspires to excel and for us the emerging markets are a key focus. Our objective was to be a leader in these markets and we have achieved that in terms of market share across the business,” says Mr Falco.

Adapting to new requirements

In western Europe, activity in mergers and acquisitions and equity capital markets has been subdued for the whole industry in 2012, especially in the first half. Mr Falco says that for these businesses to recover in western Europe, the core UK, French and German markets will need to improve, as they tend to account for about 65% of the available fee pool in the EMEA region.

The eurozone sovereign situation has not helped, and Citi has an on-the-ground presence across Greece, Spain, Portugal, Italy and Ireland. US investors and regulators have been very focused on Citi’s exposure, which the bank managed carefully market by market.

“At the beginning, it put a lot of stress on the system and we had to handle relationships carefully. But in the end, the reality is that we have gained trust because we warned early that things could get difficult, we gave clients good advice and we protected our balance sheet at the same time. That meant that by the second or third quarter of 2012, we even had some capital to commit to special situations where there was a strong business case, such as the Eni spin-off of Snam,” says Mr Falco.

Citi participated in a €9bn bridge loan for Italian utility Snam, which needed to repay debts to its owner Eni as part of a spin-off process ordered by the Italian government. By November, the entire loan had been refinanced through bond issues on which Citi won lead manager mandates, making Snam one of the largest European issuers and most lucrative clients of 2012.

Ahead of the game

While some US competitors are still arguing that Basel III is unfair for US banks relative to their European peers, Citi expects its Basel III Tier 1 capital ratio to be at least 9% by the end of 2013, five years ahead of regulators’ requirements. Where clients are downgraded below investment grade (such as in the eurozone periphery), the risk-weighted assets associated with any retained exposure to these entities will become much higher.

“We have taken a steep route to Basel III compliance, but you have to suffer to get fit. In the end, it should have a big pay-off with competitors that start later because it is creating a very conscious focus on where we allocate capital, and I feel we are leading the pack in terms of returns and efficiency in the use of the firm’s capital,” says Mr Falco.

The International Monetary Fund estimates that global banks will shrink their balance sheets by more than $2000bn by the end of 2013. That means the cost of capital can only rise, increasing the value of moving fast to shore up capital and control its usage. Mr Falco says Citi’s management understands better than most how to extract value from the bank’s capital, following the results achieved winding down Citi’s non-core assets.

“I cannot think of another US bank with a leadership team that knows Europe better than Citi. I feel Europe is going to provide big opportunities if you are able to deploy capital quickly when clients need it and if they also see you as a long-term relationship bank,” says Mr Falco. 

Cultural change

The other aspect of seizing that opportunity is building the right client relationships. Mr Bardrick acknowledges that, as with most of the large investment banks, Citi was drawn into a siloed model designed to maximise product sales during the boom years. This is no longer sustainable and one of the co-heads’ first moves on taking over EMEA banking in October 2009 was a major organisational reshuffle. They combined the corporate and investment bank, regrouping products around a team of senior coverage bankers responsible for each client. The products include advisory and capital markets and products from other business units, such as cash management.

A bank of Citi’s size naturally has 'many-to-many' relationships, interacting with the country heads and procurement heads of clients, not just their treasurers. But the relationship with each client needs a leader, says Mr Bardrick.

“We do not expect one banker to deliver 20 products across 50 countries to each client, but we do want one banker for each major client who takes responsibility for getting the whole relationship right and has the seniority to represent the client across our businesses. There are many things Citi wants to offer the client, but we have to make sure that the offering is always based around the client’s viewpoint. It’s about asking questions, not just delivering sales pitches,” says Mr Bardrick.

He believes this approach also improves Citi’s own efficiency and risk management, as the lead coverage banker should be able to see immediately what value each client is generating and the share of wallet the bank has with that client. Mr Bardrick says the bank is engaged in a long-haul project to restore the battered reputation of the financial services sector among its own clients, with coverage bankers at the heart of these efforts.

“I tell our staff there is no express elevator, we are climbing the stairs to get back to a successful service culture. Back to basics – account management and value-based service,” he says.

Logically, the next step for Citi is to integrate its global markets business more closely with client coverage. And the bank also has ongoing choices in its target client base. Citi’s decades-old presence on the ground in so many countries provides the possibility of serving more local clients. Mr Bardrick says the bank is careful to choose those who have genuine cross-border needs in which Citi’s capabilities give it a clear competitive advantage. That could be established multinationals, but also now includes national and regional champions expanding rapidly in emerging markets.

“We do not try to dominate a purely local client base, since it would not be efficient to focus the banking division’s services on small businesses. We are very competitive when clients want a relationship based on advice, ideas, trust and service across multiple product and solution areas, and multiple geographies, particularly where our unique global and emerging market footprint and expertise brings real value and benefits,” says Mr Bardrick.

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