Managing director, co-head European credit markets, global fixed income credit markets, Citigroup
Charlie Berman tells Geraldine Lambe that Citigroup is perfectly positioned to capitalise on a European shift to a capital markets-based corporate funding.
To Salomon Brothers’ diehards and those of us hooked on the piratical
romance portrayed in Michael Lewis’ Liars Poker, Citigroup’s
acquisition of Salomon Brothers (already bearing the mantle of earlier
M&A activity with Smith Barney) seemed to signal the final
subjugation of the legendary Wall Street firm. But if Charlie Berman,
co-head of European credit markets, is to be believed, incorporation
into a global giant and corporate monolith has done nothing to dispel
the old firm’s spirit; rather, the move added a bit of bite to what had
by then become a somewhat jaded recipe.
“We [Salomon Brothers] always thought and acted as if we were the best
bond house in the world – even when perhaps we were not,” says Mr
Berman. “The mergers meant we went from competing in a much loved but
old model jalopy to driving a Ferrari: more horse power, better brakes
and lots of buttons to push. Almost all the Salomon fixed income people
stayed on and the new combination of talent was striking.
“At Citigroup we have an embarrassment of riches in terms of people,
products and relationships. At Salomon, we had a more limited palette
and the fun was often winning business against the odds. We were always
a challenger for the ‘knock-out’, but never a real contender for the
long haul of the league competition.”
It was just over six years ago that Mr Berman and his Salomon
colleagues were checking out of the Mandarin Hotel in Hong Kong after a
World Bank meeting, when their mobile phones rang simultaneously and
they were asked to dial into a conference call. The reason? They were
being sold to Travellers Group.
Less than six months later, they were facing the Citigroup merger and
soon after that came the forced march from Salomon’s beloved offices in
London’s Buckingham Palace Road to Canary Wharf (news of which is said
to have caused Mr Berman to hyperventilate).
While it is now in the advanced stages, Citi’s evolution is not yet
complete and is unlikely to stop – but that is to be applauded rather
than lamented, says Mr Berman. “We have not forced too rapid an
integration. There was never the intention to smash the firms together.
Our mantra has been ‘do no harm’. If you make a change, it must be
additive, not simply for the sake of change.”
Regional flexibility
Outsiders rightly perceive Citigroup as a financial colossus – and
many assume that it is both blessed and burdened with the traits
associated with such bulk: the enviable financial clout and geographic
reach of global firms can be rapidly undermined by their associated
inflexibility and the inability to move quickly. But Mr Berman says
that is not the case with this particular giant. For example, each
region has the flexibility to tailor the Citi model to suit regional
needs, rather than suffer the imposition of a US-centric vision on a
non-US environment. So, when Citigroup’s US business combined its debt
capital markets and derivatives marketing groups to create Fixed Income
Capital Markets, European colleagues were simultaneously working on a
model appropriate to their own local conditions.
“The US and European financial markets are at a different stage of
evolution and in the corporate area, we felt the first critical link
was between loans and bonds in Europe, so we focused on integrating
those two business lines to create European Corporate Debt Markets
(ECDM). The broad strategy is identical but individual tactics are
allowed to be different,” says Mr Berman.
Making differences count
It is the differences between US and European markets that will
enable Citigroup’s European operations to make an even greater
contribution to group profits, he says. Q2 figures revealed that the
net income of Citi’s Global Corporate and Investment Bank, EMEA, had
grown by 53% over the previous year. Citi does not break down income by
product line (for public consumption, at least) but as for most firms
over the past couple of years, fixed income is the foundation on which
such happy figures are built.
What the firm will reveal is that net income for fixed income in Europe
has doubled in the past three years and now represents more than 20% of
Citi’s global fixed income results. While the global fixed income
nirvana may be at an end, Mr Berman remains all smiles. In Europe, he
says, structural and market-driven changes will present opportunities
for growth.
“The US has a very mature loans and bond market and is very interest
rate sensitive; it’s unlikely to grow that rapidly. Europe, on the
other hand, is still very much a bank-financed corporate landscape that
is only at the beginning of the transformation to a capital markets
world. There is a huge volume of bonds waiting to be issued here in
order to take out the bank finance. The removal of capital barriers and
the creation of a single market creates the opportunity for long-term
sustained growth,” says Mr Berman.
It is not simply a matter of banks pushing more profitable bond
business, he says, but rather a concurrent pressure from investors and
corporates. “Banks are now less inclined to maintain a large and static
loan portfolio that adds little to the bottom line. But at the same
time, European corporates are taking an increasingly sophisticated view
of their liability structure and investors need to focus on credit
products because it is not possible to generate return out of pre-euro
interest rate and FX volatility,” he says.
The profound change that is under way in European capital markets is
allowing firms to broaden their areas of activity so that they are no
longer so reliant on “ploughing the same field”, says Mr Berman.
Further opportunities and another sign of European capital market
maturation include market-driven developments such as the accelerated
evolution of the long-term market in euros, the development of
index-linked products in the government sector and retail capital
instruments for insurance companies and banks. In the asset-backed
market, innovation in securitisation techniques is at its most dramatic
in Europe.
Capital opportunities
“We have got a huge pool of capital in Europe that is coalescing
far more; it is able to flow more freely,” says Mr Berman. “That gives
rise to opportunities to tap into it in different ways. It’s a long
journey that is just beginning and it means there are lots of ports to
call into on the way. It means we can be confident in making long-term
plans for resources, structures and people.”
Even if there has not been a rush to integrate Citigroup’s component
parts, Mr Berman believes the structures that are now in place are the
right ones. As for many other firms, integration is the name of the
game for Citigroup. Aside from the creation of ECDM, Citigroup in
Europe created the Fixed Income Financial Institutions Group about 18
months ago. This married senior and subordinated debt and hybrid
capital with synthetic collateralised loan obligations and other
derivative products, and cash securitisation. “It was essential to be
able to have a completely integrated asset liability dialogue with
financial institutions,” says Mr Berman.
Derivatives gain ground
Equally, integration rules in Citigroup’s sovereign and
supranationals sector, where several years ago the client management of
its government auction and international syndication businesses were
merged. Mr Berman says that derivatives are increasingly an integral
part of the equation.
He believes Citi is well positioned to circumnavigate any decline in
global fixed income business, particularly as Europe has a long way to
go before its corporate bond market catches up with the US – currently
about 7% versus the US’s 40% of GDP, according to central bank figures.
And, as derivatives products and global distribution capabilities
become more important to European corporates, analysts expect Citi to
increase its debt underwriting market share (currently 7.6% compared
with 20.6% in the US) at the expense of local or regional players.
At the same time, while many other banks are shrinking their loan
portfolios, Mr Berman says Citigroup does not intend to sideline its
lending business. A lot that is written about lending (and in
particular Citigroup’s approach) “misses the point”, he says.
Citigroup’s competitive advantage is not the ability to commit a
billion dollars to an event-driven circumstance – monoline firms can do
that at a push, he stresses.
“It is our ability to be everywhere at any time, not just to leverage
the balance sheet but to make us an indispensable partner in the
day-to-day operations of our customers.
“Not only do we have the balance sheet, the debt and equity capital
markets execution and distribution capabilities, but we also provide
other advisory, treasury and transactional services not touched by
traditional competitors. I am very happy not to have to compete with
Citigroup.”
Career history
Graduated from Manchester University with a degree in English law.
In 2000, awarded the PricewaterhouseCoopers Award for Capital Markets
Achievement. Joined the executive committee of the International
Primary Market Association in 2003.
1980: Joined Bank of America NT&SA as graduate trainee lending
officer. Moved into FX sales. Promoted to associate vice-president in
debt division of Bank of America International
1985: Appointed vice-president in the loans team, focused on embryonic
European commercial paper and medium-term note markets. Appointed as
director responsible for yen, Australian dollar and Japanese warrants
issues
1988: Joined Merrill Lynch International as associate director in
product development within the investment banking division. Focused on
financial institutions and hybrid capital. Promoted to director in 1989
1990: Joined Salomon Brothers International as a director in investment
banking for financial institutions, focusing on hybrid capital
1991: Moves to Salomon’s debt capital markets and added sovereign and supranational coverage
1995: Appointed managing director and co-head of European DCM
1996: Promoted to head of European DCM
2001: Appointed co-head of European credit markets for Citigroup
2003: Additionally appointed co-head of European corporate debt markets