At this year’s IMF meeting in Singapore in September, Singapore’s second minister for finance, Tharman Shanmugaratnam, proposed incentives to boost the growth of bond markets at the same time as funding the region’s vital infrastructure projects. The region is “overly dependent on bank loans”, he said, and would benefit from diversifying its funding sources. Whether or not the incentives (including tax exemptions on interest earned and tax concessions on advisory fees) have the intended effect, Citigroup’s Asia-Pacific business will no doubt continue to thrive: sitting at the top of the Thomson Financial loans league table and in second place for debt capital markets, it is poised to capitalise on developments in either business.
“We have the broadest platform of local and international fixed income capabilities,” said Robert Morse, CEO of Citigroup Corporate and Investment Banking (CIB), Asia-Pacific, in an interview in Singapore. “We participate in the local markets in virtually every country in which we do business in Asia [Citigroup CIB currently employs 10,200 people in more than 16 markets], and we are continuing to build – we have invested heavily in structured products, derivatives, leveraged finance and high yield.”
The right business mix
The Asian region presents enormous growth opportunities for financial services firms that have the right business mix. Underlying gross domestic product (GDP) growth is very strong – the IMF has revised its forecast growth levels for 2007-2008 from 6.5% to 8% or more – and Citigroup analysis shows financial services growth trends at about 1.5 ex-GDP, giving double-digit growth potential.
Mr Morse says this healthy prognosis is supported by the broadening, deepening and ongoing liberalisation of many economies in the region, and the ongoing development of capital markets as corporates and financial services firms increasingly look for funding across the capital structure. “For a corporate, accessing the longer tenor, lesser covenanted and non-amortising bond markets is looking increasingly attractive,” he says.
“On the equity side, a number of the region’s equity markets are very vibrant already, particularly those in India, Hong Kong, Singapore, Taiwan, Korea and Australia.” If many believe that China and a few other countries in the region would benefit from opening up to more global participation, Mr Morse argues that “the domestic equity market in China has undergone a meaningful renovation over the past year or so”.
Appetite for sophisticated products is growing, too, says Mr Morse, whether it be for equity or FX derivatives, collateralised mortgage obligations, collateralised debt obligations or commodity derivatives. “Investors are interested in a growing range of derivatives and structured products, and more and more investors in Asia are comfortable with Asian credits, and are prepared to take Asian high yield exposure,” he says.
Foreign direct investment flows into the region will also remain healthy, says Mr Morse, particularly as a lot of Middle Eastern wealth is migrating towards Asia, driven as much by political and social reasons as by sound economics. As interesting, he believes, are the changes that are pushing outward investment and driving change in the mergers and acquisitions (M&A) landscape – and creating opportunities for banks.
“Historically, many Asian companies had lower price/earnings ratios (P/Es) than their developed market counterparts because of the emerging markets discount, which drew investment inwards. Now, however, the average Asian corporate has lower leverage, higher growth, lower production costs and often higher P/Es than those in the developed market. And that’s a pretty enviable position from which to engage in M&A, particularly if they are prepared to use their shares as consideration. Countries like China – with its trillion dollar surplus – and India are increasingly looking to acquire outside of their domestic markets. We therefore see cross-border M&A as a very strong growth area for our business,” he says.
Brokerage business grows
Citigroup is investing heavily in its equities platform, including sales, equity capital markets, investment banking coverage and research, says Mr Morse – although he declines to give details of investment figures or specific plans. “We doubled the size of our brokerage business in India last year and we hope to double it again. We’re doing the same thing in Thailand and we have plans in at least two other countries next year,” he says.
There has also been significant investment in the bank’s leveraged finance and high yield franchise, and Mr Morse says the bank has generated record revenues so far this year. “Revenues [for leveraged finance and high yield] are about five times more than last year’s, which were our previous record,” he says.
Mr Morse cites a $2bn bond deal executed for Fortescue Metals Group in Australia in August as a reflection of the interest in and strength of the high yield sector in the region. Citi underwrote the debt and was sole global book runner and lead manager, while Jeffries & Co was a co-manager. “We have a huge backlog. It’s a ripe, growing market,” says Mr Morse.
Citi intends to broaden its footprint across Asia “whether organically, or inorganically”, says Mr Morse, and growing the number of clients with whom it does business is a priority. One of the ways it will do that is by building its relationships with small and medium-sized enterprise (SMEs), he says. He admits that until recently, it was not a priority for Citigroup, but that in the past couple of years “we have grown that business significantly – by hundreds of percents, not tens of percents”.
Sponsorship forces
Financial sponsors continue to be a force in the region. Some commentators have argued that because Citigroup came late to the game in terms of servicing hedge funds and private equity firms, it lost valuable ground to competitors. Mr Morse counters that Citigroup was the first firm in Asia to set up a coverage group purely focused on servicing private equity firms and that it has done business with every firm that is active in Asia, including raising capital for MBK Partners, which is a first-time fund of about $1.6bn.
As part of its Citigroup Alternative Investment platform, Citigroup has several in-house private equity vehicles that are active in the region. Citigroup Venture Capital International (CVCI) invests in emerging markets and last year launched a $1.6bn fund to invest primarily in companies seeking to profit from the growth in Greater China, India, emerging Europe and to a lesser extent in other regions, including Latin America. CVCI’s recent investments in the region include Suzlon, the leading India-based wind energy company, and Solarfun, a China-based solar power company.
Citigroup Property Investors Asia (CPIA), which globally manages more than $8.5bn in gross real estate assets, has by all accounts been busily investing in the booming Indian property sector (the $40bn-$45bn real estate market there is expected to grow by 20% in the next five years) and is actively participating in China’s property boom: reports say that CPIA recently purchased four office blocks in Shanghai’s former low-rent industrial district of Zhabei for $65m.
“Our private equity investment is generally on a fund-by-fund or activity-by-activity basis,” says Mr Morse. “There are a lot of opportunities here but you will never see us competing with our clients for transactions.”
He acknowledges that in prime brokerage, Citigroup has lagged behind some of its competitors, but he believes that the firm’s strategy is enabling the firm to catch up. “Globally, we were a bit late but we have gone a long way to rectifying that,” says Mr Morse. “In Asia, we have already hired the key people we need [including Hannah Goodwin, previously at Deutsche Bank and before that Morgan Stanley, to head-up the business] and now have more than 30 mandates. We are on the verge of being as strong as our competitors. There are a lot of fund start-ups in the region and one of our key strategies has been to leapfrog ahead with the new fund start-ups, as well targeting existing funds.”
Integration process
Most importantly, perhaps, Mr Morse believes that Citigroup has addressed what many regarded as a major weakness for the financial giant: lack of integration across its businesses. He says the firm has “reshaped [the bank’s] front end”, by introducing greater co-ordination and co-operation between Citi’s corporate bank, its investment bank and its global transaction services.
“A few years ago, we had three organisations pursuing different paths; sometimes they bumped into each other and sometimes that had good consequences. We have ‘vitalised’ a partnership across those areas so that they really work together. This gives us deeper coverage in each country and strengthens the service to our clients – whether it’s daily cash management, an equity offering, a syndicated loan or a high yield deal. With the penetration we already have, this gives Citigroup an unbelievable opportunity.”
So what took Citigroup so long? “We were perhaps a bit tardy getting it done. But the firm has undergone an incredible amount of transformation in the past eight years. More importantly, we have transformed our organisation in a very positive way. We have the ability to understand markets – to evaluate risk and risk-return trade-offs – and we have about $100bn of capital in Asia that we can apply on a daily basis in support of our clients. You need both of those attributes to compete.”
CAREER HISTORY
2004: CEO, Corporate and Investment Banking, Asia-Pacific at Citigroup
2002: global head of investment banking at Citigroup
1998: co-head of global investment banking at Citigroup
1997: CEO of Salomon Smith Barney Asia-Pacific
1992: managing director, investment banking, at Salomon Brothers
1989: director, investment banking, at Salomon Brothers
1985: joined Salomon Brothers as a vice-president in investment banking
1981: joined Lehman brothers in investment banking
1981: graduated from the Harvard Graduate School of Business Administration and the Harvard Law School
1977: graduated from Yale College
