A China outlook, from Citi's CEO of China

Andrew Au, CEO of Citi China and chairman of Citibank (China), discusses Citi's recent performance there, its outlook for 2009 and why the bank remains optimistic about China despite the global economic slowdown.

Briefly, give us an overview of your financial performance in 2008? 
In 2008 our local subsidiary, Citibank (China), experienced a year of growth and profitability, achieving a 46% increase in operating income to Rmb3.6 billion, with net income increasing 95% from its 2007 level to Rmb1.3 billion. This performance in 2008 reflects the resilience of China's economy, coupled with our own strengths. In 2008 our total capital adequacy ratio was further improved to 13.6%, compared to 11.5% in 2007. We continued to adopt a disciplined approach to liquidity management, achieving a loan-to-deposit ratio well below the 75% regulatory requirement. Our non-performing loan ratio in 2008 was 0.6%.

How is your business performing to-date in 2009?
Keeping in mind the economy in China continues to do well, the early signs for our own company are positive, in terms of both revenue and net income. We have maintained a balanced business strategy in terms of ensuring we generate fee income, whether from foreign exchange, hedging products, cash management products or custodial products.

How has the global financial crisis impacted your ability to continue to expand in China?
Like many businesses, the current economic downturn has meant that we have had to carefully consider how to navigate through the headwinds it has created while planning for the future. Keeping this in mind, and despite the challenging period for the industry, we have been able to continue to invest in China. This year we have opened a new sub branch in Hangzhou and a new lending company in Hubei province, and we plan to open another lending company outside of Dalian later in the year. During the year we plan to further launch new products and services. So we are growing in China, and we expect that we will be able to continue to do so in the future. Looking ahead, we expect to have a bigger presence in China over the longer term, with more staff and an increased customer base.

Have you lost business in China as a result of Citi's global issues in recent times?
There has definitely been concern among some customers at different points in time over recent months, but we have been able to maintain a very diverse and stable client base. We are well established in China, and we think that, coupled with some of our key competitive advantages, such as our global presence, has served us well in ensuring strong ties between our company and our customers. We are pleased with the stability of our business in this regard.

Are you still optimistic on China's economic outlook?
We do remain optimistic about the outlook for China's economy. We maintain the view that China's economy will grow at around the 8% level, which in itself is very healthy. We believe that the government stimulus announced [last] year will help offset any export weakness. China's high savings rate provides a significant cushion to some of the problems being experienced elsewhere in the world. The banking sector in China also remains in good health. Chinese banks are not as leveraged as their European or American counterparts. China has the capacity to increase lending if needed given the relatively low loan-to-deposit ratio in the industry. The strength of the domestic banking sector bodes well for the overall health of China's economy.

What is the status of your recently launched rural business in China?
We have now opened two lending companies in China, most recently in the town of Chibi in Hubei Province. Earlier this year, the China Banking Regulatory Commission granted us approval to establish a lending company in Wafangdian City, near Dalian in Liaoning Province. We expect this lending company to open in the second half of 2009. We see tremendous opportunity in improving financial services in rural China, and will look to open more lending companies after we gain more operational experience.

Where do you see the key drivers for your business in the future? 
We see no need to change the course we have set for our business in China, which remains one of the most important markets for Citi globally. We will continue to have a strategy that pursues growth across different business and product lines, from the consumer business to the institutional business. Leadership in product innovation will be an area of focus once again in 2009. In terms of institutional business, the drivers will continue to come from our strong positions across areas including cash management, FX trading, treasury, derivatives products, custodian services to QFII & QDII investors, local corporate banking and corporate finance, and from serving Chinese companies expanding overseas. Our investment banking team provides a wide range of advisory services and has been actively involved in a series of landmark projects, such as acting as sole global coordinator for the HK$1.03 billion ($133 million) IPO for Inner Mongolia's Real Gold Mining and its listing on the Hong Kong Stock Exchange earlier this year. Overall we aim to maintain a very balanced growth across our entire business portfolio.