When Shanghai opened its free trade zone on September 29, Citigroup was one of the first foreign banks to hang out its shingle. The US bank is opening a branch in the enclave where the Chinese government is experimenting with reform of its interest rate and foreign exchange regimes.
Many other overseas banks were worried about unclear guidelines on what is and what is not allowed but Andrew Au, chief executive for Citibank China, committed to fully participating in the development of the zone and playing an active role in renminbi cross-border flows.
Foreign banks and brokers have struggled to establish money-making businesses in the Middle Kingdom, partly due to the regulatory environment, local competition and lack of brand recognition.
However, Citi is profitable in mainland China and generates more than $1 billion in revenues annually. In the past five years the US bank has grown its network of branches in Greater China from 50 to 150.
In another milestone in February last year, Citi became the first Western bank to win approval in February to issue credit cards in China. The only other overseas bank with such a license is Hong Kong’s Bank of East Asia.
“People ask how did Citi become the first international bank to get approval for a sole branded credit card license nationwide and no one else did? I tell them we first concentrated on helping China develop a financial services market in China,” said Stephen Bird, Citi’s Asia Pacific chief executive in an interview with FinanceAsia.
As one example, Bird served for four years as the only foreigner on the board of Shanghai Pudong Development Bank. Citi has been a shareholder of the Shanghai-based lender since 2003 and helped build its credit card business.
Greater China contributes about a quarter of Citi’s regional revenues but takes up 30%-40% of Bird’s time he says, as he works to capitalise on opportunities including the internationalisation of the renminbi and burgeoning trade flows.
Stock market analysts have questioned whether Citi, as one of the most international US banks, will suffer from outflows of investment from emerging markets in recent months.
Bird was relatively sanguine about the volatility in emerging markets, pointing out that emerging market clients are in many cases using more of the bank’s services for hedging needs and capital raising.
“Every analyst in the world is worried about emerging markets but we generated $1.7 billion in earnings before tax in a really tough environment,” said Bird. The important thing is to manage risk well and be diversified he added.
Citi’s Asia revenues for its third quarter fell 7.1% from a year earlier.
Bird said that, last November, Citi’s senior management in Asia had thought market activity would pick up in the second half of the year and, while it has been busy in debt, equity and M&A have been quieter. “It hasn’t shaped up the way we thought it would shape up but there are signs of recovery in equity issuance and the M&A dialogue with clients is busier than ever,” he said.
But Bird added the volatility had provided opportunities in the markets business such as more hedging by corporates.
Over the past year, Citi has helped raise more than $30 billion worth of bonds for mainland Chinese clients such as Sinopec, Cnooc and CNPC.
Bird added that productivity and prudent cost management were always vital. He noted that expenses were down by $69 million in the second quarter of this year versus the same period a year earlier. “You have to sweat these businesses in this kind of environment,” he said.
CHOPPY WATERS
Citi is building a financial services platform in China at a time of turmoil within the country’s financial system.
Citi’s corporate bank is its largest business in China and counts among its clients the subsidiaries of US blue chips such as Corning, 3M, GM and GE with parent company guarantees. Citi’s younger consumer banking franchise in China opened in 2002. Citi’s retail bank network spans 13 cities across mainland China and its branches have doubled in number over the past three years to 52.
To be sure it has sold some businesses, such as its remaining stake in Shanghai Pudong Development Bank last year as holding minority stakes in other banks is more expensive under the Basel III regime.
China’s banking system broadly is grappling with an increase in non-performing loans as the country’s economic growth moderates.
However, Bird expects few headaches from his clients.
“We have a very focused target market in China, which includes the country’s national champions and the emerging corporate titans of tomorrow. We bank the leading names in China across industries,” he said.
All banks in China are riding out market volatility, prompted by Beijing’s root-and-branch shake-up of its financial system - such as its step-by-step interest rate deregulation.
Many China banking analysts and economists have expressed concern about the rapid growth of China’s shadow banking system, a mix of informal lenders who are subject to limited regulatory oversight.
Bird said China’s shadow banking system was a natural evolution of the fixed interest rate regime and he expects to see consolidation down the road.
“Big banks will eventually buy some of the smaller experimental models in the shadow banking sector when the start-ups can’t fund themselves,” he said. The buyers will restructure and collect on loan portfolios and study these – a process that could form the basis for risk-based pricing in China.
As part of China’s efforts to reform its financial system it is trying to improve the quality of companies listing on its exchanges. The securities regulator has suspended initial public offerings on its stock markets in Shanghai and Shenzhen for the past year as it screens listing candidates.
Foreign and domestic banks have a backlog of companies that they are looking to introduce to investors. Citi teamed up with Shanghai-based Orient Securities in June 2011 to launch a securities joint venture, which underwrites offerings.
“The investment banking joint venture is established and we’ve got a great pipeline so when the market opens up again we’ll be able to monetise it further,” said Bird.
Citi owns equity in one company looking to IPO. Citi bought a 20% stake in mid-sized lender China Guangfa Bank in 2006. It led a consortium that acquired 85% of the lender, including Citic Trust, China Life Insurance, State Grid and IBM. Citi still holds a 20% stake.
“We led a consortium that bought a bank that was in some distress and helped return it to profitability and, just years later, as has been publically announced, it will list as a world-class entity. It is a great partnership with Guangfa,” said Bird.
