On a day when many at the Citi financial confab told of their quest to deploy mounting capital in the United States, their host had a simple message: See you later.
In a lunch keynote talk, Citigroup Inc. [C] CEO Vikram Pandit staked Citigroup's success on its global operations, implicitly describing the prospects of domestic banking as lackluster.
"Overexposure to the U.S. consumer credit risk has been the dominant driver of our performance over the last two years," Pandit said early on in a summation of where Citigroup had stumbled under his predecessors. The company's future lies primarily in catering to businesses and wealthy clients in the major cities of developing nations, and to the U.S. entities that want to do business with them, he said.
That strategy can be expected to yield a 5% growth rate and a return on assets of 1.25% to 1.5%, Citi said. Pandit wouldn't give a target number for earnings.
Even if making wealthy foreigners the heart of its business is strategically sound, it may come with political risks for an institution whose biggest shareholder is the U.S. government. Richard Bove of Rochdale Securities noted the "irony" of Citigroup's plans, given that "the U.S. president is arguing that banks should commit more and more funds to lending in the United States," he said. "And yet the biggest bank they own is committing to going overseas."
But trading domestic exposure for international expansion is the best plan for Citi and other institutions with the scope to do so, Bove added. Pandit himself described such refocusing as the unavoidable conclusion "for anybody who wants to look beyond the headlines and get into a thoughtful discussion."
Other banks, fleeing slow U.S. growth and tougher regulation such as the Credit Card Accountability, Responsibility and Disclosure Act, will also attempt to duplicate Citi's international strategy, Pandit said, but the company's "deep roots" abroad set it apart.
"Unlike many firms who have recently focused on emerging markets, expecting to parachute in and be competitive immediately, we are positioned for emerging-market growth, as we already have presences in this market," he said. Citigroup's return on assets in emerging markets is more than double its returns on capital deployed domestically, he said.
Further overseas growth will largely be "prefunded," Pandit said, by divestitures from Citi Holdings, the "bad bank" that contains Citi Financial as well as mortgages and most of its U.S. consumer credit cards. Many of these businesses could fetch hefty prices if the market for domestic consumer credit recovers, though at the moment he acknowledged that many of Citi's competitors also are trying to avoid American consumers.
"There's going to be a huge part of America that's not going to be served" by Citi or other institutions, he said, but many of Citi's rivals will ultimately have no choice but to recommit to the kinds of businesses relegated to Citi Holdings.
"Nobody today wants to talk about excess capital, but it is out there," Pandit said.
That wasn't wholly true — plenty of other institutions presenting at the conference on Thursday did talk about growing stockpiles of capital, just not in those terms. Both PNC Financial Service Group Inc. and Comerica Inc. noted their strong capital positions — and the large size of the capital raises that regulators had demanded they take as a condition for exiting the Troubled Asset Relief Program.
"I wouldn't call it negotiations — I would call it a discussion," said PNC's chief financial officer, Richard Johnson. "So we raised $3 billion."
Whether that capital is excess, of course, depends on what regulators expect PNC and other institutions to hold, which Johnson noted is still a big uncertainty.
"The whole industry really can't say today that it understands where the regulators are going on the capital front," he said. But regardless of the levels ultimately set, he said, PNC's relative position would mean it has plenty of capital to deploy.
Like Comerica, PNC said it had little drive to pursue Federal Deposit Insurance Corp.-assisted acquisitions for the time being. While neither institution ruled out such opportunities completely, Comerica CEO Ralph Babb said that acquisitions would have to be a good cultural, geographical and business-line fit. Even then, he added, "we are reluctant to distract our workout group with additional distressed assets even with an acceptable loss-sharing agreement in place."
Babb was more optimistic that loan growth might soon return. The bank's average loans outstanding declined more slowly in the fourth quarter than the third, and "we are seeing our pipeline grow," he said. "As the economy improves, we are looking forward to returning to the robust loan growth of past recoveries."
With acquisitions and lending being problematic, executives discussed alternative uses they could find for their capital.
One opportunity for PNC [PNC], Johnson said, would be refinancing commercial real estate loans as they approach maturity. PNC believes that it can sniff out attractive opportunities among the assets that its servicing arm, Midland Loan Servicing, manages.
Huntington Bancshares Inc. CEO Stephen Steinour reiterated Huntington's plan to use the capital it has raised to go on the "offense," hiring people and investing in new branches with the aim of stealing market share from Midwestern rivals in areas like small-business lending and wealth management.
For institutions big and small, Bove suggests, the dividing line between winners and losers will be whether they can minimize their exposure to ongoing mess of American consumer finance. For an entity like Citi, that means flight abroad. For a regional bank like PNC, it would mean de-emphasizing the consumer-focused business that it acquired with National City. Though the political reaction to such shifts will likely be harsh, Bove said, "this is what these banks are going to do."
Matthew Monks contributed to this story.
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