BELOW is an excerpt of the interview.
The Edge: You said Citi’s restructuring is over pending regulation. There have been a lot of regulatory changes in the banking industry since the global financial crisis. What further changes do you expect?
Corbat: I don’t expect big changes, what I expect is refinement. Going through and coming out of the crisis, the regulators understandably wanted to see capital levels increase. They wanted more liquidity. They wanted stress testing. They want resolvability. And so, the industry and Citi have gone through that systematically and addressed those. Citi is one of best capitalised banks in the world with a Common Equity Tier One ratio of 11% at the end of the first quarter.
We are waiting for final capital standards out of the US. We would be filing our resolution plan this summer around the things we talked about — a safer, smaller, stronger and simpler Citi — to address these issues and outcomes.
What about the setbacks that the group has gone through in the last few years, like the problems at Banamex, your unit in Mexico? Have those events put the new Citi to the test and have you come out better?
Absolutely. You learn from those. The adage is you never ‘leave’ a crisis or an event to learn from, without taking away any lessons. I think we’ve learnt a lot about our institution; we’ve continued to learn ways to improve ourselves. You referenced Mexico — we went in and did a comprehensive review. We found things pertaining to Mexico that we didn’t think were right. We changed people, we changed processes and we’ve gotten better as a result of that.
Regulations have made it harder for banks to make good profits. As a banker who has been through quite a few crises in the past three decades, how do you see the landscape now and how do you strategise and plan?
A few important things have come out of the regulation of capital standards. Before the crisis, many of the institutions were in a race to becoming financial supermarkets. Today, what I think is quite healthy is that if you look around the globe and if you look at the different regional and global banks, in many cases, the strategies are different (from before). That is healthy in that we are all not going for the same business model. We have picked the things that we want to do, which we think we can do well.
If you look at some of the attributes that drive people in that way — one is scale. If you don’t have scale today, the regulators aren’t all that keen to allow you to buy it, at least from US or European perspectives. Which means you have to build it and I don’t think our network can be replicated. And in an uneven, slower growth world, your time of investment and time to recoup your investment is longer. So, a lot of what you’ve seen, I believe, is people really pulling back and moving towards those places where they already have scale, which has led institutions to a different place. From a systemic risk perspective, I think it’s quite healthy.
From a profitability perspective, without a doubt, the industry today is running with a lot more capital. The industry used to run at 25 to 40 times leverage. Today, the industry is running at 10 to 15 times leverage. So, returns are down. But you will also expect that around simplification of business models and focus, the dispersion around those returns should be lower. There should be higher probabilistic returns. And that is not a phenomenon of Citi’s.It is the entire industry that has been in fact pushed in that direction.
We just finished our first quarter and it was a solid quarter in terms of where and how we made our revenue in a tough operating environment. We were able to do it in what I would describe as a way that is devoid of events — legal or otherwise. We reported US$4.8 billion of net income in the quarter. We earned a return on our capital in excess of our capital. If you look at our businesses, it was very broad-based across consumer and institutional. If you look at the geographic mix, it was good all round, with Asia as the largest contributor to profit outside North America. We will continue to build on that.
Many banks are doing the same thing … going back to basics. They are also focusing on consumer banking and all that. How does Citigroup differentiate itself from everyone else that is also focusing on the same segments?
I believe our focus and business model are unique and different from others. Things I would ascribe to our global network. On the institutional side, we operate in 101 countries: Today, if you don’t have that, you probably can’t buy it and it is pretty tough to build. And the value of that payments network, the closed-loop nature of that payments network, is that we are able capture the natural flows of foreign exchange and processing fees.
From a markets perspective, the world is only going to become more global and our ability to be on the ground to serve our clients from a local perspective is very valuable. We are not the briefcase banker that goes in and out of town on an airplane. We are there. We are physically on the ground and able to work with our clients in the local currency. We have a local currency deposit base, we can fund them in local currency, we are able to work with them in foreign exchange, give advice.
So again, we think that is unique and, if anything, we’ve seen some competition pulling back from that. From a consumer perspective, we operate in 24 countries but it is not just about the countries. Our strategy is really an urban-based strategy focused on the top 100 cities in the world. We don’t believe that your competition versus domestic players gives you any advantage to compete in the rural areas. But in the cities, in large areas of population growth, wealth creation dynamics of probably having more global citizens, we think we fit well with that, and we have the ability to invest in technology and digital banking. Again, our scale comes from our global network. It gives us the ability to have some competitive advantage. We are, by the way, the world’s largest credit card issuer today. We continue to grow.
An issue that has been debated a lot in the banking industry is how the focus of bank CEOs had been on growing profits at the expense of prudential consideration. After the crisis, that changed. You took a pay cut last year. Have the priorities of CEOs like yourself changed in line with the environment, even if your shareholders are not going to like it if profits are down?
Before the crisis, there was this belief globally that bigger was better. Today, better is better. We are focused now on the areas where we have a competitive advantage in terms of serving our clients and we can generate good returns for our shareholders. What you have seen institutions going through is that they are pulling back, shedding those things where they don’t have a competitive edge or don’t have a pathway to it.
Today, regulation and compliance, business and banking ethics — those are your licence to do business. We as an institution are very focused on that.
As a CEO, how does it affect you when every year you have to go through a stress test and your job is on the line if you don’t pass it? How do you deal with this?
As you pointed out, the stress test is every year. From our perspective, what we’ve been focusing on is not simply about meeting the expectations of the regulators — it’s meeting our own expectations. While we have made ourselves smaller, simpler, safer and stronger, we know the bar for us is high. As a global institution, regulators, everybody’s expectations of what we can withstand as an institution, are high. By the way, during the crisis, we took taxpayers’ assistance in the US, which we paid back in full. I say, never again. We never want to be in that position, where we need taxpayers’ assistance. We have the important job of safeguarding and protecting customer deposits all over the world. So we have to make sure the things we do add to that and the stress test is part of it.
Being very candid, we have done everything that we can and we have built on it. When we are not successful, we have to figure out the right way to hold ourselves accountable.
The Asia-Pacific is a significant contributor to Citi’s revenue and profits. What are your plans to grow in the region? Within this region, we have the Asean Economic Community coming up. How is Citibank positioning itself in this new environment that Asia is offering?
We have been in Asia-Pacific for over 100 years. We’ve been in countries like China and India 112 years, we’ve been in Malaysia going on 56 years. We are not a new arrival in Asia. So, Asia really is in the DNA and roots of our company. And it’s not something we are thinking about as a new venture.
If you look at our company, we worked hard to create balance. Asia-Pacific for us is a significant contributor. It is among the most balanced businesses we have between the two core businesses — institutional and consumer. There continues to be growth opportunities. Growth is slower but India is still growing at 7.5%, Malaysia at 5%. There are many parts of the world that we operate in, I told our people this morning, where they will give about anything for 5% growth.
Looking forward, there will always be ups and downs, but we think Asia will outpace global growth in the foreseeable future; we are well positioned. We’ve a good reputation, a good history, scale and presence — and we want to continue to build on them.
For us, our typical business model on the institutional side is that we follow corporations into geographies; we serve them, we then develop local clients and we follow those champions back out to the region and around the world. In some ways, we are borderless. We have ability based on our presence as a global bank to serve a broader Asia.
Are there market segments that you think has more potential for Citi than the existing ones?
We continue to look at places in Asia where we are not (present), we continue to look at places in the Middle East where we are not (present) and if some of those places make sense, we are happy to take a look at expanding into them. But from our perspective, it is not necessarily what we think — it is what our customers think. We want to make sure that when our clients see those opportunities, we are on the ground, able to service them.
Having said that, we don’t have an urgent need to do that (look to expand in places where we are not present). We think there are good opportunities in the markets we are in today. But if opportunities present themselves, we are happy to enter new markets if that’s where our clients need us to be.
Asia-Pacific has its own challenges. China’s growth is slowing and India is not doing as well as before. How do you view prospects going forward? And what do you see as the major challenges for a banking group like Citi?
Growth in the world post-GFC without a doubt has been slower. China, India and others haven’t been able to escape that. But the world continues to heal. If you look, for the period 2008 to 2012, 50% of the world’s GDP came from China. The good news is, that is no longer the case. China is still growing roughly 7%, but now [it’s] 7% on a US$10 trillion economy, not 12% on a US$4 trillion economy. As the world economy gets better, Asia benefits from it. Asia cannot be the single engine of growth while the rest of the world languishes. A healthy progressive recovery in the US and Europe and contributions from Latin America and Africa are all critical. The world is not getting any less global and we may see the Trans-Pacific Partnership (TPP) in place this year, which will further boost trade flows.
You think the TPP will take off?
People are working hard to make it happen — it’s probably the most important trade deal in a couple of decades.
Since the massive quantitative easing (QE) exercises in the US and Europe, the focus has been on how the massive inflow of liquidity into this region, including Malaysia, is causing a lot of volatility in this part of the world. Now, the US Fed Reserve may raise rates as the US economy recovers, and we are seeing outflows. The fear is that QE doesn’t really address the issues. What is your view? Do you think QE has helped the US economy?
In some ways, yes. The empirical evidence is there. We can argue the amount and duration (of QE) but if you compare the US against the other places in the world, the US has recovered faster, which I believe is a result of swift and decisive action by the Fed to stimulate the economy. For the US economy, coming out of the crisis, recovery has to be consumer-driven.
In the US, the single-largest investment of an American household is its home. During the crisis, these homes were going down in value. You’d be hard-pressed to believe that you have an engaged American consumer if his home was going down in value. So what QE did was drive rates down. In essence, it created cash flow and allowed people to refinance their mortgages, made mortgages and home ownership more affordable and got the housing sector to recover fairly quickly. Housing probably bottomed out in the US sometime in July 2009.
We can then debate the marginal returns of the QE beyond that point. The Fed said, first we’ll focus on housing, then job creation and then we can decide at what point in time the Fed’s actions will lose full effectiveness. But without a doubt, the early phases of QE were essential in terms of stabilising the US economy.
In other parts of the world, QE is not a fundamental fix. It is a technical fix that gives it time to address the problems. In Europe, for example, the combination of QE and reforms has been the most powerful. The least powerful is QE with nothing on the other side. And you can point towards the other countries in Europe, where they have taken reform action, in some ways, fairly dramatically and in other ways as far as they can push politically.
Without a doubt, QE has created lots of liquidity. The last time I looked, we still had 22 economies in the world with some form of quantitative easing. And by the way, it is an experiment — in some ways, in unprecedented proportions. From the Fed’s perspective, they were clearly focused on the prospects of inflation and we haven’t really seen that in the US. They have made it clear to the market that once they start to see those pressures, they will act swiftly and decisively to stem that.
At the same time, I believe the Fed is sensitive not just to what is going on in the US but that their actions will have ramifications elsewhere in the world
At the same time, that is not necessarily the worst thing because most of these economies are all citing export-driven recovery. So the stronger US dollar and weaker local currency helps with that. But that will only get us to a point. I think the Fed has moved very prescriptively and transparently through what were the steps to get us to raising rates. We needed to get through housing, employment. The big challenge today, not just in the US, is wage growth or lack of wage growth. By the way, with our unemployment rate where it is, we still have an under-engaged workforce in terms of labour participation rates. So, we are not seeing the strains of excess in the formal US economy.
The role of central banks has become very important in terms of macroeconomic management and policies post-GFC. Is it healthy for central banks to play this bigger role?
Central banks today find themselves where they are as a necessity of the financial crisis. I don’t believe central banks want to see themselves playing this role forever. I think they would like to get through QE, they’d like to normalise the economy and they’d like to step back and let the market forces do their jobs. I don’t view this as a paradigm shift that will be forever stuck in big central bank intervention. Obviously, they will have to play the part and they are also going to have to play their part in terms of the extraction of their liquidity, but once we can get things in essence to be normalised, I think you will see central banks stepping back from this type of position.
Could you share with us the business lessons that you have learnt from the crisis, and how that has impacted the way you run a bank today?
The world hasn’t been an even place, nor will it be. As a company that has a presence in over 100 countries, we need to take a customised view or approach to how we work there. What our client segment is, the products we offer and when you go back to the days of the financial supermarket, we were largely approaching things as one size fits all — that we were going to grow and we were going to grow everywhere.
Today, our business operates differently in Russia from how it operates in Malaysia, Brazil, Mexico, etc. It is about making sure that we have the discipline on how we allocate resources — capital, balance sheet, the people, investment dollars, technology. It’s about being focused on how we do those things and how we measure them. And from a controls perspective, making sure that we have a consistent approach.
When we deviated from these, we had issues. Mexico is an example of that and we took quick action. We changed management. We changed our procedures and made sure they were compliant with our best practices.
Could you share with us your journey as a banker? And your views on the industry? What keeps you awake at night now that you are at the helm of one of the world’s largest banking groups?
The industry is very different today from the one I joined 32 years ago in many ways. Our company is different. If you look at our history, Citi is an amalgamation of several businesses — Citibank, Citicorp, Travelers Insurance, Smith Barney and on and on. From my own perspective, I have been very fortunate. I have been saying to our people today that while I’ve only ever worked in one company since graduating from college, I’ve probably had at least 15 careers within the firm. I’ve lived abroad twice. I’ve been involved with or managed my career path along most of our businesses. Once a year, I bring together our top leadership — about 270 people this year. Of those 270, I probably know over 230 of them by name and face from the years that I have worked with them. I know them, I know of their families, I know their history in the company. In some ways, that is a bit unique. It certainly is special for me.
A company like Citi has the ability to afford you those things without having to leave the company. You can work in most places in the world. You have these two big businesses that you can be part of that are very different. If you look at what goes on from a technology perspective, we are among the largest investors in technology.
For myself, I couldn’t think of a more interesting place to work in. You get up every day and you read the newspaper and there is not much going on in the newspaper that you don’t know about. Some of those days, you look at the things going on in the world and you know it will have a negative impact on the franchise and those are just things that you have to work through.
This article first appeared in The Edge Malaysia Weekly, on May 11 - 17, 2015.