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How Citi’s bet on global banking is killing its profitability right now

citi orient securities global investment banking earnings
AP Photo
Citi’s international show isn’t winning the bank rave reviews.
Published This article is more than 2 years old.

Citigroup has bragged repeatedly about its presence in markets across the world, calling its global presence “unrivaled.” The US-based bank takes pride in the fact that it operates in 71 countries and has more than 3,000 correspondent banks.

Turns out that this strategy is killing Citi’s performance in the short-term at least. In an earnings season when other US banks are cutting their less-profitable global operations but turning in massive trading and banking profits from their domestic operations, Citi has stuck resolutely to its global moniker—and missed analyst expectations for the quarter. The bank’s operating expenses for consumer banking outside the US increased by 11% to $3.2 billion. Citi’s latest earnings statement shows that net income for the bank’s non-US operations declined by 2% in the fourth quarter, but that’s even worse (a decline of 4%) when you factor in exchange rates.

Even though Citi has made changes in its strategy with newly minted CEO Michael Corbat, it’s not clear that the firm’s global focus is going away. In December, Corbat announced that the bank would cut 11,000 jobs worldwide, scaling back operations in Uruguay, Pakistan, Paraguay, Turkey, and Romania. Repositioning costs related to firing people internationally cost the company $266 million in the final quarter of 2012. However, half of the 84 branches the bank plans to close are located in the United States. Although analysts widely consider the US to be the best ship in the storms of uncertainty still wreaking havoc on the global economy, Citi is focusing instead on other “high growth” markets.

Citi’s peers are making the opposite bet. On Monday, Morgan Stanley said it would axe a significant part of its Asia-Pacific business, paring back its investment banking unit there by 15%. According to a source cited by Dow Jones, Goldman Sachs has scaled back efforts to hire 1,000 people in Bangalore, India, and Salt Lake City, Utah (described in recruiting materials as its second-largest Americas office). As part of a plan to sell $50 billion of its assets since 2010, Bank of America has gotten rid of Julius Baer, its non-US wealth management group, and most of its stake in China Construction Bank. Across the pond the switch to the home front continues; for example, Deutsche Bank is cutting 1,000 jobs, though evidently none in Germany.

Not that keeping a presence in global markets is necessarily a bad bet in the long term. Unlike most other banks, Standard Chartered has actually expanded its presence in emerging markets as other firms have pulled back, with plans to add 16 new branches in China and India and approximately 70 new branches in Africa over the next few years. Across Wall Street, projections for growth in emerging markets are nearly double those for advanced markets, although they’re more modest than we saw before the financial crisis.

That being said, it’s not a bet without risk. “We’re not in a flat world anymore. We’re in a G-Zero world,” explained political strategist Ian Bremmer on Monday at a conference in New York. “Multinationals aren’t as important since the financial crisis.” If Citi is any indication, they may also be far less profitable—at least for now.

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