Facing brutal competition in the U.S., giant Citigroup is reaching out to the burgeoning middle classes around the world.
It's not easy to navigate Rua da Quitanda in São Paulo, Brazil during lunchtime. The busy street is filled with a dozen salesmen from competing loan shops pressing flyers into hands among the passing crowd. "Loans!" cries out a tout. "We make personal loans." A woman makes shooing motions at a particularly pesky one--then gives up and starts running. Not Fernando José da Silva, a 51-year-old mass transit worker. On a recent afternoon he's sitting in the hush of a Citigroup minibranch, telling a loan officer about his sick daughter (she has respiratory problems) and daunting medical bills. Moments later he emerges with a $450 loan, at 7.9% interest a month, and a look of pleasant surprise.
Citigroup is eagerly seeking more folks like da Silva millions of them, in 54 countries outside the U.S. Its assets of $1.5 trillion and 2004 revenue (before deduction of interest expense) of $108 billion make it the largest bank in the world. But Citi faces the same dilemma that the largest U.S. oil companies do: Its North American operations, which provided 61% of its $21 billion in net income (before charges) last year, can't gush forever; the biggest strikes will come from abroad, where growth rates are high and the bank is adding customers at twice the domestic rate. With such prospects in mind, Charles O. Prince, soon after becoming Citi's chief executive in October 2003, decided that half the bank's earnings should derive from international markets by 2009. "We would in some ways be throwing away our legacy if we did not expand in this direction," he says. "There's an explosion of opportunity."
It's an ambitious goal, focused on consumer banking. It must be met neighborhood by neighborhood, country by country, by courting the emerging middle classes in such fast-growing economies as Brazil, Mexico, Russia, India and China. Citi has made massive investments in up-and-coming economies, betting that its premium brand will be a hit with the masses. The potential payoff is enormous. Marjorie Magner, head of consumer banking, figures the potential revenue from global consumer banking is $1.3 trillion, much of that from virgin territory.
This is not a game of steady gains. Citi has recently stumbled badly abroad. Regulators in Europe are investigating its alleged role in the collapse of the scandal-laced Parmalat SpA and a questionable bond-trading strategy, dubbed "Dr. Evil," by participants. (Prince had another name for it: "knuckleheaded.") Right around the time of those contretemps, Japanese officials accused Citi of misleading some of its wealthy clients and forced the closure of its private bank; Citi fired three senior executives, including the head of Citigroup International. And then there was the revelation of a "substantial, years long relationship" with Augusto Pinochet, the former Chilean dictator. Last month the Federal Reserve took the unusual step of telling the bank not to make large acquisitions until it straightened out its systems of compliance.
But much of Citi's massive push abroad isn't taking place on the trading floors or in mahogany paneled board rooms. Around the world it's working with regulators to create the legal mechanisms that allow Western style consumer loans, credit cards and deposits. Then Citi has to persuade customers to trust it with hard earned cash. Then put credit cards in the hands of people who have never before used plastic. Much of the world has never considered taking out a bank loan or paying interest to buy a car or TV or to pay for a wedding or medical bills.
Working in Citigroup's favor are its deep roots in international banking, strengthened under the reign of Walter Wriston, the bank's chairman from 1970 to 1984. (He died in January.) He climbed to the top job after heading Citi's international business and expanded the company well beyond U.S. borders, often obtaining first-mover advantage. But he and his successor, John Reed, seemed content with 1% or 2% market share in many countries, achieved by focusing mostly on the wealthy elite. "Walter Wriston said once that when he ran the bank, the largest source of revenue was shipping finance," recalls Prince. "That was 30 years ago. The bank he ran has been completely transformed by competition, by evolving technologies, by changing dynamics in the financial marketplace."
S TILL, CO-OPTING THE MASSES IS a slow business, as Citi's experience in Russia underscores. When it opened its first branch in Moscow in November 2002, a Western pioneer in this respect, it found a relatively primitive legal structure that is only now putting in place a deposit insurance program. Citi and other banks worked with regulators to help set up credit bureaus, which could begin operating as early as September, and a change in lending laws so that credit card interest begins accruing after a set period rather than at the time of a sale. Taken for granted in mature markets, the feature was so new in Russia a press conference introducing the card attracted 27 reporters.
Such efforts certainly grease the wheels for Citi, which has spent an estimated $100 million building 18 branches in Moscow and St. Petersburg, and 200 ATMs and kiosks in gas stations and shopping malls with nary a kopek in profits. But they also help reassure a population deeply suspicious of sharing private information or trusting anyone with its wealth. Years of government expropriation, communism and, more recently, gangster capitalism have all taken their toll. Many of the 145 million Russians woke up in 1998, following the Asian currency crisis, to find their bank had collapsed and their life savings had disappeared. As a result, an estimated $50 billion in cash, one third of the US savings, is stashed away at home. In this market of skeptics Citi found it had just single digit brand recognition. Executives brought landlords for potential branches to existing locations to prove Citi was a legitimate outfit.
To find its first customers Citi exploited connections from its corporate banking side, which has served multinationals and large Russian companies since 1993. Executives went to personnel directors at the largest businesses and proposed a direct deposit program they said would save hundreds of productivity hours because employees would no longer have to suffer Moscow's interminable traffic to get to the bank.
