| NEW YORK, July 2
NEW YORK, July 2 Citigroup may be losing ground
in a business that is central to its recovery plan, as rivals
catch on to how much money the unit makes.
The bank's transaction services unit, which moves $3
trillion around the world daily for companies, banks and
national governments, received scant attention from competitors
and investors for years. But it has done wonders for Citigroup:
About a third of its profits since the financial crisis have
come from the unit. Best of all, the business used little
capital at a time when the bank - which required three rescues
during the credit crunch - had little to spare.
With regulators pressing banks globally to find more capital
to support most traditional lending and trading businesses,
transaction services suddenly look more interesting to
JPMorgan Chase & Co and Bank of America Corp
have made transaction services a priority in the past two years,
and have hired key senior executives from Citigroup. Regional
banks such as Singapore-based DBS Group Holdings and
Australia and New Zealand Banking Group have ramped up
their efforts, too.
There are early signs that rivals are eroding some of Citi's
profits. In the treasury and trade part of the business, which
is most directly comparable to other big banks' business lines,
Citigroup's revenue fell 5 percent in the first quarter from the
same quarter last year, while Bank of America's dropped 3
percent and JPMorgan's slipped a fraction of a percent.
Competitors don't disclose profit for their units, but
Citigroup's pretax income for transaction services fell 8
percent in the first quarter, one of the biggest drops since the
The percentage of large corporations using Citigroup for
cash management slipped in Europe and in the United States from
a year earlier, according to recent surveys by consulting firm
Greenwich Associates. And in the United States, prices for many
transaction services are dropping, reflecting competitive
"Other participants in the market have woken up to the
potential of this business," said Citigroup's Naveed Sultan,
global head of treasury and trade solutions, which is the
biggest part of Citigroup's transaction services segment.
Transaction services include a wide array of products, but
the business boils down to collecting deposits and transferring
money, processing transactions and providing trade financing and
other forms of secured lending. Microsoft Corp, for
example, uses Citigroup to help collect excess cash from more
than 350 subsidiaries in 100 countries and put the money into
central treasury accounts. The U.S. government uses Citigroup to
help process passport applications and remit application fees.
Even if the bank is finding itself in a more crowded field,
the unit is still performing well. In the first quarter, when
the bank's revenue fell, it still earned a 73 percent return on
its capital by one measure, when most banks are struggling to
earn 15 percent returns. And in Asia, the bank gained ground in
the cash business, according to Greenwich.
The bank's business is bigger than its rivals'. Its annual
revenue from treasury and trade services reached $8 billion last
year, while JPMorgan's most comparable businesses booked $6.7
billion and Bank of America reported $6.2 billion.
Citigroup's executives said they think their franchise will
be hard to catch up with. The technology and regulatory effort
required to operate in so many countries is tough for rivals to
build, Sultan said. Contracts tend to last for a few years, and
customers are often reluctant to change systems so they can use
a new bank, he added.
JPMorgan and Bank of America do not have international
networks as big as Citi's. And while Citigroup has been pulling
out of consumer businesses in countries such as Turkey, Pakistan
and Paraguay, it is being careful not to cut back where it would
lose valuable corporate business.
Investors are hopeful that Sultan is right, and will watch
Citigroup's transaction services unit closely when the company
reports second-quarter results on July 15.
"It is a big business for them, and it is an important
business for them," said Chris Bingaman, who owns Citigroup
shares as a portfolio manager at Diamond Hill Investments, which
has $10 billion under management.
RIVALS READY FOR LONG BATTLE
Competitors say they are prepared for a long fight.
Bank of America CEO Brian Moynihan said at an investor
conference in December that the business "is an important growth
area for us - not capital-intensive and produces good profits."
Mike Cavanagh, co-CEO of JPMorgan's corporate and investment
bank, acknowledged that winning new clients can be a multiyear
process. But he said the prospects for profits and closer ties
with corporate clients as the bank expands around the world make
continued investments worthwhile.
"We're following our clients and willing to take the time to
build this business," he said.
In Citigroup's estimation, there's another benefit to
transaction services: They can bring in business to other parts
of the bank. Companies that use Citigroup's treasury management
are more likely to use the bank for securities underwriting and
merger advisory deals, the way a consumer with a Citi checking
account turns to the bank for a mortgage.
Jamie Forese, co-president at Citigroup who oversees the
unit along with corporate and investment banking businesses,
said, "Our transaction services businesses are the backbone of
our global network and are central to Citi's overall strategy."
A BIGGER BAZAAR
With competition heating up, many banks are discounting
services in the U.S. ranging from balance reporting to accepting
currency deposits at a branch, according to data in the most
recent Blue Book of Bank Prices from industry research firm
Some items have been discounted more than 50 percent, but
consultants who have worked on the deals say the private
contracts have so many unique terms that is impossible to put a
firm number on how much prices have come down.
For the largest corporations that Citigroup focuses on,
banks are increasingly willing to cut prices to hold or win
business, said Daniel Blumen, a partner at Treasury Alliance
Group who consults companies contracting for treasury services.
"If you are a large corporation and you are shopping smart,
you are seeing better deals from the banks," Blumen said.
Customers are taking notice of the wider array of banks in
The World Bank, for example, counts on Citigroup to provide
trade finance - a form of secured lending - to small and midsize
companies in emerging markets. But it also wants other big
global banks and regional and local banks to do more in the
program, which will help the group meet its goal of bringing
more credit to emerging markets, said Bonnie Galat, head of
business development for IFC Trade and Supply Chain Solutions, a
part of the World Bank.
Galat has found that in the last year a number of banks have
become more interested in working with her program. BNP Paribas
, Societe Generale and a Bank of Tokyo unit
of Mitsubishi UFJ Financial Group Inc have made deals
with her agency.
"Citi is a great partner, but we would like to work with
more banks," she said.
(Reporting by David Henry, additional reporting by Saeed Hasan
in Singapore. Editing by Dan Wilchins, Peter Henderson and