Citigroup Inc. (C) Earnings Call Transcript & Summary

So good morning, everybody, and thank you. Thank you, Thomas, for joining us this morning. We at Crédit Suisse look forward to your leadership in the years ahead. So as Thomas said, we're back for day 2 of our 21st Annual Crédit Suisse Financial Services Forum, and I'm pleased to kick off the day welcoming back Citigroup. I'm not just welcoming back Citigroup, I'm welcoming back Naveed Sultan, who heads up TTS, Treasury and Trade Solutions, for Citigroup. He joined us here in February of 2016. A fair bit has changed since 2016, including about 35% growth in related TTS revenue and related TTS-driven deposits if you look 2019 versus 2015. So without further delay, let's get started here. We'll have a fireside chat, and then Naveed will be available afterwards for a breakout session.

Thank you, Susan.

Thank you.

Good morning, everyone.

Okay, day 2. So let's get started, if you would, at kind of a higher level with maybe a brief overview of the TTS businesses, maybe just to level set here on size, scope, composition of the businesses.

Yes. Thank you. If you think about the TTS business, it's very strategic and foundational for Citigroup's business and operating model. And we deliver a wide range of working capital management solutions to our clients around the world, leveraging our global platform. It includes products and solutions in payments area, receivable areas, liquidity management services, commercial cards, trade finance, trade services and foreign exchange. Our engagement with the clients is wide-ranging. So we do business with corporate clients. 80%-plus Fortune 500 companies use our platform around the world, government entities; public sector entities, financial institutions, including banks; digital economy clients; the big tech; the fintech; as well as the commercial banking clients. As far as the digital economy clients are concerned, digital economy clients are on an accelerated path to globalization, and our platform is a very natural fit for them to achieve that goal. In terms of the size and scope, we are in 98 markets where we actually have banking licenses. And in some of those markets, we have operated well over 100 years. We are connected with over 250 trading systems, including several -- on top of that, several alternative payment mechanisms and channels. So on average, we process about $4 trillion worth of flows, which could go up to, whatever, $5 trillion, $6 trillion on a big day, and that's essentially in 145 currencies around the world. And we have a market share of about 15% for the SWIFT dollar flows. Now if you look at this business from a client perspective, it has both operating and strategic relevance. The operating relevance is that we are deeply embedded in our clients' operating environment, in their operating processes and help them do business around the world on a day-to-day basis. Strategically, because we provide working capital management solutions and help our clients become more efficient. The companies who have more efficient working capital management tend to outperform their peers on 4 critical dimensions: growth, reinvestment, dividend payout and market gap. So both from an operating and strategic standpoint, it's very, very relevant to our clients. Now it's -- in terms of its contribution to Citi, 2019 was the sixth consecutive year of growth. We delivered about $10 billion worth of revenues, over 20% of company's net income and 45% of total company's deposits, which, as of December 31, the average was about $559 billion. And that mostly is the operating deposits. Highly efficient business, according to independent objective studies and consistently has delivered well over 20% return on equity. Last year, we grew our deposits by 10% on a constant dollar basis. And I think the correlation between the operating activity and the deposits is very, very tight and close post Basel III and all the rest of it. So therefore, it does reflect their growth in deposits, operating deposits, does reflect the growth in the underlying operating drivers. So that's more or less -- like I said, it's a very strategic business. It's fundamental to our business and operating model.

And so let's back up a second. Based on the numbers that you gave me, the pretax margin and the ROE are clearly above the average for Citi as a whole. How have those trended over time?

The -- for the last 6 years, like I said, we have delivered 6th consecutive year of revenue growth. We have a very sharp focus on scalability and operating efficiency. And if you look at the trajectory of all the key ratios in the last 6 years, they have been a positive trajectory despite different macroeconomic environments, geopolitical context and interest rate volatility in U.S. and elsewhere in the world.

Okay. And in terms of the deposit flows, up 10%, I think you said, last year, and we drove a number, having grown about 35% over the last 4 years. Can we talk a little bit about the key drivers of the deposits. And kind of what's going on with deposit flows? What goes on in a risk-on versus risk-off environment?

I think the deposit growth is an outcome of your client engagement and your ability to continue to improve your operating drivers. So that is you are delivering your solutions to your clients around the world, they are expanding in different markets, they are going into new customer segments. And since we are so embedded into their operating processes, next market geographically or next business segment is a very logical extension of our engagement with our clients. So once that happens, you see the deposits picking up because operating liquidity is, by definition, what is needed to finance the underlying flows of a client. Then we have been seeing -- continuously gaining more market share, not only with the existing clients but, of course, also with the new age clients. And because of the platform we have, whenever there is a consolidation in the marketplace, there is a natural gravitation towards our platform. So all those -- some new solutions, of course, new solutions. And the thing is that clients are continuously becoming more sophisticated. They are -- they need advice from partners like us to help them navigate an environment which is going through structural shifts. The economies are in transition, finance is in transition, globalization is in transition. So if you look at, in that context, we are very compatible with how the clients want to do business globally and we assist them navigating those shifts, that leads to more business, and that creates an outcome for our liquidity, for our deposits share.

Perfect. So you've touched on some of these elements already, but let's talk about the growth strategy with Treasury and Trade Solutions. And maybe talk about how you maintain that market leadership over time and how you maintain this, let's call it, mid-single -- mid- to high single-digit growth rate, although I don't think that you would assume that, that was a naturally sustainable growth rate for this business.

Yes. Well, like I said, I mean, if you think about the nature of our network, it is -- I -- we talk about it a lot, and sometimes there are debate in the industry that some synthetic network is going to come and replace these traditional networks. But just to explain what the network is because it really gives us a very differentiated and a unique position in the marketplace. So the network is really, first of all, 95 markets where we have banking licenses. We understand the legal and regulatory jurisdictions. We understand the business environment and risk relating to those markets. And we have very close relationship with the regulators and policymakers. And we have been a significant participant in those economies. So that's one component of our model. The second one is that our core technology infrastructure is global and is consistent around the world. On top of that infrastructure, which is really our digital channels, online channels, our payment systems, trade systems and things of those -- commercial card systems. On top of that, we have built a very rich set of functionalities, products as well as our solutions. So that's the third component. The fourth component is our coverage model. We in our coverage organization are organized exactly the way the client is organized. So they are in many, many markets. There are many subsidiaries, many buying centers, regional treasury centers, global treasury centers. So we cover them between our relationship managers and salespeople exactly how they are organized, and therefore, we have very embedded relationships with these buying centers. So having explained the uniqueness of this, that particular network continues to facilitate a greater share of clients' wallet, be it our existing clients or be it new age clients. In addition to that, if you look at how the digital economy is evolving today, we are also attracting flows from this new breed of fintechs, which we call aggregators. So what the aggregators do, they aggregate flows from those customer segments we don't directly do business with. So these could be the consumer bank, consumer clients. It could be small businesses around the world. And then they are looking for a platform to distribute it around the world. And I think what is very important for us to remember is that the globalization is becoming very inclusive. Today, one can produce anything anywhere and distribute it everywhere using these digital platforms. And therefore, that access to a global platform is very, very important. So we feel very confident. And then, of course, on top of that, we are continuously investing in that innovation, improving the client experience, broadening our product capabilities, operational resilience. So we believe that we are unique, our positioning. We feel good about our positioning, that as the environment evolves as we go into the future, we will be able to maintain that growth despite the -- of course, we will have impacts of the economic headwinds and interest rate volatility. But through the cycle, we believe that our growth rate will be over the GDP growth rates.

So let's talk about the competitive landscape a little bit. You're in 98 countries with banking licenses, so it's very hard to replicate. The presence that you have had for as long as you have had it at several banks, and it's a small handful, have a similar infrastructure and capability, but there's always change in the competitive landscape, whether it's new entrants into the treasury services business or otherwise. Can we talk a little bit about what you're seeing there in terms of the competitive landscape?

Yes. I mean clearly, the -- there is a widespread recognition in the market that this is a very attractive business. So you are seeing both traditional and nontraditional players coming into this particular space. And as far as we are concerned, like I made the point in the earlier discussion, that we have a very unique and differentiated position. Our strategy is informed by 2 things: what the client needs are; and secondly, that we want to be the financial platform for global commerce. If you look at today, how the world is evolving, 7 of the topmost valuable companies in the world today are platform companies. And we have a unique opportunity because of these assets we have built to make that transition into becoming the financial platform for global commerce. And therefore, we are really making a lot of investments in 4 areas: client experience; connectivity and data; innovation; and safety, soundness and operational resilience. So we believe that our competitive position is strong, and we will continue to gain the market share. Now if you look at the nontraditional players, the nontraditional players which would, really you think about the fintechs. The portion of the fintech on the institutional side has become more collaborative. On the consumer side, it's more competitive because the fintech on the consumer side think that it's easier to disintermediate the consumer relationships. On the institutional side, there is a recognition that the relationships are so embedded. Therefore, it's very difficult to disintermediate. And particularly, in our case, because of relationships, global scale, the fintechs find our platform very attractive to come and work with us from an operating standpoint. So therefore, we work very closely with the fintechs as partners as well as its clients. In fact, we have built a practice within our financial institutions group, what we call fintech. So as clients, we want to facilitate them to grow their business around the world. And as far as the collaboration is concerned, partnerships, we integrate their capabilities into our solutions. They bring new ideas, technology. We have the scale, the trust and client access. So that relationship works exceedingly well. So I think this competitive interest is a confirmation of the opportunity, and we actually find it a very positive motivator to make sure we don't become complacent and we stay ahead of the game.

So it's interesting when I think about this change in the competitive environment, and you talk about it as a catalyst. One of the things that's so attractive about these businesses is that the market is huge, right? It's huge whether you look at just the U.S. version or the global version, and obviously, you're looking at the global version. It's massively fragmented, right? There's very little good data available, but your market share is somewhere between, let's call it, 5% and 6%. I think JPMorgan told us on Tuesday that theirs was about 6%, which I'm going to assume you're then close to 6-ish percent as well. But these market shares haven't really moved. The top 3 players are all in the 5%, 6%-ish range, and there's only a top 3 or top 5 players. What are in -- what is, in your view, the driver of incremental market share consolidation? Because in every other business, you should be looking to be at 2x that market share.

I think -- yes, absolutely. It's a great question. So like you said, I think the market is very fragmented. And it depends upon what lens you are using, and it's difficult to estimate. Coalition actually puts our market share around 9%, 9% to 10%, considering our revenues last year of $10 billion. So total addressable wallet, you can say, give and take, about $100 billion. That is large corporates, our formally defined target market, but we are not competing in the rest of the market. So it could be a different lens if you say 5%, it's much bigger. Overall...

I'm using an overall market.