Citigroup Inc. (C) Earnings Call Transcript & Summary

Hello, everyone, and welcome to this call for the buy and sell sides on the transaction that was announced this morning. You will have watched the media briefing. So we'll start with some remarks -- additional remarks from Piyush, and then we will take questions. Piyush?

Okay. Thanks, Michael. Actually, my remarks are very focused. Michael suggested to me that I might want to spend a couple of minutes trying to explain this whole net asset concept. There are some questions around it. So when you're doing a purchase of assets and liabilities, which we are, this whole construct that has been created around net asset and using that as a definition of book is a warped construct that makes no sense. In our case, we're taking $11 billion in loans and $15 billion in deposits. So the gap is $4 billion, which they give us in cash. This is just an exchange of cash flows. So effectively, we account the cash as an asset, they give us $11 billion in loans and $4 billion in cash, and we pay them $15 billion for liability, net assets are 0. The only way to think about capital is, when I inherit the book, what is the RWA of the book and what is the capital adequacy I need to keep the support that are RWA. And then RWA of the book and the capital I need to keep to do this thing is about $1 billion. So that's effectively the book. And when you add in the integration cost because you say, "Okay, I'm going to capitalize that," that gets our $1.2 billion and so the $900-odd million premium that we pay is 1.8x that number. That's the sensible way to think about what is the price to book of this transaction. And so the rest of it is just a cash flow exchange issue. It's nothing to do with any of this stuff. So I don't know, just a clarificatory comment, maybe we'll throw it open for question-and-answers.

Okay, Diana, we can open the floor for questions.

[Operator Instructions] Our first question, Mr. Aakash from UBS.

Thank you, Piyush, for the clarification on price to book and price to net assets. I think if -- the confusion obviously arises because you will be quoted on price to net asset basis. And I think if you use a similar methodology to yours, their price to book also doesn't seem to be very different from what you've paid for this deal, I believe.

Well, that's exactly right. And which is why, I think that is -- frankly, I was quite surprised, very unorthodox way of thinking about book value. But if you look at the loan book that they have, it's about 20% lower than ours that they're taking on. And those tend to be more high-risk markets compared to Taiwan. So I suspect the RWA is quite similar. And therefore -- and the premium we're paying is about quite similar. So I completely share if you really effectively think about the capital you need to keep against the book and buying relative to premium, it will be about in the same range as ours. And that's the right way to think about it.

Right. So this pricing that you arrived at, is it like -- was it better because of the competition? Or does it seem like a reasonable price to you to pay for this book?

It's a bit of both because it's such an attractive piece of business, right? It's a 20% ROE business in the market. We figured that we were backwards and say how much could we go up to, to take the business and make it accretive at the time of integration. I don't want to dilute in this thing. So if I can make it accretive, then the question is how much do you go up to what we can afford to pay and still be competitive in the market? So I mean, that's the usual way to do these things. That's what we did.

Got it. So on synergies, you did not mention branches at all. You did say that for the next 3 years, you don't expect any [ retention ] of the staff. But what about the branches? Are you in a position to sort of close some branches and drop them in your existing network?

We'd have to -- yes. I mean, theoretically, yes. If you look at the ANZ transaction in the last 3, 4 years, we've shut down 20% of the branches. But it's sensitive. It's sensitive from a regulatory standpoint, and we also got to be mindful of the customer impact. And therefore, I fully expect that we will get synergies and rationalize the distribution. They are 45 branches, we're 33, and given I'm going to start with so many, I think we'll have even more than the 20% opportunity eventually. But we're going to have to work it along with the regulator and make sure the customer over -- I mean, we don't wind up creating customer service issues, et cetera. But the regulator has been very productive in working collaboratively with us on the ANZ transaction. It's just that you've got to do it with some sensitivity and finesse.

Got it. Understood. And then a 10% to 20% customer attrition assumption that you're working with, based on your experience, what is the time line for that happening? Does that happen in day 1 or does it happen over the next 1 to 2 years?

We got about 15%, 17% attrition. And a large part of that is -- by that time there are more than half of that happened at the time of transfer itself.

Right, so it's very [ immediate ] and happens very quickly. Okay. And then I think the other thing that you mentioned in the media briefing was that for some of the other Citi's assets that you have looked at, the financial economics did not make sense. I'm assuming this was largely in contract with Indonesia. So could you share your thoughts on like what was the reason for why you left the Indonesia portfolio path? Was it like subpar or was it the price too high?

Well, we looked at -- frankly, I mean, on this call I can say that the 2 best assets Citi's always had are India and Taiwan, right, in the whole region. India is a very good book, but India is extraordinarily high priced. And because we figured very early in the game that the Indian banks, given the price to book that they have, would always outcompete us. And when you go back to how do you make the transaction accretive, we are on a certain value. I didn't know how to do it, so we decided to pass. Of the other ones we looked at Indonesia and China -- from my standpoint, they're both subscale. They're not big enough to move the needle. And so for the work and effort you need to do to integrate the business relative to the scale impact you get, it's not that consequential, right? So -- now, obviously, you've been in a different situation because they're doing [ 4 ] markets. Then maybe they can find a better this thing -- from [ pro forma ] standpoint, very hard to get the scale benefits that you need to make this thing really attractive.

Got it. And then my last question is your steady state ROE target of 13%, which you're talking about. Would that change on the back of this acquisition in the future?

Well, I think if anything, this will improve a little bit. So, Sok do you want to?

Yes. So we say that it will add at least $250 million to us post the sort of COVID recovery. So on the $250 million bottom line, at least, even excluding the synergies and on our -- sort of if you look at the [indiscernible] that we are actually getting I think we actually easily get a lift of 3% to 4%.

Got it. So 13.3%, 13.4% would probably be the right number to keep in mind now for your steady-state ROE?

Yes. You said something.

That 3% to 4% EPS.

I think they're talking about ROE terms, right, that we are going to [ yield ] a lift -- so on the $250 million and assuming a base of roughly $7 billion, I think you can get that kind of lift.

Yes. Assuming equity is unchanged, if you calculate, the ROE is the same.

Our next question, Hayden (sic) [ Jayden ] from Macquarie.

Congratulations on doing this transaction. I just had a couple of questions. First of all, around the $250 million profit number. If I...

Sorry, around what number? You're actually a little [ squeaky ]. Can you speak up?

Can you hear me okay?

Yes, that's much better.

The $250 million -- yes. Okay. I'll talk louder, sorry. I have some questions around the $250 million. It sounds like that's before we get the attrition of 10% to 20%. And then you mentioned also, Piyush, during the presentation that there's about 8% to 10% cost-based synergies, potential for 20% revenue growth over 3 to 4 years. So this $250 million, where do we think that it could get to if we put all of those factors together? And I guess the follow-on question from that is, what do you think is the sort of CAGR and growth you could get out of this business over that time period as well?

The one thing I can't tell you about is what happens to interest rates. So the big upside in this business is the fact that they have a $15 billion deposit base and -- of which $11 billion of CASA. And so if rates actually -- while we wind up getting fixed rate hikes then you go back to more than -- exceed the 2019 rate level, then there's a lot more upside to this business, frankly. So it really depends on -- but let us part that aside for a minute. And you just assume that you get to a normalized interest rate environment, then I think we will give up roughly $25-odd million, I mean, out of that $250 million, maybe 10-odd percent because of the customer base attrition over the period of time. And I think we'll wind up, might take 2, 3 years, getting about a 20% lift in revenue. So I think -- and some odd expenses. So somewhere between $275 million and $250 million -- and $300 million is what I think we can get to, but it will take 2, 3 years to get there. So...

Okay. That's really helpful color. And my follow-on question is, if I look at some of the data just from the regulator in Taiwan, it seems that the Citi number of active cards have been declining over the past few years. The local banks have seen a bit of a step-up in terms of active cards. DBS has obviously grown a little bit as well. Do you think that now that you're combining, will you look to go and increase that base of active cards? Would you just sort of seek to monetize the base of customers you've got on? Would you go into an acquisition mode now for customers?

Yes, I think we can. If you look at our performance in the last 2 -- what you said is correct, by the way. So Citi's card base has been flattish, in fact, it's a bit. And in the last 2 years, our secured book has also come off. It's very different from DBS. We've been able to hold our cards -- the cards also, everybody's cards came off because of COVID spend. But our secured book also we were able to hold. And I think that reflects a willingness and ability of Citi to continue investing over the last 2, 2.5 years. I think -- and it's quite clear that as part of what's been going on, the investments have not been forthcoming, that we need to grow this kind of franchise. I think if you're willing to do that, you can actually hold your own once you have a reasonable scale. And like I said, the reason I put up these slides about what we've been able to achieve in Taiwan in the last 3, 4 years is just to make the point that if you -- and the reason we can hold our own is partly the digital agenda. I think, in cards today, the cards in the old days, is your off-line business. You've got a credit card and went and spend. Today, you've got to have a really good digital capability to supplement your offline card space. Now your rewards management, your ability to do a whole bunch of card servicing and so on. Once you have that, then customers start doing more and more with you on the card front as well. So I do think that, based on our own experience in the last 2, 3 years, we can actually do a lot more with their card footprint than they've done in the last couple of years.

Our next question is Melissa Kuang from Goldman Sachs.

I just have a question on your AUM. Maybe if you will share in terms of the AUMs of Citi. How has that been growing over the years? And how that has been comparing to the industry in Taiwan? And in terms of your AUM growth as well on your own book currently, do you have any -- quite a bit of Taiwan [ investors ] in all of these? And how do you see that developing? And also I'm just a little bit curious in terms of -- you mentioned on the call that yours also was a bit high yield. Can you just share the kind of products that Citi sells and the kind of products that you have and how that is complementary and how you can actually bring about the synergies?

So I have data only for 3 years, Melissa. But in the last -- the year '20, '18, '19, '20 to date, Citi's AUM has been growing at about -- has grown 15% in that period, not bad in that. And in the same period our AUMs have grown 30%. So -- but there's just this point in time period because of the data I have in front of me. The nature of our AUMs are actually interestingly different. And that's why we think that we make more money on a per AUM basis, and we think we have an opportunity. A large part of Citi's AUMs are focused on bonds. So they really do a lot of bond sales, but bond sales typically have the lowest margin in the portfolio mix. We do a lot more sales of structured products and structured opportunities, which tend to generate better returns. So our relative mix -- that's why Sanjay called it complementary products. They do a lot more bonds. We do a lot more structured products in our mix. And that's really the difference in what drives the incremental returns for us relative to them.

Right. Can you maybe share also like wealth management growth? How has that been on the AUM because it's [indiscernible] But just in terms of the wealth management fee growth, that would be helpful?

What was the question?

The wealth management fee growth.

The Wealth Management fee growth for Citi was, again, the 2 data points I have has been actually very strong, $2.3 billion to $3.4 billion, whatever that -- yes, between 2018 and 2020, it's up about 50%. And by the way, ours is also up north of 50% in this period.

We've got Mr. Krishnan from Jefferies next.

I have a couple of questions. I just wanted to clarify that you said you will be having $1.2 billion of capital. And if I hear correctly there is an RWA of $7 billion. So I think the capital ratio that you're working on is 17%, which it seems a bit high. So if you can give some color if that $1 billion already includes some capital that you think that we need for the growth over and above what you need for running a subsidiary? And the second question is that, I mean, I would tend to think that Citi will be operated as a branch, and you will be looking at it as a subsidiary. So are there anything on the consumer banking business that you may not be able to do that Citi was able to do because they were working as a branch?

Well, first RWA. Do you have it?

Yes. So I think you are asking how do we get 8.7 percentage...

No, no, no. His question is he says he has reckoned the RWA is $7 billion, and therefore, $1.2 billion capital of $7 billion RWA is 17% capital adequacy, why are you keeping so much capital? But I'm not sure where the $7 billion RWA number came from, right? So...

Yes. So the RWA that we have computed is about $9-odd billion. And remember, the premium is a capital deduction. It is not RWA term. It's capital deduction from the numerator. So your Tier 1 capital or for capital, you deduct $1 billion, and then you add on about $9 billion to the denominator for risk-weighted assets.

Okay. Okay. That helps. Okay. So the RWA is $9 billion. Okay. And then the question on....

Yes. So will take into to account the local rules like mortgages, there'll be 40% risk-weighted cuts and that will probably be a 100% risk weighted, and then there'll be some operational risk charge and all that.

And your second question, the short answer is no. Frankly, as a subsidiary, you're always able to do a lot more than you are as a branch. And that's why our model is that we subsidiarize where we can. The downside of subsidiary, of course, is governance, you need to have a local board. But since we know how to operate with local boards, the local governments, we are happy to take that overhead, but the flip to that is you just get a lot more flexibility because you get all the capabilities that a locally incorporated bank gets.

[Operator Instructions] We've got the next question from Mr. Nicholas, Credit Suisse.

Just add further clarification on that $275 million to $300 million that you were talking about earlier to Jayden's question. How do we think about, I guess, the fact that you're getting some excess deposits that you can plug into DBS Taiwan. And essentially, that should bring down your funding cost and improve the earnings. Is that already incorporated in that $275 million to $300 million that you talked about?

No, actually, it isn't. So the synergy I talked about clearly what we think we can do on the Consumer franchise. But I think this is material. Frankly, it's not just the funding cost improvement, it's the funding capacity because there's only so much I can fund in the interbank market and through cross-border funding. And therefore, the funding shortfall actually constrains some of our ability to grow the book as well. And so the incremental funding we get is quite helpful, both in terms of the view to grow our Corporate banking business side as well, as you correctly said, that the margin might improve our cost of funding. And no, I haven't factored that in.

So to the extent that Citi has also deployed the surplus funds at higher rates during the pre-COVID days, that will be inside the $250 million number.

Yes. But the credit margin they won't be. Credit margin will be in the Corporate bank.

Yes.

Okay. Okay. Got it. And apologies, it was cutting out a bit for me during the media briefing. But could you just repeat what you mentioned on -- I believe there were some details on the average accounts for Citi being much larger than DBS and some spend being 20% higher, and how that's an opportunity for you guys?

Well, the real point we're trying to make is that their customer profile is the best and most affluent customer profile of any bank in the country. And one, we said the 2 areas, the 3 ones which I pointed out as example, is their credit card spend is about 20% higher than our credit card spend. If you look at credit card spends, our credit card spend is about 4,500 or 4,600, it's also top quartile. But Citi's credit spend is more closer to 5,500, right? So it's meaningful. So their profile of customers is a more affluent, more spending customer profile on cards. And the same is true on their affluent banking business. On the affluent banking business on the equivalent of Citigold or My Treasures, their average relationship balance is about 15% higher than what our Treasures average balances are. And on the private client, the Citi Private client, their average balance is about $2.5 million, which is almost 100% higher than what our averages are. So it's just all data points to demonstrate that they have a very affluent and high-quality, high-profile customer base, which anecdotally people know, just to substantiate it with the data. Now when you have a higher profile, high-quality customer base, you really have the opportunity to get them to do a lot more cross-buy, I call it, cross-sell, cross-buy. If you have the right range of products and the right digital solutions, then you can actually get much better wallet penetration for that kind of customer profile.

So that's on Slide 5 of the Piyush's presentation deck. You can see all the numbers there.

Our next question, Harsh Modi from JPMorgan.

A couple of questions. First, in Taiwan, how is the payment competition evolving, especially things like BNPL? And also this entire cohort of high-net-worth individuals on the payment side, credit card, wealth management is the segment everybody is focusing on. So is there any risk of breakthrough, let's say, either on the payment side or on BNPL or any other, even DeFi or something kind of taking away the traditional market share? Or on the flip side, is there an opportunity for you to have to meaningfully grow your market share because we're already ahead of the curve in some of these -- using some of these technology to deepening our presence?

Harsh, that's a tough question. First of all, I don't think DeFi is going to change anything anytime soon. If it happens, it will happen in many other places before Taiwan. Taiwan actually, the overall digitization of the landscape has trailed many other markets, interestingly. So I don't see that happening in Taiwan first. The wealth product, again, I don't see too much impacting the Taiwan thing. It's because the wealth product has less to do with payment, right? It's to do with being able to get democratized where maybe some digital and some advisory. On the wealth side, if you had to ask for macro trend, it has been that a lot of Taiwanese money is continuing to equally flow out. And as the Taiwanese are trying to get -- in fact, it will be the biggest -- one of the biggest sources of money in Singapore in the last 2, 3 years has been the Taiwanese inflows coming in over here. And to that extent, the fact that we have connectivity and the fact that Singapore, Taiwan work well together, I actually see that as a benefit. I think we can benefit from that. The last piece is the one which is little uncertain, which is the impact of buy now pay later, et cetera, schemes, and there are 2 dimensions to that. One is if people get very aggressive and the regulators let you, then I think it cuts into your card revolve rate. That's the most apparent thing because card revolve pricing is much higher than BNPL, based on maturity. In practice, what happens is the banks have already been doing that. If you look at all of our ENR in the last 2 years, we offer installment loan programs on the card. And therefore, there are a lot of people who want to move to the installment loan programs, they take it from us anyway. So the real question is, do the regulators introduce, let new competitors come in to compete in that space? And if we see a lot more new competitors in the space that will put some pricing pressure. So that's probably 2. But in point of what's happening is most places, regulators are being very cagey about letting a lot more aggressive BNPL happen. So -- it remains to be seen. What's really clear to me that you're going to see a huge impact of BNPL on the installment loan books in most of our markets.

Right. So the base case assumption should hold. Okay. The second one, your regulator, what are the questions they're asking as you are deploying capital both internally, regulated and your Board. Are you comfortable, you are now close to 14, slightly below that or close to it? There's still a way to go to 13. So how quickly do you think you are in a position to normalize that and between both internally you and regulatory guidance on that?

We have no regulatory guidance in that. We've been quite clear in the past that our management operating range is between 12.5 and 13.5, so you call it 13. And the regulator has been quite comfortable with that operating range. So that means that we can actually dip down below 13 as well if we wanted to. So then the question is really what is the outlook for RWA growth, capital efficiency and use. And so that's something we keep an eye on. So this will finally reflect in our dividend policy. And we said that we will continue to have a steady growth in dividend policy. I think that's what we'll work at.

Our next question is from Neel Sinha from CLSA.

A couple of them have already been answered. Piyush, I had 2 questions to think about just from a 20,000 feet perspective, the Taiwan market, it's not like India, it's not a very large population, there's I think 23 million, 24 million people. The growth rate is also quite low. It's already affluent. So trying to figure out, like is it most do with higher margin, smaller base versus thinking of tapping the mass affluent and -- or growing mass affluent in India in terms of strategy? And the second thing I was sort of thinking about. Like credit card basis, sometimes they're quite brand sticky, right? And it's part of the suite of many other services that maybe Citi was offering. So what is the downside risk? Because it is a fairly overbanked market as well. Any thoughts on that would be good.

Okay. I think they're both good questions. So to me that -- I'll be honest, if you really think about it in strategic terms and growth markets agenda. For us, the big countries, the Indias of the world and Chinas are clearly more important than Taiwan. I'm going to start with that. However, where Taiwan really makes out is the wealth business. So I pointed out before that the number of rich people in Taiwan are twice what you have in Hong Kong and 3x what we have in Singapore. And so to the extent that wealth management is such a core and integral part of our business, that is very, very attractive to me. Our Wealth business is now 20% of the bank. It used to be 7%, 8% of the bank. And that continues to be a very significant growth. And half of what I'm acquiring is basically the wealth franchise. And that is strategically aligned. And not only is there an opportunity in Taiwan, I think the connectivity and the Citi opportunity is the high end is further facilitated by that. The second part, which is that we have such a good franchise, it makes 20%. It's actually almost opportunistic because if I can get this thing, I get a 50% wealth franchise, which is saying, and then on top of that, I get a really good customer base, I build out the card thing, I can get a high-return, high-margin business. Nothing wrong with that as well. So it's how we thought about it, frankly. On your second question, which was...

Yes. I mean I was talking about the cards business tends to be brand sticky and part of the value chain here.

Yes. Interesting thing is, I think there are 2 or 3 drivers of card stickiness. One, I do think that increasingly a large part of card stickiness is your capacity to blend the online and offline, the digital capability. And our digital cards, when you come to our platform, the ability to do everything effortlessly and seamlessly, whether it's to change your limit, stop your overseas card, keep your onshore card to better security, have -- move their awards around, that's very superior. And that's getting us a lot of traction in the other markets where we have cards. The second is you're right, brand matters. But I think as a "foreign bank" you have a premium and prestige. In Taiwan, in particular, Singapore brands play very well. So I think that I am not overly concerned about people looking at the DBS brand. In all our surveys, our brand positioning is right up there alongside Citi brand positioning. So that doesn't bother me too much from a brand distinct standpoint. If you look at market shares in Singapore, for example, over the last few years, we've been outstripping Citi. In fact, we've been outstripping all the others. We were #3 in Singapore, we're now #1. So I can tell you that our brand plays quite well and our digital capabilities play quite well. So I do think we retained card stickiness.

Thank you. We have come to the end of the Q&A session. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.