Citi’s 2017 Investor Day: Institutional Clients Group

Citi’s 2017 Investor Day: Institutional Clients Group

January 5, 2020 0 By Kody Olson


I have the unenviable position today
of addressing all of you after lunch. But I also have
the privilege of presenting our institutional client’s
business to you, one of the world’s premiere,
global, wholesale platforms in operation today. Over the next 45 minutes or so, I will touch on a few topics
covering that business. I’ll provide an overview
of our franchise, discuss our strategy
for continuing to grow our business, and finally, talk about the current efficiency
in returns and the factors likely to
drive these going forward. On slide one, we show
an overview of our franchise. Over the last 12 months,
the ICG was a significant contributor to Citigroup overall results,
generating $35 billion in revenue and nearly $11 billion in net income,
70% of our total. We operate the largest proprietary payment network
in the world with direct connectivity to the financial system
in 98 markets. We have clearing
and custody capabilities in 63 markets
and trading floors in 77. And we facilitate around $4 trillion of transaction flows
on a daily basis. Our franchise is client-focused, with our business serving over 80%
of Fortune 500 companies. We maintain an industry-leading
operating efficiency of 55% and we generate attractive returns, with a return of just over 13% on more than $80 billion
of allocated tangible common equity. We are a leader
in the global marketplace with a balance of revenue
across banking and markets. We offer a full range
of wholesale products, including
Treasury and Trade Services Lending, Capital Raising,
Advisory, Investment Research, Capital Markets Execution,
and Security Services Capabilities. Over the last several years, we’ve maintained and strengthened
our leadership in these franchises, as demonstrated
by the industry awards we’ve earned and by the growing number of areas, where we enjoy a top-five position,
or better. We believe we are uniquely positioned to deliver attractive,
sustainable returns with an unparalleled global reach
and a diverse set of products to serve the growing needs
of our clients. We have relationships with the largest
and most sophisticated corporations, investors, and financial institutions
in the world, for whom we serve
as a trusted adviser. And we have taken
a disciplined approach to resource allocation, which has allowed us to serve
and grow with these clients while at the same time
improving our efficiency ratio. We have also been investing
in talent and culture. A culture that is rooted in our commitment
to the highest standards of integrity and ethical conduct, with a mission of enabling growth
and progress around the world. We’re proud of our culture
and the results that we’ve produced. But we believe, we can capture
even greater upside from here. We have a track record
of establishing market-leading franchises in areas like Fixed Income
and Treasury and Trade Solutions. And we’re applying
that same discipline and client-focus today
in areas where we believe we can drive
additional wallet share gains, including Equities,
Investment Banking, and Securities Services. We believe the share improvement, combined with modest growth
in the overall market and some tailwind
from increasing rates, has the potential
to deliver over $2.5 billion of additional pre-tax earnings
over the next few years. And this
EBT improvement should drive our current return
on tangible common equity of just over 13% to roughly 14%
in the medium term and above 14%, longer term. While we are close to this goal now, it will take focus and execution
in a number of areas, which I will talk about
in greater detail in just a moment. But first, let me briefly cover
our franchise position and our strategy, which together serve as
the foundation of our future growth. We’ve shown this map
many times in the past, and we continue to believe, and we see the evidence
in our results, that our global network is what’s driving our momentum
in our business today. We believe this network, built over the course
of our 200-year history and present in 98 markets, cannot be easily replicated
by any of our peers in today’s environment,
and gives us a unique competitive advantage in serving
large, sophisticated clients. Today, about a third
of Fortune 500 companies are domiciled
in the emerging markets, up from just ten percent
ten years ago. And our proprietary network positions us to serve
these emerging market clients as they continue to grow
beyond their home regions. More specifically, it positions us well to be the core
operating bank for these clients. Serving their cash management, Foreign Exchange, custody,
clearing and other day-to-day needs in more markets around the world
than any other bank. Our footprint also contributes
to our diversification as no region accounts for more than
40% of our revenue nor less than ten. And it positions us to capitalize
on growth in emerging markets as trade flows
between these developing markets represent a growing proportion
of global flows. So, regardless
of where trade flows may shift, we believe we’re well-positioned
to continue to capture opportunity. We offer a full spectrum of products
and services to our clients, from recurring transactional support to more strategic,
less frequent products like capital raising
and M&A Advisory. And we are ideally-positioned to meet the needs of both corporate
and financial institution clients. For our corporate clients,
our TTS business is at the heart of our relationship, helping them manage
their day-to-day cash and working capital needs. And it provides the foundation for adjacent revenues in areas like
foreign exchange and rates hedging as well as more episodic products. For our
financial institution clients, Security Services is the backbone
of many of our relationships and leads to revenue opportunities in fixed income and equity markets
as well as other products. These core products in TTS, Security Services,
Rates and Currencies drive nearly 60% of our business and represent areas where we have unique access
to large and growing revenue pools due to our Proprietary Network. As I mentioned earlier,
our global network evolved over the course
of our 200-year history, as we expanded to markets
where our clients needed us. And as our client’s footprint
expanded beyond the developed markets so too did ours. Today about one-third of our revenue
is generated in the emerging markets and two-thirds
in the developed markets. And when you look at the composition
of what we do in each type of market you can see it’s quite different. Our developed market’s franchise is likely comparable
to some of our peers with a balanced client base
and a diversified product mix. Having said that, over 40% of the revenue
we generate with our clients is achieved by leveraging
our Proprietary Network. And where we have unique access
and scale relative to peers is in the emerging markets, where our footprint
and long-standing relationships with the world’s largest
multinational corporations give us a competitive advantage. Nearly 90%
of our emerging markets’ revenues are generated
with multinational corporate clients. And roughly 80% of those revenues are generated through the network in TTS, Security Services,
Rates and Foreign Exchange. In actuality, given the nature of the business
we do in emerging markets, our emerging market’s franchise
contributes to the stability, not the volatility,
of our overall results. And that’s not commonly held. The impact
of this target-client strategy is evident
in our revenue performance, where we’re seeing strong growth
in those businesses that benefit most
from our Proprietary Network. In total, TTS, Security Services,
Rates and Currencies have demonstrated high, single-digit
revenue growth in constant dollars since 2014, outpacing the rest of our businesses. So, while we faced industry head-wins
over the past few years, in areas like Spread Products
and Fixed Income, we’ve still been able to grow
our revenues. And we feel very good about the underlying momentum
in our franchise. As I said, our strategy was developed
with our Proprietary Network in mind, dedicating our resources to clients who truly value
our global capabilities. And over the last several years, we have rationalized our client base, going from over 32,000 clients
to just under 14,000, improving the focus and intensity
of our coverage efforts on those clients
that can most benefit from who we are and what we are. Non-financial corporations generate
about 40% of our client revenues and include
developed market companies expanding globally, particularly
into emerging markets, that rely on our global platform
and our local execution. And emerging market champions
expanding beyond their regions and the capabilities
of their local banks. Financial institutions,
global investors and public sector entities comprise the remainder
of our client base, generating about 60%
of client revenues. Each of these clients is large
and sophisticated with the need for integrated,
global financial solutions. And with our geographic footprint
and full-product spectrum we are uniquely positioned
to serve them. Consistent with this strategy, over 80% of our
corporate client revenues are generated
with large multinational companies. And it is clear
that these clients value the full footprint that we offer, as over 80% of our network revenue
is generated from clients that transact with us
outside of the top 60 countries. And our goal is to deepen
these existing relationships serving our clients
with more products in more markets. For us,
the more complex a client’s needs the better we are able to serve them. And the number of countries
in which we serve a client is the best indicator
of our revenue and growth potential. For example, in situations
where we transact with our clients in more than 40 countries, our revenues average
$23 million per client. And those revenues have grown by 11%
over the last 12 months. This compares with 3% revenue growth with clients with whom we do business
in fewer than 40 countries. Our financial institution clients
also employ us across a broad set of products
and services. And again, a large portion of our revenues
from these clients, a little over half, is generated by leveraging
our Proprietary Network. What’s more, about a quarter of our revenues
are in products outside of markets contributing to the stability
of our revenues with this client segment. These clients reward
truly exemplary service. And since 2008, we have dedicated
significant resources to ensuring that we are providing
this quality of experience. One place this is reflected
is in our recent number-one ranking in the latest
Greenwich Associate Survey for global fixed income. And it’s also driven
significant wallet share gains over that same period. Another benefit of our strategy of leveraging our network
to serve large, sophisticated clients is the quality
of our corporate credit portfolio, totaling $586 billion
of funded and unfunded exposure. While we lead with the network, we also lend
to our most important clients to serve their funding needs
and broaden our relationships. The portfolio is well-diversified
by market and industry and over 80% of the exposure
is rated investment grade. Reflecting the credit quality
of the underlying borrowers as well as the terms and structures
of the transactions themselves. We’ve seen this quality reflected
in the portfolio’s credit performance with an average annual loss rate
of just five basis points over the last five years. Our global footprint
positions us well to serve both traditional,
global businesses as well as next-generation clients. Many of our relationships spend
multiple decades, some over 100 years, during which time
we’ve helped our clients grow and expand
into new markets. These are valuable
long-standing relationships and highly important
to our franchise. And because we are an integral part
of their core day-to-day operations, we should continue
to grow with these clients. And today, we’re also seeing
a new generation of clients that are becoming global
at an unprecedented pace. So, the global footprint that a traditional client
may have built over 40 or 50 years is being replicated
in a fraction of that time and by companies
who may have less infrastructure to support that rapid growth. Here,
Citi is a unique partner, providing the platform
and local market expertise for these companies to expand wherever they find opportunity
around the world. And our revenue opportunity tracks
this rapid pace of growth allowing us to generate
revenues in line with our longest
standing relationships in a much shorter period of time. On slide 16,
we show one such example. As you can see,
our relationship with this client began in just 2013 with a dialogue around
cash management with the Chinese subsidiary
of a U.S.-based company. And over the course
of the next four years, we grew with this client, expanding our relationship
to over 10 countries and broadening
to more than 20 products, including more episodic products like Debt Underwriting
and M&A Advisory. As a result,
we grew our revenues with this client to over ten times
the amount generated in the first year
of the relationship. This is a great example of the opportunities
we’re seeing today with these next-generation clients, as they grow geographically at a pace far faster
than we’ve ever seen in the past. And as such,
they require sophisticated solutions that Citi’s proprietary platform
can provide. On slide 17, we show another example,
another next-generation client. This one domiciled
in the emerging markets. In the case of this client, our relationship began in 2010
with modest revenue as we began to provide
cash-management solutions. Over the next six years, we capitalized on strategic,
episodic opportunities in equity and debt underwriting, all the while growing
our recurring revenues in the network products. We grew these revenues by providing
key operating solutions in cash management
and working capital finance in more than ten countries. And as a result,
we saw significant growth in our recurring revenue
over that period. Many of our competitors
are capable only of competing for the more episodic revenue. Whereas, we are well-positioned
to compete for both the episodic as well as the more valuable,
recurring opportunities. The value we provide to our clients is evidenced in how they view us. We believe that a third
of our top clients consider us to be
their most important banking partner, capturing a very high share
of their fee wallet. Close to another 20 percent
of clients consider us one of their
most important banking partners. We’re striving every day to become
the single-most important partner for an even greater portion
of our target clients. And we believe
we have made progress over time in up-tiering our relationships. The potential upside is significant. Given the size of our target client’s
collective wallet a further 1% increase
in wallet share would equate to incremental revenue
of roughly $1.5 billion. While we’ve grown our revenues
in wallet share over time, we have done so with a focus
on expense discipline that has allowed us to support
our clients and invest in the business, while also improving
our efficiency ratio to an industry-leading 55 percent. We’ve reduced front office capacity
in certain areas to ensure that we are right-sized
in the current environment. We have simplified
our organizational structure and we have streamlined our middle
and back-office operations. We’ve accomplished this
by centralizing staff and moving resources
away from high-cost locations by automating
and simplifying our processes and by simplifying
our technology platform, requiring fewer applications
and data centers to support our business. These savings have allowed us
to focus on more client-facing technologies, enhancing the client experience
through better digital and online… digital and other
self-service solutions, which I’ll discuss in a moment. Now, I’d like to share
with you our path to realizing our upside potential. We believe the playbook for realizing our target return
on Tangible Common Equity of roughly 14%
in the medium term is achievable and straightforward. Contributing to higher returns
are a number of factors. The first is revenue growth, which we expect
to be driven by a combination of modest growth in revenue pools, in improving economy, which should bring with it
higher interest rates and investment-driven share gains. Altogether, we expect revenue to grow
at roughly 4% annually, which is in line with the growth rate
we’ve been able achieve since 2014. This revenue growth should drive
significant operating leverage as we continue to automate
and simplify our operations to fund our investments and offset the impact
of volume growth. We expect this net revenue growth to be partially offset
by credit normalization and somewhat higher,
capital levels as the business grows. This combination of revenue growth, positive operating leverage
and credit discipline is powerful. With the potential by 2020, to generate over
$2.5 billion in additional EBT and a return of roughly 14%
on the more than $80 billion of Tangible Common Equity
we allocate to the ICJ. Today, we generate returns
of just over 13% with the majority of our businesses
already generating attractive returns in excess of our cost of capital. And we enjoy the strongest returns
in some of our largest businesses. Our path forward is to strengthen and extend
our leadership positions while growing in areas like equities, where we believe we can capture
additional revenue opportunities that will improve
earnings power and returns. And we’re doing just that, with a demonstrated track record of extending our leading positions
in our largest businesses, Fixed income and TTS. And we are making progress
in growing our wallet share in both equities
and Investment Banking. These are both businesses
with strong return potential, where additional revenues should create
significant operating leverage. Revenue growth is an important
component of our path to a 14% return. We expect about 35%
of our revenue growth to come from overall market growth, representing about a 2%
annual increase in wholesale revenue pools. And about 20% to come from an improving,
economic environment and the accompanying
higher-rate forecast that John described
in his presentation this morning. And we expect the remaining 45%
of revenue growth, or just over $2 billion, to come from growth
in our wallet share. Representing an estimated 75-100
basis point increase in overall share, whether it’s achieved
by extending leadership positions in areas like TTS or Fixed Income or by closing the gap in Equities. At the same time, we will continue to improve
the efficiency of our business through ongoing investments
in technology and automation as well as continued migration
to lower-cost locations. Cost of credit
should be a modest offset, as it is expected to normalize
from somewhat favorable levels. This combination of revenue growth
and positive operating leverage is expected to deliver an additional
$2.5 billion in EBT by 2020. We expect
all of our businesses to contribute to the revenue growth
that we are projecting. In TTS, we’re investing in technology
to drive additional share gains by enhancing the client experience through our Citi Direct B.E.
corporate banking platform which gives our clients
seamless access to their operating accounts
anywhere at any time. And in Fixed Income, where we already enjoy
a significant market-share position. This growth will be more dependent on overall market growth
and other macro factors including interest rates. While in other businesses, we believe we should be able
to outpace the growth in the overall market to create our own opportunities, such as in Equities, where we expect to capitalize
in investments, in talent, technology
and balance sheet to close the gap
to our top-tier competitors. We also expect to capitalize
on the strategic investments we have made in investment banking
to drive wallet share gains in key sectors
where we see opportunity. And we plan to continue to leverage our unique global footprint
in Security Services to win mandates with target clients while also benefiting
from higher rates. And in the private bank,
we plan to continue to augment our strength
in banking and lending, with growth and wealth management
and capital markets. Across the board we are investing
to enhance the client experience by leveraging technology, to improve the ease of execution
including in self-service channels. And hopefully you saw
some of these initiatives today in action around the room,
where we’re showcasing our Citi Direct B.E.
Corporate Banking Platform, our Citi Velocity, our platform for markets’ clients, and our Digital Banking Platform,
In View, for the private bank. Now, I’d like to spend some time
on each one of our businesses, starting with TTS. TTS connects our clients to the banking system
around the world, and is the most obvious beneficiary
of Citi’s proprietary footprint, allowing us to provide better, more comprehensive solutions
to our global clients. Our TTS franchise is the leader
in working capital management, global cash management
and trade finance services to multinational corporations,
financial institutions and public sector organizations. As you can see on the bottom left, our revenues are diversified
across products and regions and have grown at an annual rate
of three percent since 2012, mostly reflecting volume growth
and market share gains given the sustained low-interest rate
environment over that period. We capture significant volumes
in this business, including
commercial credit card spend of over $40 billion
in the last 12 months. TTS is also a tremendous source
of high-quality corporate deposits. Having grown 8% annually
since 2012 to over $400 billion today. At its heart,
TTS is a solutions-driven franchise, with a focus on
the continuous enhancement of client experience through the development
of new technologies and digital interfaces. One of these technologies,
Citi Direct B.E., which has been showcased here today, is the foundation
of our client-experience strategy. A single, global platform
that provides access to payments and receivables,
liquidity management services, trade and Foreign Exchange solutions. It is transforming
the client experience by a click-through global access to an intuitive
and user-friendly interface. On this platform, we support clients
in over 135 currencies, and 26 different languages. Transactions and approvals including reports and inquiries
designed to monitor trends and increase visibility are available
across three seamless channels, online, mobile and tablet, leading to improve
client self-service and efficiency. Citi Direct B.E. mobiles applications
allow the CFO and treasurers
of a multinational corporation to continue to manage
their daily treasury needs anytime and anywhere, whether they are in the office
or traveling, with the same level of security,
and efficiency, regardless of which device
they have at hand. We’ve seen rapid adoption of the technology
over the last five years, with volumes growing
from just $1 billion in 2012, to over $2 trillion
over the last 12 months on our mobile platform alone. Turning to Fixed Income, which is our single largest
business segment within ICG, and a true leader
in the global marketplace, where we have continued
to consolidate share as others have retrenched. As you can see on the bottom right, we’ve improved or maintained
our rank in all of our fixed businesses
over the last several years. And in 2016, we enjoyed a top-three position
in all of our businesses. This represents
a significant improvement in a number of products
including commodities, where we grew
from the number-nine ranking in 2012 to a number-two ranking, which was achieved
through disciplined efforts with targeted corporate
and investor clients and a core set
of products and services. And we do not own or operate any physical commodity facilities. As you can see on the bottom left, our Fixed Income
revenues are diversified by client with 34% attributable
to corporate clients, which is directly tied to the strength
of both our global network and our TTS business. These corporate revenues have been
more stable over time and are also highly dependable as we are managing these clients’
operating accounts across more countries and regions
than any peer can offer. And they contribute to our strength
in rates and currencies, where over 40% of our client revenues
are generated with corporate clients, creating greater stability
to those aggregate revenues as well. We continue to enhance
our market-leading franchise by leveraging technology
and focusing on client experience. One example is Citi Velocity, our industry-leading analytics
and trading platform, which provides our clients
with unparalleled access to Citi’s research,
including proprietary analytics and product specific models as well as trading capabilities
for foreign exchange, interest rate commodity
and future’s products. While we’ve included it here as a part of our Fixed Income
market’s business, the access to research, commentary data and analytics
is just as important to our equity market participants. And Citi Velocity has received
over 50 industry awards including those for most innovative and best overall
single-dealer platform. Another example of innovation
is CitiFX Pulse, our end-to-end,
global Foreign Exchange solution for corporate clients. Together, our Velocity
and Pulse platforms are utilized
by over 125,000 unique users in more than 130 countries. Turning to our Equities business… We believe it is positioned
to grow after recent pressure on the revenue pool
across the industry. Over the last couple of years, we’ve made investments in people, making key hires
in management, sales and research, in technology, improving our internal
and client-facing platforms and in balance sheet. Growing client balances
in areas such as Prime Brokerage
and Delta One derivatives by roughly 40%
since the beginning of 2014. And as you can see in the chart
on the bottom right, even as the revenue pool
for cash equities has remained under pressure, our above-average industry growth in both derivatives
and Prime Brokerage has allowed us to grow
our revenues by 4% annually since 2012, while the industry has largely
remained flat. Historically, we have maintained
a number-eight or nine rank among peers
in equity market’s revenue. With the targeted investments
that I just mentioned, we have seen early signs of progress with our rank improving
to number seven. As you can see on the chart
on the bottom left, from our current position, the gap between us
and the number-five market position represents an annual
revenue opportunity of approximately $700 million. We believe our goal to achieve
a number-five rank in the medium term
is both realistic and credible and more representative
of our natural competitive position relative to both
our fixed income rank and our rank in equity underwriting, as shown on the top left. In Investment Banking,
our goal is to be a trusted advisor to the world’s largest
and most global firms. We’re continuing to drive
wallet share growth with our target-market clients and are making selective investments
in talent to strengthen and defend our wallet share in key sectors, including technology,
financial institutions and energy, as well as in select countries. To this end, we have demonstrated
5% revenue growth since 2012, which outpaced
the target market wallet growth over that same period. We have increased our overall
wallet share to 5.2% and our share
in our target market has grown from 7.9% in 2012
to 8.8%, which included gains in technology, real estate, industrials
and financial institutions. In Security Services, we provide security settlement, clearing, custody
and asset servicing to institutional clients
in 63 markets, the largest direct custody and clearing footprint
among our peers. We view
the Security Services business as similar TTS in many ways, providing the core,
operating infrastructure for our investor clients to grow
and transact around the world. And over the last several years, we have been executing
a multi-year effort to improve efficiency
and re-orient the business to drive sticky client relationships
and a creed of returns. We have rationalized our offerings
and exited non-core businesses focusing on our key clients
and our core product strategy. While at the same time, we have invested in automation
and robotics to improve our platforms
and drive efficiency. This strategy has translated
into several high-profile client wins such as those
with Norges Bank and John Hancock. And has driven significant growth
in both revenues, up 7% annually since 2012
as well as operating margin, which has improved over $500 million
over that period. Going forward, our strategy is to continue
to leverage our proprietary, 63-country network to pursue
further opportunities with these clients. And finally,
turning to our private bank. Our organizational model differs
from many of our peers, as we include our private bank
as part of our institutional business rather than a separate,
wealth management division. Our business targets
the ultra-high net worth segment: clients around the world with at least $25 million
of household net worth. The connection with the rest of ICG affords our ultra-high net worth
clients the ability to leverage the same expertise provided to multinational corporations
and large, sophisticated investors. This integrated approach has led to continued strength
in new client acquisitions, as well as the deepening
of our client relationships, resulting in diversification
across our revenues and steady growth in loans, deposits and assets
under management and annual revenue growth
of 4% since 2012. To better demonstrate
the integrated approach we’ve taken with the increasingly global needs
of our private bank clients, here we’ve laid out an example. Citi’s total relationship
with this particular client spans across four markets
in three regions, utilizing products and services
offered not just by our private bank but also by markets, TTS
and the consumer bank, through Foreign Exchange trading, capital markets opportunities,
and credit cards. And while the revenue recorded
in our private bank segment was attractive on
a stand-alone basis, it accounted for only half
of the total revenue generated by this client, with the remainder attributed to synergistic revenues
in the other areas. And while this is only one example,
there’s a rapidly growing number of such global clients
at the private bank, who value our full platform
across geographies and businesses. Now, while I’ve covered
many topics here today, I want to leave you
with a few key thoughts. First, our institutional franchise
has an unparalleled global reach. And is a franchise
which is difficult to replicate, putting us in a unique position
to serve our target clients. By leveraging
this differentiating factor, we expect to continue to grow
revenue with our traditional clients and with a rapidly evolving,
next generation of global businesses. We have tremendous,
upside potential ahead as we continue
to deepen client relations, becoming an increasingly important
and trusted banking partner. What’s more,
we have a proven track record of establishing
market-leading businesses. Such as in TTS and fixed income. We’re leveraging that experience and our capabilities to continue
to make targeted share gains in investment banking, and to close the revenue gap
in equities. Our disciplined approach
in serving our clients in a cost-effective,
responsible manner has allowed us in recent years to deliver
industry-leading efficiency and returns. And we believe
that we are well-positioned to deliver attractive
and sustainable returns in each of our businesses
going forward. We feel confident that this strategy can deliver
EBT growth of over $2.5 billion and a return
on Tangible Common Equity greater than 14%.