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Global banks start believing in less is more- Citi and HSBC prefer taking the exit route from non-core markets(Daily Messenger (Pakistan) Via Acquire Media NewsEdge) Almost 10 years ago to the day Citigroup's then chief executive Chuck Prince started his global apology tour, aimed at mending relationships with regulators and bolstering Citi's reputation. Tokyo was the first stop. The US bank had been deeply embroiled in scandals that led to the termination of its Japanese private banking licence. To repent, Prince took a carefully choreographed sevensecond bow at a press conference, showing how far Citi would go to protect its global reach. What a difference a decade makes. Last week, Japan was one of 11 countries where the US bank said it would pull out of its consumer banking operations entirely, including Egypt, Costa Rica and Hungary. "While these consumer franchises have real value, we didn't see a path for meaningful return," Mike Corbat, Citi chief executive, told analysts as part of its thirdquarter results, which included the discovery of a new fraud scandal in Mexico. The move follows earlier withdrawals by Citi from consumer markets in a handful of countries including Spain, Pakistan and Uruguay. In total, Citi has cut its retail banking presence almost in half to 24 countries since 2012. HSBC, Citi's main rival for the title of most global bank, has been pulling back too. The Londonlisted group has withdrawn from consumer banking in more than 20 countries, such as Colombia, South Korea and Russia, leaving it with retail and wealth management operations in about 40 markets. This has been mirrored by others, such as Barclays withdrawing from retail banking in Spain, Italy, France and Portugal, GE Capital seeking to exit much of its consumer banking operations in Europe and Royal Bank of Scotland pulling out of about a dozen markets, including most recently its public listing of Citizens in the US. Six years after the financial crisis, the behemoths of banking are still retreating. The official reason is mostly about economics they are leaving smaller markets where they have failed to achieve sufficient scale or become profitable enough. "Too many banks had dreams of a string of pearls, but they didn't really make much of a necklace," says Huw van Steenis, banking analyst at Morgan Stanley. "This is about simplifying the business and focusing on where the banks have an edge." Making money from the farflung networks of Citi and HSBC has become more urgent as shareholders grow impatient for higher returns. "They have found for the most part that it is very difficult to have synergies in retail banking across borders," says van Steenis. Since the days of John Reed, Citi's former chairman and chief executive and architect of the strategy to create a global financial supermarket, banks are now more focused on the earning power of each country rather than simply accepting unprofitable outposts that "plant the flag" to support the brand. "Fifteen, 20 years ago they were in empirebuild mode ... usually you take a look and say what is 12 per cent market share in these countries? It becomes a no brainier," says Glenn Schorr, banking analyst at ISI Group in New York. However, some financiers argue the real cause of the retreat is the vast pile of regulation thrown at the industry since the crisis, accompanied by expensive fines for any breaches of increasingly strict compliance standards. "The number one priority for both HSBC and Citi today is to stay out of trouble on antimoney laundering and bank secrecy act issues," says Noor Menai, chief executive of CTBC Bank USA and a former Citi executive. "Given the almost biblical vengeance regulators can extract from you you have a risk heat map it almost makes no sense to stay in those countries." Citi's latest retreat follows its humbling failure in the US Federal Reserve's stress tests this year on qualitative grounds, which many observers assumed was because of the bank's complexity. HSBC's own strategic rethink started in 2011, when Stuart Gulliver became chief executive shortly before the bank was fined $1.9 billion and signed a deferred prosecution agreement for money laundering and sanctions breaches. Sir Sherard CowperColes, senior adviser to HSBC, says banks are engaged in a "preemptive cringe in front of regulators" that may leave parts of the world cut off from the global banking system. "While there may be a public interest benefit in these withdrawals, there may also be cost," he says. However, the fact that Citi has decided to keep its 50 Russian branches despite the US and European sanctions on the country over its role in the Ukrainian conflict suggests that regulatory risk is not the only factor. When pressed, some bankers admit that big global groups are throwing in the towel in the face of much stronger local competitors, which have learnt from their foreign rivals and harnessed the new technology transforming banking to up their game. As international banks retrench, regional powerhouses are emerging. In the Middle East, Qatar National Bank has expanded its retail network through acquisitions across the region and Africa. In Latin America, Colombian lenders Grupo Aval and Bancolombia have been snapping up assets across the region. In Asia, Singapore's DBS and China's ICBC are expanding overseas. In a stark reminder of the swelling size of local lenders, Saudi Arabia's National Commercial Bank opened subscription for its initial public offering on October 19. The kingdom's biggest bank by assets is planning to raise $6 billion in what will be the secondbiggest IPO this year after the Chinese ecommerce group Alibaba. International banks are competing for the ideal client, who is wealthy and wants to shift money around the world seamlessly. The fact that Switzerland's UBS is the biggest wealth manager in Asia shows some are succeeding. And Citi and HSBC still have potent global ambitions. They are keeping a corporate and investment banking presence in most markets from which they are exiting consumer banking. Citi will still be in 100 countries. But the pressure from shareholders, regulators and local competitors is only likely to increase. So expect the industry's globetrotters to keep reshaping their foreign presence for several years to come. |