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(SINGAPORE) With its capital position strengthened, US financial services giant Citigroup plans to complete its restructuring and then leverage its global franchise to earn its way out of trouble, according to Citi's CEO, Vikram Pandit.
In a wide-ranging interview during a recent visit to Singapore, Mr Pandit said that after completing its exchange of preferred shares for common equity in late July (whereby it swapped some US$50.8 billion worth of preferred securities for newly issued common stock), Citi's capital position reflects 'incredible financial strength'.
'On the completion of our exchange offer, we had 12.7 per cent Tier 1 capital and more than 9 per cent Tier 1 common capital.
'It's an important milestone in that it puts issues of capital strength behind us,' he said. Tier 1 capital is the ratio of core equity capital to total assets and is viewed by regulators as a key measure of a bank's financial strength. For US banks, those with Tier 1 capital of above 6 per cent are considered well capitalised.
A former investment banker and hedge fund manager, Indian-born Mr Pandit, 52, took over as CEO of Citi in December 2007 and has adroitly steered the bank through one of the most tumultuous periods in its 197-year history.
Badly mauled by its exposure to the US housing sector and derivatives, Citi was forced to raise more capital and seek a total of US$45 billion in support from the US government, which now owns some 34 per cent of Citi's stock. Its stock price, which was at close to US$56 at the end of 2006, crashed to a low of US$1.02 on March 5 this year.
However, Citi's management steadied the ship by moving rapidly to shore up the bank's capital position, slash costs and sell assets. The stock price has recovered to US$3.17 at the close of trading on Monday.
In the first two quarters of 2009, Citi was able to show a profit, thanks partly to asset sales. Its profit for the second quarter was US$4.28 billion, helped by the sale of its holdings in brokerage Smith Barney.
'We've done a pretty good job in the first two quarters of this year,' said Mr Pandit. 'But we got there after a lot of hard work last year. We reduced our assets by almost 25 per cent. We reduced our risk by a lot more than that number. And we cut about US$16 billion a year in expenses.'
Looking forward, he said: 'We have a clear strategy, a clear focus on understanding what we're good at, at what's our DNA, and we'll go with that.'
He indicated that, as part of its restructuring, Citi has sold more than 20 businesses and plans to sell another 20 - largely in the consumer finance area, many of them in Europe. 'A big reason for that is there has been a shift in the consumer finance markets,' he said. 'There is less funding availability and they're probably less robust as businesses.'
Citi is also selling some of its small and medium- sized businesses. Most recently, last month it sold its Japanese asset management unit, Nikko Asset Management, to Sumitomo Trust of Japan for US$795 million.
The new, restructured Citi will have three main lines of business of roughly equal size: a consumer bank; a securities bank, (which will include investment banking operations); and a financial services business (including cash management, custody and transaction processing).
Mr Pandit pointed out that while Citi has a large credit card and mortgage portfolio in the US and is increasing its lending in these areas, it will seek to build on three of its special strengths: its global network, which enables it to serve clients everywhere; its focus on fast-growing emerging markets, where it already has a presence; and its ability to serve major cities. 'This is a franchise with incredible earnings power in a normalised market,' he said.
Asia will be a big part of Citi's story going forward, according to Mr Pandit. 'Asia has been an integral to Citi for more than 100 years and it will continue to be,' he said. 'The numbers speak for themselves. In the first half of this year, we had US$2.8 billion of net income out of Asia.' About 40 per cent of Citi's profit comes from the region.
Mr Pandit added that Citi is also positioning itself as a link between US companies and Asian markets. 'We have a lot of companies in the US that want to access Asia. We're there to help them with that, and we'll do whatever it takes.'
On the question of whether the US government's 34 per cent shareholding has any impact on Citi's operations, Mr Pandit said: 'The US government has been very clear that they have no interest in running or operating banks or, for that matter, any company. Their interests are very aligned with ours. We have common objectives. The reason why they invested in banks in the first place, including us, is because they wanted to strengthen the financial system and increase lending availability. Those remain their goals. And those are our goals too . . . and I hope they make a lot of money on their ownership interest.'
Asked what he had learned personally from the experience of the financial crisis, Mr Pandit said that the crisis provided 'a clear sense of how interrelated the world is and how interrelated the banking system is'. 'Financial institutions can no longer be surgically said to be separate from the rest of the financial system,' he pointed out.
'Another thing that you continually learn, again and again, is that financial markets are all about confidence; they really are. It's not the sort of thing you learn in good times, because good times are full of confidence.
'And there is no formula for restoring confidence,' he added. 'As financial types and bankers, we pride ourselves on our analytical skills and our skills to manage different issues and come up with the right judgements. But confidence issues, when they hit economies and when they hit markets, they are probably the single most important thing that affects the health of any financial system. You come to learn how important that is.'
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