Can this man make Citi's consumer bank rock?

THE CITI NEVER SLEEPS, the advertisements once said, but someone obviously forgot to send the memo to Citi India’s consumer bank. Citi, which had virtually written the book on consumer banking here, seems to have fallen asleep. Bad business decisions, younger and hungrier rivals, and the slowdown, all combined to push revenues of Citi’s consumer bank in fiscal 2010 down by 28% to Rs 2,881 crore from Rs 4,011 crore in fiscal 2009. Hongkong and Shanghai Banking Corporation’s (HSBC) corresponding numbers fell 12.66% while Standard Chartered Bank’s (StanChart) rose 6.45%.

However telling, these numbers don’t say it all. Around since 1902, it was in the mid-1980s that Citi changed the face of retail banking in India. It introduced credit cards, auto loans, and personalised statements among other things at a time when stodgy state-owned banks—there weren’t any pan-India privately-owned banks of consequence then—would update individual accounts by hand, on paper pass books. Indeed, till the mid-2000s, the retail business accounted for close to 50% of Citi’s revenues.

That’s down to 38% today. Pramit Jhaveri, Citi’s CEO of six months, now has the job of putting the business back on track. It’s not going to be easy, but Jhaveri seems unfazed; tie off, and legs crossed, he settles down to explain how Citi can get back on track. “With a brand like ours and with the kind of clients we have, there is no justification for not growing and increasing our market share over the next few years.”

Jhaveri has more than just numbers to wrestle with. Private banks such as ICICI Bank and HDFC Bank, which emerged in the mid-1990s, dominate retail. The consumer business brings in 60% of ICICI’s revenues and 78% of HDFC Bank’s. Combined, they are five times larger than Citi, HSBC and StanChart combined. This, without counting a state-owned organisation such as State Bank of India, a Fortune Global 500 company.

Regulations have a hand in this. Reserve Bank of India (RBI) norms restrict the number of branches that foreign banks can collectively open, to 12 a year. While the apex bank doesn’t mind up to 18 branches being opened, it’s still no match for what Indian banks, sans restrictions, can do (see table). The foreign banks have been lobbying for change—back in 2001, Citi had a plan to open 175 branches—and though the RBI periodically reviews the issue, it has so far remained unmoved.

Last April, however, in part to keep the foreign banks happy and in part to buy more time, RBI said no prior permission was required to open ATMs. Citi was then in the midst of either closing down some of its ATMs or relocating them which continued till the end of May 2010, when Citi had 443 ATMs. By August, that had risen to 532. According to Rahul Soota, Citi’s head of retail and commercial banking, the bank added 60 ATMs in July alone. That’s almost two a day in a country where getting real estate is often fraught with difficulties.

This verve is vintage Jhaveri, a career Citibanker since 1987. In 2000, he was asked to build Citi’s investment banking business in India from scratch. Prior to that, he was with the corporate bank. He went about it smartly, giving his team space to operate (“Jhaveri delegates and doesn’t micromanage,” says a colleague), using his relationships to get more business (he’s known to be an ace networker), and seeking out new opportunities. For example, he identified the possibilities of big deals in the BPO space. In November 2004, Citi advised GE Capital International Services to sell a 60% stake for $500 million to General Atlantic and Oak Hill Capital Partners, two private equity majors, who picked up 30% each. Citi also led in some of the headline deals such as the Tatas buying Corus and Jaguar Land Rover, and GTL Infrastructure acquiring Aircel’s tower business. Trade publications such as FinanceAsia and Euromoney routinely place Citi on top of rankings such as India’s Best Investment Bank of the Year.

Jhaveri still needs to fight the perception that he lacks consumer banking experience, strictly speaking valid. And that he’s here only for a short while. His predecessor Mark Robinson was sent in from Citi Russia when Sanjay Nayar, CEO since 2002, quit in 2009 to head Kohlberg Kravis Roberts in India. (Some allege Jhaveri was passed over: He doesn’t comment on this.) Robinson’s sudden exit in 2010 spooked the industry, given that it came while Citi’s New York-based principal was battling the sub-prime fallout. The inference: India had ceased to be important. Nayar says there’s always been support for India from New York. “My mandate and hence for the management here is to quite simply grow the business,” adds Jhaveri.

Ashvin Parekh, partner & national leader for global financial services, Ernst & Young, explains the dilemma that foreign banks face. “They pursue consumer banking aggressively because it spreads their risks and reduces dependence on corporate banking. But, the current regulatory framework is such that it will be difficult for foreign banks to grow the balance sheet of their retail banking businesses.”

Jhaveri would, however, like Citi’s consumer business to grow faster than the corporate bank over the next few years. “We are pioneers in the space (consumer banking) and that cannot be taken away from us.” And while he shies away from setting any milestones, insiders believe that 50% of overall India revenues would not be bad, if only because that’s where they once were, not long ago.

CITI’S BRANCH IN MUMBAI’S NARIMAN POINT has art on the walls, deep couches and a Citigold lounge where customers can host meetings as in a private club. It’s a different world from the more functional branch in suburban Andheri which comes sans paintings, fancy seating and the lounge. The two branches symbolise the conflict within Citi: Which part of the market should it target? Traditionally, Citi was more Nariman Point. Of late, it’s partial towards Andheri.

In 1997, CitiFinancial was created by Citibank N.A. as an arm that would lend money to customers around the world. Here, CitiFinancial was classified as a non-banking finance company (NBFC). For Citi India, this was godsend. Since NBFCs don’t take deposits, and only finance consumers, they are exempted from RBI’s norms on how many branches foreign banks can have. Citi India figured it would now use CitiFinancial to drive its retail business.

CitiFinancial lay dormant for six years. Then, in 2003, when the economy truly started booming and Indian private banks began chasing customers madly, on instructions from headquarters, Nayar, then CEO, let CitiFinancial loose. Citi split up its retail strategy. Citibank India would restrict itself only to credit cards and high end mortgages while CitiFinancial would cater to the masses and focus on unsecured loans (to buy a car or a microwave, pay for a wedding or a vacation) and small mortgages.

CitiFinancial added branches, lowered interest rates in line with competition, and began to see an increase in customers and profits. It also became the face of Citi’s retail business and its branches were seen as quasi Citibank branches. A March 2006 CitiFinancial advertisement summed it up. It showed a switch with the slug: ‘Cash in a Flash. Loans from Rs 10,000 to Rs 1 crore.’ At the bottom right hand of the creative was a toll-free number and the standard disclaimers in minuscule type.

In 2007, CitiFinancial reported its highest ever net profit of Rs 220 crore. The next year, profits crashed to Rs 19 crore. By fiscal 2009, losses were at Rs 729 crore. Not all of this was due to unsecured lending; the general economic situation took its toll. But, as Citibank India’s, country business manager (global consumer group), N. Rajashekaran, says, “The one thing we would like to have done differently is the extent to which we did unsecured lending. Had we been cautious, the impact of the slowdown would have been less.”

It wasn’t CitiFinancial alone that took wrong calls. Citibank had matched competition in issuing credit cards for all. In 2006, it had 2.9 million cards in circulation: By 2008, that number touched an all-time high of 4 million. The majority of these customers questioned the need to pay an annual fee for cards when the likes of ICICI Bank, ABN Amro and Deutsche Bank weren’t charging any. To retain them, Citi followed suit, leading to the loss of a small but steady revenue stream. This is apart from the huge loss due to defaults, upwards of 35% according to industry estimates.

The problem of unsecured lending is not unique to Citi. Indian private sector banks and other foreign banks also suffered huge defaults. But this spelt doom for CitiFinancial.

At the time of StanChart’s Indian Depository Receipts issue in May, CEO Neeraj Swaroop, an ex-Citibanker, spoke out against unsecured loans and how they were damaging banks. Retail accounts for 27% of StanChart’s revenues, which bested Citi and HSBC’s profitability in fiscal 2010.

Today the buzz is that CitiFinancial is on the block; over two-thirds of its branches have been shuttered. In 2008, at its height, it had 450 branches in India: 118 remain. Jhaveri is evasive. “We are looking at strategic options that make sense for us and commensurate with the importance that Citi attaches to India.”

Insiders expect it to be sold to an Indian player. In 2008, Citi pulled the plug on CitiFinancial in the U.K., and the Japan operations are being cut back.

Jhaveri may want to remember a story his colleagues like to repeat. In 1999, former CEO Nanoo Pamnani shot down a suggestion to sell the auto-financing business for $25 million. Senior execs had argued that auto financing was commoditised, competition from ICICI Bank merciless, and collections a problem; at least two of these were the problems of going mass. Nine years later, in the face of mounting defaults and uncertain interest rates, the bank simply closed the business down.

Nayar says CitiFinancial was ahead of its time. “Eventually, it was greatly affected by the global slowdown and the result of going mass. In a way, the consumer finance business was ahead of the development of financial infrastructure such as information bureaux and unique ID numbers.”

For Citi, it was back to Nariman Point, all over again.

Citi was not alone in figuring out that the mass market was not profitable; GE Money quit the auto and consumer durables business and later decided to wind up its home and personal loan operations as well.

Jhaveri, meanwhile, appears to be making haste slowly. To recoup, step one would be to get more business from its core customers, the ‘mass affluent’, a politically correct term for the rich. Citi’s branches have a decent concentration of them: Its retail revenue per branch (Rs 69 crore), is higher than HSBC’s (Rs 49 crore), StanChart’s (Rs 20 crore), ICICI’s (Rs 10 crore) or HDFC Bank’s (Rs 9 crore). “We are at our best dealing with customers looking for value,” says Vijay S. Ramchandran, Citi’s chief marketing officer (South Asia).

The challenge is getting more out of them. “We need to innovate enough for consumers to pay a premium,” says Sandeep Bhalla, business manager, credit payment products.

CARDS ARE A GOOD PLACE to start. Some of Citi’s partners include Jet Airways, Indian Oil and Shoppers’ Stop. Each time a consumer uses a Citi credit card to buy any of their products, bonus points accrue, which lead to all kinds of benefits—complimentary tickets, free dinners at tony restaurants, etc. The idea is to pretty much entice consumers with these benefits. Better still, the tie-ups are exclusive.

“To my mind, co-branding with Jet Airways and Shoppers’ Stop were great innovations. Citi has had the best co-brands in the industry,” says Ravi Subramanian, former head of consumer assets and credit cards at HSBC. Though exact numbers are hard to come by, industry sources admit that Citi’s co-branded cards are by far the most frequently used.

This clear shift away from the numbers game is something bankers endorse. They also point to its rock-solid mortgage business and suggest building on that. Fully secured mortgages worth Rs 9,822 crore were made in fiscal 2010 for residential property, up from Rs 9,764 crore the previous year. Compare that with HSBC, which saw a fall in residential mortgages from Rs 5,697.5 crore in fiscal 2009 to Rs 4,678.5 crore this year. “Citi has successfully managed to get rid of the bad book, while a lot of its competitors are still worried about that,” says Subramanian.

Wealth management is another area that Citi wants to focus on, but given its low profile nature, there aren’t numbers to evaluate. Says Kajal Gandhi, associate vice president, ICICIdirect.com, the retail broking arm of ICICI Securities: “In mortgages and wealth management, the kind of credit profile they (foreign banks) serve is something the Indian private banks cannot match up to.”

Jhaveri, meanwhile, is pushing for what he calls the One Citi model, which relies on cross-selling: He is hoping to leverage the relationships he built during his investment banking years. So, beyond, say, advising or financing an M&A transaction for a client, it’ll also open accounts for the employees, give them credit cards, etc.

“We have the brand, the platform, and the people in place,” says Jhaveri. “It is now all about execution.”