Citigroup: A Likely Winner From Credit Suisse Collapse

Restructuring a large investment bank is a complex matter. Whilst credible execution is a key ingredient, the CEO also needs a good measure of luck. By that I mean, a favorable macro environment that would support its business model profitability during the transition period. The key risk is a tailspin where a bank loses market share, revenue, and key rainmakers which ultimately manifests into a lack of profitability and loss of market confidence.

As an example, the restructuring of Deutsche Bank (DB) commencing in 2018 was an example where lady luck was smiling at the management team. Whilst DB's CEO, Mr. Christian Sewing, clearly executed well on the cost side - suffice it to say, it hugely benefited from strong growth in FICC trading revenues during this period. Without the strong tailwinds from FICC trading, DB's strategic turnaround may have faltered earlier on. The most recent volatility in DB, in my view, is not a cause for concern (although I managed my position to mitigate any risks given the recent price action).

On the flip side, Credit Suisse's attempted restructure failed, in part, due to the bear market in 2022. Unlike its peers, CS investment bank is geared mostly toward credit markets and capital markets issuances. These were areas that were quite challenged in 2022. Similarly, CS's areas of strength in leveraged finance, M&A, and SPAC deal activity were either loss-making or inactive. Whereas CS has little exposure to the booming FICC revenues. CS's business mix meant that the IB was loss-making and therefore contributed to the general loss of confidence in this bank. It was death by a thousand cuts which finally culminated in a death spiral last week.

Citigroup's Strategy

Citigroup's (NYSE:C) strategy includes the divestment of its global consumer bank. Unlike the usually painful and prolonged restructuring of an Investment Bank, the disposal of consumer franchises is mostly achieved at a premium to its tangible book value and relatively quickly. In Citi's case, that results in releasing of substantial capital whereas shareholders are still impatiently waiting for the announcement relating to the disposal of Banamex Mexico.

The other parts of Citi's strategy include an accelerated and substantial investment in wealth management (especially in Asia) with the stated objective of building a leading global wealth management platform. Citi is also doubling up on investment in its crown jewel Services division comprising Trade and Transaction Services ("TTS") and Security Services ("SS").

Since announcing its strategic transformation in 2022, Citi certainly benefited from tailwinds in the Services division powered by higher interest rates:

As can be seen from above, Citi has grown the top line by a massive 27% year-on-year driven by both higher rates as well as increased volumes.

Citi also benefited in 2022 from the strong secular growth in FICC income and that is reflected in its Markets division:

Citi is #2 globally in FICC and it delivered strong growth of 13% year-on-year in 2022 (noting that 2021 was also a relatively strong year). The growth in Markets was largely offset by a decline of over 50% in IB fees (debt and equity underwriting and M&A advisory) predominantly due to the rapidly rising rates and frozen capital markets throughout most of 2022.

Citi's Global Wealth Management ("GWM") however delivered a relatively weak performance (down ~2% overall) in spite of significant investment in the hiring of relationship managers ("RMs") globally.

The lackluster performance in 2022 was not a great surprise of course. The 2022 year was one of the worst years on record for the typical 60/40 bonds portfolio. This has a direct impact on lower AUMs and fewer investment activities by clients. However, these bear markets do not last forever and the strategic direction of the business is unaltered whereby Citi is continuing to invest heavily in RMs and its product platform.

The Implications Of Credit Suisse Collapse

Citigroup highlighted in its presentation it's #5 globally in private banking and #3 wealth manager in Asia. There are no league tables in Asia published regularly, but it is common knowledge that CS and UBS (UBS) are its main western competitors in the wealth management space. The collapse of CS and its acquisition by UBS is clearly a golden opportunity for Citigroup both in terms of attracting top talent in the WM space as well as growing AUM.

Citi is benefiting in two major ways. Firstly, given the uncertainty in Swiss banking, key staff (including relationship managers) are deserting the ship and looking for opportunities elsewhere and Citi is likely to be the greatest beneficiary in Asia given its strong platform and position in Asia Wealth. Typically, when top-performing RMs are leaving, they take with them a substantial part of the AUM, they are managing, and some relationship managers oversee well over a billion in AUM.

In a recent Bloomberg interview, David Rubenstein asked Citi's CEO Jane Fraser whether she is calling some of the great private banking relationship managers in CS and asking them to join Citi. Jane quipped back, "no, they are calling us". Enough said.

Secondly, in the merger of two dominating Swiss banks such as CS and UBS, there will inevitably be some revenue dis-synergies or in other words, AUM outflows to competitors. It is very common for very wealthy clients to spread their AUM between several private banks, rather than be concentrated in one. Customers that have banked with both UBS and CS, will now be looking for an alternative and Citi is a flight to quality franchise in Asia that has a very strong brand name as well. The CS saga, including the re-writing of the laws over that fateful weekends, including the wiping out of the AT1 bondholders, clearly did not help to foster trust in the Swiss banking industry either.

UBS management has evidently recognized the problem and risk especially prior to the completion of the CS acquisition. According to a report by Bloomberg, UBS wealth boss Iqbal Khan has traveled to Singapore and Hong Kong trying to reassure bankers and is in the midst of preparing a retention package for top performers. In my view, given the uncertainties noted above, this will probably prove to be too little and too late. CS has over $1 Trillion of clients' assets and a sizeable proportion of that is or would be lost to competitors (including Citi) by the time UBS completes the acquisition of CS.

Final Thoughts

The recent turmoil in the global banking industry is helping Citi's competitive position in two key areas. Firstly as I covered in my prior article, the collapse of Silicon Valley Bank (SIVB) is advantageous for its TTS division. Whereas the collapse of CS is turbo-charging its wealth management strategy which is of core importance to its overall strategy. This will certainly move the dial on Citi's wealth management strategy.

In every banking crisis, there will be losers and winners. Citi is a flight to quality franchise in these uncertain times and is a clear winner in my view.

I remain very bullish.