What separates one bank from its competitors? While banks in the United States continue to merge and oligopolize, not much. The four largest American banks are so dominant that the fourth-largest one by assets, Citigroup Inc. (C), has quadruple the assets of the fifth-largest.
Citi introduced the ATM to the United States back in the 1970s, and created more innovations along the way, including certificates of deposit, and compound interest on savings accounts. The bank has broken ground in more dubious ways, too. It was one of the first beneficiaries of the infamous Troubled Asset Relief Program that rewarded mismanaged banks with billions of dollars (in Citi’s case, 25) in taxpayer money. In the year and a half before the then-Secretary of the Treasury graciously turned the public spigot counterclockwise into Citi’s awaiting mouth, the bank’s stock price had fallen from the mid-$500s to $35. After multiple splits and reverse splits, it’s remained in that neighborhood ever since, which is still high enough to give the bank a market capitalization around $140 billion. (For related reading, see: Top 10 Bank Stocks for 2015.)
A Tale of Two Citis
Fond of using its corporate name as a prefix, Citi separates its activities into two distinct units: Citicorp and Citi Holdings. The former is something of a homonymous pun. It holds the Citi core operations, separated into three divisions — global consumer banking, institutional clients group, and corporate.
The first of those is the department that operates under the “Citibank” name. It handles the ordinary stuff you’d expect from a consumer bank — holding depositor funds, lending money to small businesses, offering low-level financial advice, etc. Citibank is also the home of Citi’s card operations, which we’ve learned time and again is where banks enjoy some of their most effortless profits. There are 142 million Citi cards in circulation, making the bank the world’s largest issuer. All told, global consumer banking is Citi’s most profitable arm in terms of raw dollars. It was responsible for $10.8 billion in earnings in 2013, or almost half the company’s total. (For more, see: How Wells Fargo Became the Biggest Bank in America.)
The institutional clients group is a similarly expository name. That’s where Citi performs its traditional investment banking. Lending big sums to corporations, securities lending, that sort of thing. When Sprint Corp. (S) merged with Japanese company SoftBank, Citi served as the lead financial advisor. The bank served a similar function when Dell Inc. went private in 2013. Institutional clients business contributed $9.6 billion in profit last year. (For related reading, see: Bank of America vs. Morgan Stanley.)
Finally, Citi’s corporate department is analogous to corporate departments in other, non-bank companies. It’s an account for day-to-day operations, payroll, the bank’s own real estate holdings, and other items necessary to conduct business. It’s not a moneymaker, but it’s vital. (For more, see: Is Goldman Sachs Still a Winner?)
That leaves Citi Holdings, which the bank describes bluntly as “businesses and portfolios of assets that Citigroup has determined are not central”.
Citi operates in over 100 countries, separating operations into four geographic regions: North America; Latin America; Asia Pacific; and Europe, the Middle East and Africa. Looking primarily at consumer banking by region, North America is by far Citi’s most profitable. Canada and the U.S. accounted for more than $4 billion in earnings in the most recent fiscal year. Half of that comes from credit cards, the perpetual profit center for most banks (think about that the next time you make only a minimum payment). Cumulatively, North American operations earn Citi a profit margin of 20%. (For more, see: How Visa Counts On Your Free-Spending Ways.)
Europe, the Middle East and Africa remain a small market for Citi. In Western Europe, Citi barely registers. Its largest markets in this part of the world are Poland, Russia, and the United Arab Emirates; France, Germany and the United Kingdom are non-factors. Consumer banking revenues in Europe, the Middle East and Africa were barely $1.5 billion in 2013, which is down from each of the previous two years. Total net income was a mere $48 million, largely due to enormous operating expenses. North Americans can rejoice, or at least not feel self-conscious, knowing that the average EMEA Citi credit card carries an $1,100 balance — $100 more than the average North American card. Imprudent spending is a worldwide phenomenon. (For related reading, see: How Bank of America Holds 1/8 of All U.S. Deposits.)
Balance Sheet Built on Balances
In Latin America, average loan balances are even higher. Consumer banking there earned Citi $1.4 billion on revenue of $9.3 billion, while securities banking and transaction services earned an additional $1.6 billion.
That leaves Asia, the region in which Citi’s securities banking is largest relative to its corresponding consumer banking. Consumer banking profits on the world’s largest and most populous continent totaled $1.6 billion last year, which is down 13% over the previous year (which was down 6% over the year before that.) Citi’s Asian securities business is riding high, however. It earned $1.3 billion last year, more than half again as much as in 2012. And that on somewhat modest revenues of $4.7 billion. (For related reading, see: 2015's Most Promising ETFs.)
The Bottom Line
As a business, Citi has everything going for it. In this context, “everything” means dominant shares of the banking market and influence via lobbyists. Last year the bank spent at least $5.34 million on lobbying and contributions. That’s a microscopic price to pay for the occasional $45 billion bailout. When a corporation gets repeated federal guarantees that it can’t go defunct, investors should take that as the signal that it is. (For related reading, see: JPMorgan Chase: Too Big (and Profitable) to Fail.)