I am long on India and China: Stephen Bird
Stephen Bird has been a Citibanker for the last 14 years. But since the beginning of this year, he has taken over as the Chief Executive Officer for the Asia Pacific region at Citigroup. Responsible for 17 countries in the region – including India, China, Hong Kong, Singapore and Australia – Bird is a great believer in the Asian century. In his first interview in India, he tells Somasroy Chakraborty and Arijit Barman about the rebalancing of the world and Asia’s twin engines of growth. Edited excerpts:
The much-touted Brics phenomenon – especially India – is severely bruised. What worries you about India?
The whole world is bruised. That’s my first take in the context of India. I have been in Asia for 14 years and I have been using the expression that Asia is driven by the “twin engines" of growth of India and China. And this thesis has underpinned growth several times during this period. We have built our business consistently and progressively in these markets and across Asia by focusing on key mega trends such as globalisation, urbanisation and digitisation. Our investment in India has given us a lot of digitisation capabilities.
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Broadly speaking, there is a re-balancing of the world. We have two-thirds of the world’s population in Asia. The consumption and the developmental stories of India and China are strong. We are aware of the short-term issues, though. India’s growth is the lowest in nine years. But there are other positives in today’s environment that will help India. For instance, lower oil prices are an advantage for India. The fact that India is less of an export economy, in the slowing world, helps India. So, India is less prone to shocks owing to short-term reductions in exports, to which other Brics countries may be sensitive. I am confident that the phase will pass and the broad thesis will stay in place.
But business confidence is severely lacking.
We are all a part of the confidence. I meet clients every day. I am a half-glass-full guy. I think that helps in leadership. And while confidence has been relatively stronger in the past, these things turn quickly. When the base story is strong and the shorter story is troubled, that is a far better situation than being in a small pocket of euphoria when the base story doesn't look right. The big story is in place.
India and China, the models are different. One is services driven while other is manufacturing driven. China is building assets...Are either sustainable in the long run?
I think it’s a factual description. But, the way I would interpret this is that India has been able to achieve a two trillion economy despite the lack of good infrastructure facilities. If India had a robust model of infrastructure, the economy would have probably added two or three percentage points of growth to India. We have seen that in China. So, there is a lesson in long- range planning. India needs 20 years of sustained infrastructure built-in. That's a reason to feel good for the next two decades, because India will need to address this imbalance and we are keen to use our global network and platform to play a leading role in this area.
China used to be a 55 per cent consumption economy in the eighties. Its disproportionate growth of exports brought it down to 35 per cent. So, China is trying to get back to an economy that is more balanced. And I think China will be able to achieve it
I joined the Asian business during the last Asian crisis of 1997-98 and everyone thought that the story of the Asian tigers was over. But, we had a V-shaped recovery. We did have currency contagion; Korea then needed to tap the World Bank because of the shortage of the foreign currency reserves. Many lessons were learnt. That was Asia's crisis then and Asia is in a better position today and I am optimistic about its future.
To take one theme of your mega trend, which is globalisation. People would argue that at a time when FDI flows have slowed in India, more and more of India Inc. is going abroad. Last year $20 billion went outside India. Is it part of a natural process, an evolution as business globalised or would you say that sentiment is affecting this flight of capital?
We have helped Indian companies raise about $100 billion in the last seven years, about half of that in the last three years. We have advised many of those landmark transactions. Indian champions are becoming global champions. We have deep relationships with many of these fantastic Indian companies who now run global enterprises. You look at Tata's, Reliance, Vedanta, Infosys, Wipro. They have a global mindset, a global perspective and our priority is to continue to help the established Indian champions grow and the new breed of emerging corporate titans from India.
But some CEOs say the opposite. They say they are leaving India because it is so much easier to do business outside from the regulation point of view. So that ripple effect back home is yet to occur
I think it will happen. Those investments outside India are still dwarfed by the position of India. So, rational economics prevail. I think it will be a much sadder situation had these companies not tapped those opportunities. If Jaguar had gone to somebody else, if Corus had gone to somebody else, we would be sitting here saying this should have been Indian companies.
Why do you feel so optimistic about India?
We have a fantastic team here. We pioneered a lot of things in India. So, my question is what are we doing next. We developed an application called “SMS to Call" that allows people to call by sending an SMS and the bank calls back. Another great one is cash to mobile, which enables users to pay through mobile. Digitisation is the future that is quintessentially India. We took software capabilities from India, which are now the global banking platform for the Citi. We have a fantastic business here, it’s already a huge business and we need to keep it growing. There is no reason the future should be less bright than the past.
In 2010-11, Citi India’s net profit grew 66 per cent. How did the bank perform in 2011-12? What are the growth drivers?
In the first quarter in Asia, we generated $1.1 billion in net income — up 18 per cent year-on-year, which is 37 per cent of the whole company. India is one of our most important markets and continues to perform strongly. In the financial year ending March 2012, Citi India’s assets grew to Rs 1.3 trillion and its net profit also grew to Rs 19 billion.
In India, our focus is ensuring we are the leading retail and institutional bank. We are focused on what exactly is our value proposition. So, for every single business we are focused on, there has to be the best-in-class value proposition.
And who decides that? It’s the client. And that’s the only sustainable path to growth and everything else will flow from there.
As a company we have gone back to the basics of banking. We are the global bank for institutions and individuals. We are not a universal super-market. We sold insurance, we sold asset management, and we sold broker-dealer — we sold our hobbies and are now intently focused on serving our clients around the world in areas like trade finance, cash management, capital markets, advisory and retail banking. We are getting easier to manage because we are a simpler institution and we have delivered nine consecutive quarters of profits globally.
For India, the consumer business is very important. You have seen smart banking launches here. We are tapping into the emerging affluent client base here. We are also the leading cards business here and we have strengthened the value propositions. We have a great team here and that’s why I have high expectations.
The current churn in corporations in terms of cash flow, profitability and so on, is directly linked to asset quality for the banking sector. How big it is a concern for you at Citi? Are you expecting any kind of a negative shock from Asian assets?
Citi Asia represents 20 per cent of the assets of Citigroup. I am deeply involved and tightly plugged into the evolving risk activities across markets. I feel confident that we are building the book the right way.
I look at my portfolio in the context of those assets, relative to all those other revenue streams. I would be worried if I see assets and no other elements to those relationships. That is a risky business. We are not in that business. That is why I feel good about the target market selection and the portfolio quality. Right now, we are at historic lows in terms of losses in our portfolio well across the regions. Also, in the first quarter in Asia all our businesses produced positive operating leverage which is important and underlines the scale we have in Asia where we generate around $15 billion of revenues and $4-5 billion in profits annually from 17 markets with no one market more than 10 per cent of revenues.
Does it make sense for Citi to do an Indian depository receipts [IDR] to raise capital like Standard Chartered Bank did some time back?
We are immensely well capitalised as a bank. We have 12.5 per cent Tier-I capital as of the last quarter. We are arguably the world’s best capitalised global bank. We are in a fortunate position of having huge amount of capital, which in an uncertain world is a good thing. I am long India and I am long China. When we think of the long game, India and China are among the best places to deliver high return on capital in terms of shareholders and we do not have any shortage of capital. So, we do not have any immediate plans [IDR]. Never say never, but it’s not on the agenda right now. Given how bullish we are on India, we want to maintain full ownership of our Indian business and be able to reinvest our earnings here to support our clients and our own growth.
You talked about consumer banking and its potential in India. Would you say the limits on branch network is a bane for foreign banks including Citi, especially given that the regulators seem to be quite conservative on this issue?
Branches are important. But, I believe we have begun to prove that bricks-and-clicks is the best suited model for us. Thirty years ago, John Reed, former chairman of Citigroup, said branches will become a liability. What we are trying to do all the time is to have an iconic physical presence because it does two things: one, it tells our clients where we are located and two, it gives us 24x7 advertising opportunity. Since we come from a disadvantaged branch banking background, it means that we will strive to be better digitally every day. And that probably means being more future-ready than any other bank. I am effectively filling in the gaps owing to limited branch presence. I actually quite like having this disadvantage in some ways, for being better digitally prepared for the future than anybody else. Also, 98 per cent of our transactions in Asia happen outside a branch now anyway.
You are optimist about Asia — both India and China. On the other hand, there has been tweaking in your Asian portfolio. Citi has offloaded its stakes in financial institutions and banks in Turkey and China. In India, you have offloaded stake in HDFC. Isn’t that contrary to your thesis? Do we expect more such divestments in the near term?
We have invested heavily in Asia over the last decade and will continue to invest in a region that now represents 35 to 40 per cent of Citi’s profits. We primarily divested our stakes to prepare for Basel III. Our clients being from the same industry recognised this need since it was self-evident why we were doing it. They believed in doing this together in a manner that allowed both partners to continue to grow the longstanding strategic partnerships we enjoy with each one of them. Though it’s never easy to do these divestments but we did manage to convey our intention correctly and execute it well, keeping our clients interest in mind. These are all very strong and important relationships for us.