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Harnessing the growing power of the Brazilian consumer

Gustavo Marin

CEO/Citi Brasil

Published  Thursday, October 1, 2009

The year since the now infamous collapse of US investment bank Lehman Brothers in September 2008 has been one of the toughest and most humbling in the history of US financial giant Citi.

Citi turned to the US government for aid in the midst of this crisis, as did nearly all its major peers through the much-discussed TARP program, but the government's support for Citi took on new levels with large loan guarantees and eventually a plan that would give the government a 36% share of the group's outstanding common stock.

As Citi works on its reorganization into Citicorp, which will hold onto the firm's core business, and Citi Holdings, the division for its non-core businesses, including brokerage and retail asset management operations, Brazil and other emerging markets look to be central for the group's recovery.

BNamericas sat down with Citi Brasil's CEO Gustavo Marin in his office in São Paulo to discuss how the bank plans to grow after shaking off rumors of a sale earlier this year and what Citi's sale of its stake in card acquirer Redecard means for its local operations.

BNamericas: Citi Brasil had been rumored as a possible asset to sell during the worst of the crisis, but the group as a whole has held on to the unit, saying that it is a key part of its ongoing strategy. With the affirmations on your credit ratings over the last two months and the overall economic outlook improving, what are the key parts of Citi Brasil's strategy?

Marin: I think that the strategy reflects the strategy outlined by [Citi CEO] Vikram Pandit - a product of the division of the bank into Citicorp and Citi Holdings. Basically, certain types of assets, mostly related to developed consumer economies, will go into Citi Holdings. Citicorp will be the growth bank and includes the global consumer and corporate bank, with presence in 110 countries, which is really the differentiating factor of Citi. As far as the strategy of Citicorp and those 110 countries, there are about 10 that are really the drivers of growth in terms of size, opportunity in the market, and wallet available for the financial institutions, and clearly Brazil is among the top of this list.

We are forecasting that the size of the financial markets of those [top 10] countries is going to grow three times faster than in developed economies, which is why we are shifting allocation of capital in the bank from developed economies to developing economies.

Of course, in the last 18 months, the priorities have been much more related to the strengthening of the balance sheet of the bank overall and the capitalization of the bank. Now that this chapter is over and Citi now enjoys some of the strongest capital ratios in terms of Tier 1 and tangible common equity in the US banking industry and in the world, Citi is really now focusing on the development of its growth strategy.

BNamericas: So what does that mean on the ground in Brazil?

Marin: Well, this market is booming, as you have seen. And people ask me what the story is behind this, and it's the story of the Brazilian consumer and social mobility, with people moving up the social ladder.

With that mobility, come aspirations and the ability to access consumer goods, which also helps and is supported by the growth of credit. For that [to work], the strength of the Brazilian financial system has been critical, as it was not exposed to the sources of trouble that impacted other banks in Europe and the US. The banks continue growing and lending, and this whole story will be the one behind the growth of the financial system, so that we will be growing the bank for all the opportunities that come, such as individuals, consumer credit, cards - all the products that Citi has for the Brazilian market under the brands of Citibank, which is a very aspirational brand in Brazil, and Credicard, which is a more democratic brand that penetrates all the different strata of Brazilian society.

BNamericas: How specifically does Citi take advantage of this growing market? Are there particular products that seem underrepresented or that otherwise make up your push in Brazil?

Marin: All the products are growing, and [we should note that] there are several trends to this: the growing economy, social mobility, lower interest rates, and access to capital. With lower interest rates, for example, we see the growth of emerging [market] companies - not just consumers - as a much wider array of companies gain access to credit. This is an engine of growth in the corporate market and for investment, and this is not just for the big Brazilian conglomerates.

So, we are seeing growth in investment banking, with the opening up of the capital markets, which had been closed since August of last year until March, when we opened the market with the follow-on [offer] of [our share in credit card acquirer] Redecard. The market is returning back very, very quickly, so investment banking in 2010 is going to be a big driver of growth in the corporate investment bank, coupled with the consumer growth story.

BNamericas: On that point of Redecard, it was followed by the VisaNet IPO, in which Banco do Brasil [BB] and Bradesco sold small portions of their stakes. Citi obviously sold its whole stake in Redecard, as Itaú Unibanco picked up the controlling interest in the company. Is there any impact for Citi from not being able to be a part of this segment?

Marin: It was a very important gain and we sold at very attractive multiples, reflecting the peculiarities of the Brazilian market. If you look internationally, the acquiring business is not as big a business as it is in Brazil. The prices commanded by a company like Redecard or VisaNet are unthinkable in any other market, and that reflects the way the card industry is organized in Brazil, which we think will converge to an international standard in the long term. That's why I think the value of these [companies] might not remain the way they are [now]. We saw a very good opportunity to realize a very important value for the bank, and also invest in our priority, which is the issuing business and - as it is all over the world - in the relationship with the consumer.

BNamericas: The central bank BCB has put out its top 50 ranking of the banks, and Citi Brasil has again come up as number nine in the country. Is that the position that you expect to have for some time to come?

Marin: There are businesses that we are in and there are some that we will not. We are not in the mass retail banking and we're not going to be, since you can't compete organically with banks that have 2,000-3,000 branches. Our strategy is positioning Citi as an aspirational brand and serving all the other social classes through Credicard. We operate in markets with potential for growth and we measure our performance on profitability, not just the size. For the time being, the strategic position of Citi will not change.

BNamericas: Your branch network has stayed fairly flat for the last few months. Are you looking to grow your network now?

Marin: We are going to be adding new branches, but not in a massive way and aiming at covering regional markets in which we are not present. We have about 60 branches in São Paulo and we cover about 64% of our target market, the A and B [socioeconomic] classes. We are probably going to expand to 85%, but we are not going to be doubling [our branch network] to reach that. We'll be adding about 30 branches over the next couple of years.

BNamericas: Where are the regions where you want to grow?

Marin: We are seeing a new path of development in Brazil. In the past, a lot of the growth was concentrated in the axes of São Paulo and Rio de Janeiro, and now we are seeing - as we saw in the US and Europe - the decentralization of growth. You see the regional poles of growth, with the interior of São Paulo, the center of the country and the south.

BNamericas: M&A had been on the table earlier. Is it still?

Marin: It is, but at this moment, Citi is still not trading at its full potential value - basically at book value. From a corporate finance analysis, it doesn't work and it would be highly dilutive. For the meantime, I'm focusing on growing organically.

ABOUT THE COMPANY:

Citi Brasil is the country's ninth largest bank in terms of assets, with 41.9bn reais (US$23.4bn) as of end-June, according to central bank BCB.

It operates in Brazil in the corporate segment, and as retail bank Citibank, private banking group Citi Private Bank, credit card issuer Credicard and financing unit Credicard Financiamentos, serving a total of over 400,000 customers.

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