Citi believes that its future clearly lies in Asia and Latin America and seems prepared to put in the investment dollars to get it done. It spent around $600 million investing in its operations abroad last year, with the bulk centered in Asia. That helped the bank open new branches and hire new workers. In Beijing, Pandit said that while the bank was paring down its workforce in the U.S., it was ramping up hiring in Asia, especially China.
Citi has been in China for a while and maintains close and cordial relations with the government. It has new branches in 13 major Chinese cities along with 46 consumer outlets. The bank branch is very important in China, as it's the only place where a person can obtain a credit card. Since 2003, Citi has issued a credit card in cooperation with a local Chinese partner.
But Citi's expanded physical presence is still but a small fraction of the total Chinese consumer banking market. Foreign banks hold just 1.8% of the market, with Citi a small sliver of that. The number of credit cards in circulation in China has exploded to 270 million, up five fold since in the last five years. The big Chinese banks have gotten most of that business, but there seems to be a lot more market to share. MasterCard (MA) estimates that China will have 1.1 billion credit cards in circulation by 2025, with spending on those cards estimated to reach $2.5 trillion. Based on China's population and rising personal incomes, that number sounds modest.
Allowing Citi to market its own card will raise its brand recognition among the status-driven Chinese, especially the urban, educated and rich consumers that Citi wants to target. Tapping just a fraction of that market could be very lucrative.
But what if the Chinese economy falls off a cliff and the banking system runs aground? Pandit said this at an analyst meeting in December:
There's no question that there are likely to be cycles in the emerging market areas. There are always questions of moving a little too fast, moving a little too slow. Having said that, when you look at the underlying trends, the secular change is real. And so if you think they're going to grow at 6%, well, maybe they don't. If they grow at the Fed's stress test of 4% or 5%, so what? At the end of the day, that's where the growth is, and so I think we're pretty well positioned to capture that.
So even if the growth rate isn't stellar, it is bound to be better in China than in the U.S. or Europe. Having a toe in the Chinese market, however small, will be a net positive.
Of course, growth in credit can end up reversing really fast if the economy tanks and people lose their jobs. The Chinese real estate market is thought to be in a bubble similar or worse than what the U.S. was in a few years ago. Meanwhile, a slowdown in Europe has taken a toll on China's export market. The Chinese tend to spend all cash on large items, but that's changing as the younger, post-Mao generations grow more comfortable with the idea of taking out loans and using plastic. A crash in housing could quickly spread to consumer credit cards, delivering a one-two punch to Citi's bottom line.
It is unclear how big Citi will be allowed to get in China. The government keeps close tabs on the financial sector and holds up its national champions. But even a small sliver of this explosive market could mean a lot for Citi, especially if the government keeps other foreign players out of the market.
