The Taiwan Banker

Citibank’s withdrawal from the consumer finance business in 13 Asia-Pacific countries is the latest example of a rising localization trend in Asian banking. Major European and American banks, which once found ample low-hanging fruit in these markets, have lost some of their competitive edge. The reasons for this are many, including the ascendancy of East Asian regional banks, the rise of fintech, increased capital adequacy requirements and compliance costs, and evolving business strategies at the Western banks. The finance industry has had an eventful past quarter century, from the Asian financial crisis in 1997-1998 and the Internet bubble in 2000 to SARS in 2003, the global financial crisis in 2008, and COVID-19 in 2020, all of which have significantly impacted operations. International banks have also undergone several rounds of M&A activity. The resulting financial environment is very different from before. The number and type of banks, as well as the impact of fintech, have made the industry both more competitive and diverse than ever before. Especially since 2008, large European and American banks have retreated from overseas markets. Regional or local players have become increasingly dominant in East Asia. Transformation is the new normal Looking back at the development of modern international finance, the United States enacted the Financial Services Modernization Act in 1999, breaking the shackles of the Glass-Steagall Act of 1933, and ending the firewall between commercial and investment banks. This also gave birth to the financial holding company, and the emergence of cross-industry operations such as commercial and investment banks and insurers, etc., an important key to the development of the financial industry in this century. Shortly before the repeal of Glass-Steagall, Citibank merged with Travelers Group, creating the world's largest financial group at the time. This was also the largest financial merger in the 20th century. After the transaction, Citigroup had branches in more than 100 countries, and strived to maximize assets and scale. Meanwhile, other global banks embraced a “bigger is better” ethos over the next decade. In September 2008, at the outbreak of the global financial crisis, several large century-old financial institutions closed down or were acquired, and risk awareness in financial supervision once again increased. BASEL III increased the requirements for risk capital provision, and subsequently various regulators strengthened their anti-money laundering laws. Compliance increased operating costs, causing international financial institutions like Citigroup and HSBC to make strategic adjustments. In addition, Chinese financial institutions increasingly capitalized on China’s rapid economic growth and rising global clout. Larger banks must localize to stay competitive In the past, large international financial institutions relied on their capital or experience to move into emerging markets in the Asia-Pacific region, including Taiwan, earning large profits. However, in addition to the aforementioned changes in the international business environment, local competition has gradually increased as Asia has gotten richer. It is perhaps not a coincidence that Singapore, the richest country in East Asia measured in terms of per capita GDP, has produced three of the strongest regional banks: DBS, OCBC, and UOB. The increasing competition in various financial markets (especially consumer finance) highlights that the advantages of large banks such as Citibank, HSBC, JPMorgan Chase, and Bank of America are gradually declining in the face of strong competition. The “dragons” can no longer dominate most Asian markets. In response to the increasingly competitive global financial operating environment, large multinational financial institutions have focused on niche businesses and regions. In fact, as early as October 2014, Citibank announced its withdrawal from 11 consumer markets around the world, including Central and South America and Eastern Europe, as well as Guam, South Korea and Japan. Citigroup's goals are to focus on high value-added customers, and to promote high-end wealth management, corporate finance and investment banking. Citi Asia Pacific CEO Peter Babej recently stated in a memorandum that the decision to withdraw from consumer finance in 13 countries is critical to its ability to redeploy funds to more profitable regions. It is not about the attractiveness of any particular market, but rather based on “strategic needs.” Citigroup will continue to operate its Asia-Pacific, Europe, Middle East and Africa consumer finance businesses in the four financial centers of Singapore, Hong Kong, the United Arab Emirates and London, and has meanwhile decided to devote more resources to corporate finance. Going East It’s not only Citi. HSBC, another one of the world’s large financial institutions, announced a "pivot to Asia" in February 2021, reducing its Western business, and pledging to invest US$6 billion to expand into Hong Kong, mainland China and Singapore. On May 26, it also announced its withdrawal from the US consumer finance and SME financing businesses, in order to shift its focus to wealth management and international banking, especially in Asia. It will retain more than 20 branches in the US, transforming them into an international wealth centers to focus on “the banking and wealth management needs of globally interconnected high-net-worth clients.” In addition, HSBC also plans to withdraw from the French consumer finance market. According to a report by Les Echos of France in May, it will sell its full French consumer finance business, including 230 branches and 4,000 employees, and is prepared to lose more than 1 billion euros to transfer the aforementioned business to Cerberus Capital Management, a US private equity fund. HSBC CEO Noel P. Quinn said that HSBC’s US business will focus on connecting its corporate finance and wealth management customers with global markets. Meanwhile, after experiencing huge losses from subprime mortgages in 2007 and the financial crisis in 2008, the multinational wealth management bank UBS decided to “return to its customer origins and focus on advantageous businesses.” By focusing on its core customer-oriented wealth management business and cutting out less capital-efficient non-niche businesses, it has finally cast away the shadows of the crisis and once again consolidated its leading position in global wealth management. In recent years, it has expanded its investment in fintech and technology ecosystems, aiming to grow from its existing wealth management niche into digital financial services. No more need for training wheels Citigroup should focus on the global strategic layout for its consumer finance business in 13 markets. The significance of this incident to Taiwan’s financial industry should lie in the inspiration that it can provide. Citibank’s withdrawal can also be seen as a reference for domestic banks. Although Citi was still making money from retail banking in Taiwan, it is clear that the margins were not attractive enough for the company to stay in the market, which is increasingly a red ocean. The 80/20 rule (80% of sales come from 20% of customers) is also applicable to the consumer finance market, and the situation is increasingly tilted towards big banks. Several leading banks account for almost 80% of the market's profits. Taiwan’s banking industry need not need engage in every segment of financial services, but rather should take the opportunity to think about transformation and development. Banks can exit businesses with low margins or meagre fee income, combine big data analysis with fintech to improve operating efficiency, and differentiate themselves to increase customer stickiness in a mature, commoditized market. After many years, Taiwan’s banks have grown, and banking talent development has also changed from a one-way process of input into an environment that includes both input and output. Many domestic banks have grown overseas, but in contrast to the technology hardware sector (notably semiconductors), Taiwanese banks have not yet gained a strong foothold globally. In particular, domestic banks are still less competitive than leading foreign banks in profitable niches such as international corporate finance and high-end wealth management (private banking). Furthermore, domestic banks that already have an overseas presence should also take advantage of the opportunity to rebalance their global layout, revisiting their overseas development strategies to take into account overall niches, risk and capital requirements, and higher compliance costs. Citi’s operations span 13 countries in Europe, the Middle East, North Africa, and Asia. Citi’s experience can be used as a reference point for Taiwanese banks, whether its sales strategies, customer profile or compliance practices and approach to regulators. Meanwhile, it’s also necessary to also keep in mind the focal points of regulators: financial stability, the rights and interests of customers and employees, and the normal operation of services. The situation is changing rapidly. Banks must go back to the drawing board, in a test of their management competence, and find a new blue ocean model. The author is Deputy Director of the TABF Publishing and Communication Center.