Support for customer flows helped Citi in Swiss franc fiasco

Singapore

A WILLINGNESS to service customer flows meant Citi recovered somewhat from its losses after the surprise unpegging of the Swiss franc against the euro, said Patrick Dewilde, the global bank's Asia-Pacific head of markets and securities services.

In an interview where he also spoke about the bank's restructuring process, the Singapore-based Mr Dewilde told The Business Times that while he cannot provide details on the Swiss franc incident, the bank's trading rooms "did very, very well" in the second half of January.

"We kept on serving our customers from 7am in the morning till New York went to bed . . . Customers knew we helped them out, and kept on trading with us, kept on coming to us when nobody wanted to help them. The next day, when life was easier, they gave us easier business," he said on the sidelines of a Citi annual investor conference.

Mr Dewilde was making a point on how volatility in the foreign exchange markets matters less as long as the bank keeps on servicing customer flows. "If what you want to do is to take proprietary positions, volatility matters a lot more," he said.

The Swiss central bank decided in mid-January to stop holding the franc at a fixed exchange rate against the euro, causing the franc to spike dramatically. Citi reportedly lost US$150 million that day, partly exacerbated by it not having renewed hedges on options sold.

John Gerspach, Citi's chief financial officer, said in a fixed income investor conference call on Jan 23 that the bank experienced a "modest loss", though it experienced "good activity levels" from its customers in the foreign exchange markets.

Mr Dewilde, who joined the bank in 1983, was appointed to his post last April. He oversees the bank's substantial regional foreign exchange business, as well as its other businesses in rates, fixed income, equities, commodities and securities services. The bank is examining every segment of its business. If it cannot be in the top three, it has to seriously consider whether to stay, he said. Mr Dewilde has also introduced new training programmes. "I'm a believer that perspiration is more important than inspiration," he said.

Citi's institutional business revenue in Asia fell 3 per cent to US$7.2 billion in 2014, while income from continuing operations rose 4 per cent to US$2.3 billion. In 2014, Asia was the biggest geographic contributor to Citi's institutional income after North America. The division Mr Dewilde oversees contributes more than half of Asia institutional revenue.

Citi's fixed income, currencies and commodities business is No 1 by market share in Asia-Pacific excluding Japan in 2014, according to research firm Greenwich Associates.

However, the equities business is facing challenges from shrinking institutional brokerage flows. Mr Dewilde said he has made it a priority to bring multiple parts of the business together, including derivatives and underwriting, to offer a better product.

Meanwhile, Citi's securities services business is in the top three, he said. It scored a deal last year to provide global custody and securities lending services to support the US$850 billion investment portfolio of Norges Bank Investment Management, which manages Norway's pension fund.

Looking ahead, growth is tough to come by and banks are in a "relative value game". But growth will come to those with the best fit between their offerings and their customer base, he said. Citi will not compete head-on with local banks, but will focus on companies growing across borders and asset classes that can tap on its platform.

Global banks have been facing declining profitability and regulatory challenges since the global financial crisis. Citi took a US$3.5 billion hit in the fourth quarter of 2014 for legal and restructuring costs. Its woes had included regulators probing currency manipulation and compliance with anti-money-laundering laws.

While regulation abhors big banks, it has also created a barrier to entry for smaller competitors to quickly build up as extensive a network as Citi has, he said.

A Belgian with Germanic roots, Mr Dewilde said he likes to focus on what is measurable and tangible. Soon into his new post, he started examining which customers need cross-border services. He wanted to know how many products are being sold to them, to see what was missing.

One aim is to increase the proportion of his flows business that can be automated, to improve execution efficiency. "I give my people clear targets on how much delta I want to see every year. A guy that goes from 70-71 per cent is no better than one that goes from 10-11 per cent," he said.

Another aim is to build up a so-called "creative solutions" side of the flows business. He ultimately sees 30 per cent of the business coming from this "value" business, with 70 per cent from volume. For example, a conversation with a large insurer in China revealed the company was worried about how to invest billions of dollars in incoming bond coupons and new premiums. He eventually discussed, with the client, the possibility of it financing a shipping port in England.

The issue of too much liquidity and too little fixed income assets was brought up by Matt King, Citi's global head of credit products strategy. Central banks seem to have run out of bullets to stimulate the economy, Mr King said. He added clients have to "mind the cliff" even as it seems liquidity can push markets up.

Mr Dewilde agreed this was a worry. "A lot of people are confusing price and value. They are buying something because the price goes up."