At Citigroup’s helm, Sanford Weill pushed the group through rapid global expansion with epoch-making deals, against the head-wind of emerging market crises. By Philip Alexander and Taimur Ahmad
Just as Sanford Weill created the world’s largest banking group in 1998, so Citigroup’s own forays into emerging markets came to characterize the experience of the bulge-bracket in this alluring yet volatile frontier of global finance. There were the immense opportunities of heavily underbanked countries with large and young populations, and the alarming risks of massive write-downs as the worse-run emerging economies fell over the edge.
Even before his Travelers Group merged with Citicorp in 1998, Weill was beginning to diversify a US operation into the developing world, with Travelers’ Smith Barney brokerage unit buying one of the most recognizable names on Wall Street, Salomon Brothers, in late 1997. “It just became obvious that we would not be important, we would not be able to service the rich constituencies unless we had a global presence,” Weill tells Emerging Markets.
But the risks became clear early as well. Salomon was exposed to the 1998 Russia crisis and the collapse of giant hedge fund Long-Term Capital Management (LTCM), justifying Weill’s well-known caution about relying on trading activities. “Salomon was not enough either, and that led to the conversations about the merger of Travelers with Citicorp. I think that really put in place a company that had a long history in many parts of the world, that had been in countries like India and China, in Latin America since the 1920s, that didn’t run away all the time, and that was trusted by these countries,” says Weill.
As ever, he was not content to sit still with the newly-acquired global brand, and acquisitions began quickly, even while sentiment was still recovering from the Asia, Russia and Brazil crises at the end of the 1990s. “Citibank’s whole philosophy was to keep their position in each country no more than 2 or 3%, so when there’d be the next big problem they wouldn’t really get hurt.” This allowed the bank to buy into emerging markets when they were not the flavour of the month. In 2000, Citibank merged its Polish operations with Bank Handlowy, the country’s oldest bank, to create Poland’s leading financial institution. There was a lengthy approval process amid sometimes bitter opposition, but Weill retained his faith in Poland as a low-cost production base for the EU, and was also reassured that even the leaders of the trade union movement had supported the drive towards free markets.
Going large in mexico
This was only a curtain-raiser to the epoch-making emerging markets deal of Weill’s tenure, the purchase of Mexico’s Grupo Financiero Banamex-Accival (Bank Banacci), which was renamed Grupo Banamex. At $12.5 billion, it was the largest foreign investment ever in Mexico, and the largest financial sector deal in the whole of Latin America. “We had the ability to concentrate something through an acquisition that might take us a decade to do by growing our business in the country. Overnight, we ended up with 25% market and deposit share,” says Weill.
One Mexican banking analyst based in New York observes that the revolution was not so much the entry of top US financial management, as simply the recapitalization of a banking sector still reeling from the peso crisis of 1994. “Even in 2001, banks were not undertaking much new lending, but they needed fresh capital more than fresh thinking. Many banks were still relying on tax credits extended to keep the sector alive in 1994, but the central bank did not want to tell the public they were technically insolvent.”
Weill acknowledges that “it was really a case of getting very good management and it was really a case of Banamex acquiring Citi in Mexico rather than the other way around”.
The analyst says Banamex has lost market share since the Citigroup takeover, eclipsed by the more aggressive restructuring undertaken by rival Bancomer when it was bought out by Spain’s BBVA in 2002-2003. But Citigroup had opened the door. And with a rising tide of demand growth, and banking penetration still only around 30% in Mexico, Banamex has nonetheless managed to more than double revenues since the buy-out.
This is the theme Weill believes is crucial for the group today, as he has long sought to capitalize on the rise of an emerging market middle class. “It plays right into our strength as a terrific consumer bank also. And when you can be in both businesses in a country – both the consumer business and the corporate business – you don’t have the problems of cross-border financing. You can raise money in the same country you’re lending, which is much simpler.”
Taking the same long view, Citigroup bought a stake in China’s seventh-largest player, Shanghai Pudong Development Bank, in 2003. “When China got access to WTO, the agreement on financial services gave them five years before they’d have to begin to level the playing field with US financial companies, and this gave us the opportunity with the development of the credit card with Shanghai Pudong,” he explains, backing China’s own gradualist approach as appropriate to avoid accidents in the process of financial liberalization.
Mind the politics
The US Congress is a little less sympathetic to China. Citigroup’s involvement in China is a reminder that even the world’s largest bank is sometimes at the mercy of international politics, and Weill warns against any return to “the old ways of protection and tariffs”. But he denies having concerns that Citigroup might be politically targeted as the financial face of American hegemony – even after activists bombed branches of Banamex following the Citigroup purchase in 2001. “It was important to get to know the governments and relate to the people, and let them know that while we’re interested in our investment being profitable, we’re also cognizant of what is important to them, and we think that we can help their economy grow and prosper – and I think they’d be better off with us than without us. I really believe that’s true.”
Regrets? One in particular – Argentina, where Citigroup was forced to set a less welcome record, namely the largest ever single bank write-down, more than $2 billion, after the country’s financial collapse in 2001-2002. “I wish we’d kept our position in Argentina at 2%,” says Weill wistfully. But he adds: “Philosophically it was right, but ultimately it was not so good. I don’t know who could have expected a country to end up with six presidents in a period of four months and a government that basically took the money – I want to use a tougher word – to make up for bad management.”