The Citi of Tomorrow: Today
Wriston, Walter B.
During the past half century Citicorp completed two separate but integral strategic plans that not only revolutionized our company but also significantly influenced the whole financial service industry As a result of a study completed in 1967, we formed a bank holding company to permit us to broaden both our geographic and product base. We defined our business not as a United States commercial bank with branches abroad but rather as a global financial services enterprise with the United States as our home base. In those days, "financial service" was not understood as the all-encompassing buzz word that springs to mind today We utilized the holding company structure to overcome the geographic constraints on our domestic businesses and some of you might even agree that we were fairly creative and successful in our efforts. By making a few selective acquisitions, but mostly by creating de novo units, we built a global network that has today become a unique competitive franchise.
In 1967, we also realized that demand deposits in the New York market were not increasing and over time would be insufficient to fund our growth. The emerging funding problem was attacked by invention and exploration of innumerable short- and long-term instruments floated in the professional money markets of the world. The longer term solution to this problem did not emerge until the completion of the strategic plan for the 1970s. It was this plan that marked the genesis of a world-wide consumer banking blueprint for Citicorp. While the 1967 study altered our corporate structure, the 1970 plan revised our corporate businesses. In formulating this plan, we first reviewed in some detail our own corporate history in order to learn what it was that caused us to grow from a small commercial bank, born in New York City in 1812, to a global financial services intermediary. The recurring theme in our history was that periods of vigorous growth followed each occasion when we had correctly defined the developing trends in our marketplaces and devised appropriate strategies to take advantage of them. We first emerged as a significant bank in the latter part of the nineteenth century by relating successfully to the transition of the United States from an agricultural to an industrial economy. In the final quarter of the twentieth century, we realized that we had to transcend the corporate treasurer and the metropolitan New Yorker as our sole funding sources and find ways to attract the more than $1.5 trillion consumer savings market in the United States. In essence, we adopted the Willie Sutton strategy of going where the money is.
In the 1970s, as interest rates rose, the competition among corporate treasurers to become profit centers was becoming fierce. The banks in true kamikaze style, aided this trend by helping corporate financial people learn "how to run on zero balances without really trying." We correctly perceived that as technology evolved, large idle compensating balances would become a thing of the past. The correlation seemed clear: the better the technology, and the more skilled the financial officer, the lower the balances. If this were true, we would have to look elsewhere for the funds we needed to grow. There were only two sources-the professional market which, like everything in this world, has some finite limit, and the savings of consumers.
Over time, it seemed to us, the institution without access to the consumer would slowly become an institution without adequate funding. In addition, consumer led economic recoveries are becoming more the rule than the exception and we looked for ways to participate. For all of these reasons, you have often heard about this consumer transition and the identification of the consumer as a key to our strategy in the middle '70s. It was usually described as risky but there are also risks in doing nothing.
In light of what is happening today it is useful to look back at the past. In 1975, we had about $4 billion in consumer loans; two-thirds domestic, one-third international with the principal emphasis on credit in the New York metropolitan area. In that year; our consumer deposits were concentrated in New York City and totaled about $5 billion. We started 1984 with $29 billion of consumer loans-this number does not include our two new savings and loans in Illinois and Florida-and our consumer deposits were $26 billion. In building this business we never forgot our cardinal principle of diversification of risk-what we call our actuarial base.
The wide diversification of risk within the Individual Bank may surprise you. Fully 85% of the assets are outside of New York City, with automobile loans in forty states, first and second mortgages on homes outstanding in thirty states and more than twelve million credit card customers spread throughout the nation. We became the largest domestic issuer of Visa and Mastercard, while simultaneously developing a private label credit card to fill a niche for such merchants as Goodyear and Tandy Radio Shack. At the same time we built a profitable, innovative regional card whose rebate feature offers consumers a true Choice. Our deposits are also diversified with 50% outside of New York City. Although we are the largest consumer bank in New York City, more than 90% of our earnings are generated out of state.
When the domestic auto finance companies abandoned the financing of foreign cars in the American market in the early '80s, we filled the void and almost overnight established a proprietary foreign car financing network. When most banks and several S&Ls could no longer tolerate the vagaries of fluctuating interest rates and pulled out of the mortgage market in the early '80s, we developed no fewer than seven variably-priced floating-rate mortgage products because even when rates were 15%, people were moving and had to buy homes. Out of the crises of the late '70s, we seized an opportunity to establish a differentiated consumer business.
This $29 billion consumer loan portfolio of today, which grew from the New York Metropolitan Division ten years earlier, if analyzed separately would be the twelfth largest bank in the United States and would rank in the top quartile of the Fortune 500 in terms of net income.
We had a plan. We followed the plan but not without a few setbacks. After decades of correctly forecasting interest rates, the extraordinary rates in the late '70s created a funding loss on our U.S. Governments and other fixed-rate assets. We responded by establishing a matched book and an aversion to long-term funding risks. You might also remember the bloodletting caused by a 12% usury ceiling on personal loans when we had a 15% cost of funds. To say the least, this unprecedented unhappy circumstance set back the timetable on the attractiveness of our credit card business. Again, we didn't wait for others to come to our rescue but instead instituted a disciplined search for a way to overcome the problem. We found an alternative in South Dakota and in the process became a major force in that employment market. The benefit of a realistic pricing environment in South Dakota has been augmented by a rich base of the high productivity of Citibankers. But the South Dakota experience had even wider ramifications. Many other states, including New York, suddenly saw the jobs created by our industry and began campaigns to attract Citicorp and others to their states. Today, twenty states have already passed some form of interstate banking legislation and many others are looking at proposals.
1983 was the watershed year for our consumer business. We had a plan, we modified the plan as we went along, working within a regulatory environment that was not always conducive to our best efforts. In addition to building what is now the largest and most profitable consumer bank in Europe, the most recent adaptation of our plan was the utilization of Savings and Loan vehicles to augment our strategic concept of a thin-branch consumer network in three critical states in the US. With our recent acquisition of First Federal in Chicago and New Biscayne in Florida, coupled with Fidelity Savings and Loan in California, we have become one of the largest S&Ls in this country. With these institutions' low operating costs and extremely positive image, our consumer effort has been given an entirely new dimension. Citicorp now has the ability to take deposits and provide a full range of consumer products in areas that account for close to half of the consumer deposits in the United States. All this happened in the space of ten years.
As we think ahead about the future of the Individual Bank, I am reminded of our model for the consumer business. We envision a world of 35 million Citicorp customers producing earnings of $30 per customer. Thirty dollars per customer is not a staggering amount but we are only at one half that level right now. Considering the rich potential of our new domestic markets, coupled with an increasing emphasis on service delivery via the credit card, we can meet that target by the end of the decade. It costs about $150 per year to service an individual through a branch system. That number plummets to $20 if we use the credit card as our primary delivery vehicle. In short, through fees and merchant discounts, the card as a stand-alone product is a profitable endeavor. By the 1990s, it may well become the core delivery mechanism when augmented by automatic teller machines and home banking.
I am certain that those of you with a mathematical bent have already multiplied $30 per customer times 35 million customers and are surprised by the result. We had big plans for this group when it started and we can now see a time by which it will become a billion dollar business.
We have had very little trouble in acquiring this customer base but to keep this valued group we have to go back to basics, go back to service. This was the underlying rationale behind our development of our own automatic teller machines, the popularity of which exceeded our wildest ambitions. As the Pac-Man generation grows up, it will not only favor but require machines that can deliver both money and service, and terminals that can resolve their banking and financial problems in the home. And yes, we will have real live human beings on hand to help and to be marketers.
Now that our consumer strategy has begun to bear fruit, many of you may be wondering whether or not it is time to go back to the drawing boards and make another strategic plan to prepare us for the 1990s. That is not the case. We are continuing to update our plan and move along an evolutionary path established in our review during the middle '70s.
That plan called for what we now have at Citicorp: three separate kinds of world-class banks, all of which can leverage off an unrivaled global network. The Investment Bank, which we call our Capital Markets Group, is the most recent addition to our formal corporate structure. This bank will enable us fully to intermediate the capital flows of the world. This business currently earns more than E. F. Hutton but size alone does not tell the whole story. This bank is already a premier operation. Our Investment Bank ranks first in the world-wide swap market with over $6 billion of transactions closed in 1983. We were the first commercial bank to crack the top twenty publicized merger and acquisition deals in the U.S. and we are consistently one of the top three dealers in U.S. government securities. Our presence will become increasingly apparent as the decade progresses. We have the Institutional Bank, by far the largest earner, and the principal supplier of financial services mechanism to corporations and governments worldwide. This bank will become more closely intertwined with the Investment Bank as the decade unfolds and as we progress in our efforts to "delink the balance sheet."
We recognized long ago at Citicorp the commodity nature of a commercial loan. In fact, due to the costs of loan loss reserves and regulatory capital requirements, a commercial loan, like a life insurance policy can be unprofitable in its first year. Hence, we have designed our Institutional Bank to utilize the credit facilities as tie stepping stone to other services, primarily fee-based electronics, as we proceed toward the 1990s. Some of our competitors can offer electronic reporting land transaction services between a base office in, say, London and a financial center like Hong Kong. None of our competitors call yet offer these services through five or ten commercial centers dealing in non-reserve currencies. We have a goal of wiring the corporate world and we are gaining on it every day.
Traditional thin-spread institutional lending has become basically anachronistic at Citicorp. We are upgrading the commodity loan into a proprietary service package, and we will enjoy fees for this package. The compensating balances of yesterday; which made base-rate lending profitable, are indeed just that, yesterday's. We have had to recognize that if we are not being compensated via fees for our services, we are essentially not being compensated at all.
Commercial asset growth on the books of Citicorp is being discouraged. While some in the media are still focusing on size, as a measure of success, for some time now we have been concentrating on limiting the growth of commercial assets. We are stretching our imagination to take assets off of our books, not to put them on. In 1983, more than $2 billion of loans in the United States which our Institutional Bank generated, were sold to others by our Investment Bank. That number should double in 1984 and can easily reach $20 billion in the next five years. Our stockholders benefit, since we keep part of the spread while someone else keeps the assets. But in order to make this a viable business, you must have both the asset generating capability and the distribution capability nationwide and worldwide. We have both and they are both at work here and now.
As cross-border lending slows, developing and industrial countries alike will be forced to develop their indigenous capital markets. Citicorp's Investment Bank intends to fulfill a leadership role in this effort. This group established operations in ten additional countries in 1983 and we hope to be fully operational in 50 by the end of this decade. Once again, we are leveraging our unrivaled network. In none of these 50 countries will we be strangers-our Institutional Bank has been there for years. Although we would like to see the formal demise of the Glass-Steagall Act, our real money-making future lies in the potential for merger, barter, and arbitrage activities, which are not the investment banking products of the 1960s and 1970s, that may often be centered in countries many people might never consider as prime markets but are in countries we know well through long-established profitable operations.
I have given you a glimpse of the three world-class banks within Citicorp-the Investment Bank, the Individual Bank, the Institutional Bank-and how we see them evolving over the decade. We call these banks the three "I's." We have also two embryonic "I's" at Citicorp that fill out the complement of what we term the "I" to the fifth power strategy These two new businesses will become fully operational before the decade ends.
Our first new business is insurance. We have a very simplistic rationale for this business-insurance services account for fully 40% of all financial services today You cannot be a truly effective financial services enterprise without offering this product. Insurance is a natural adjunct to our consumer business, particularly when one considers the current outmoded and expensive agency method of distribution that permeates the industry. As many of you know, we are already a major factor in credit insurance and we intend to become a factor in the insurance business worldwide. Our overseas expansion is made possible by a recent Fed ruling enabling us to establish a fully competitive insurance operation in the United Kingdom. In the Fed release, which announced the approval to enter this business, the Board concluded: "The general activity of underwriting life insurance in the United Kingdom can be considered usual in connection with banking or other financial operations in the United Kingdom." This is an enormous breakthrough for us that has passed almost unnoticed but is of immense value for the future. It is Citicorp's stance that underwriting life insurance is consistent with the general activity of financial operations in the United States as well, particularly when you boil the insurance product down to its essence which is the judgment of risk and the time value of money.
The opposition to our entry into this business is well known as the insurance lobby reacts with a lemming instinct in order to protect its antiquated distribution network and to stifle competition, all to the consumer's disadvantage. A far more powerful force than Citicorp will change the rules and that force is the consumer. I recently told the insurance industry itself that "you can limit the public's convenience only as long as they are ignorant, only as long as they know of no alternative. Once the public knows and realizes that all that's standing between them and convenience is some government regulation, either the regulation will change or the government will." The money market funds killed Regulation-Q, by giving the consumer a choice and the regulations limiting the underwriting of insurance may well do the same for the insurance products.
Our present insurance activities dovetail neatly with our vast first and second mortgage base, which has been recently enhanced by the acquisitions of First Federal and New Biscayne. Within the existing regulations, we currently underwrite life and disability credit insurance and have $1.5 billion in insurance outstanding, the majority of which is against a $2.5 billion second mortgage portfolio. That is approximately a 30% penetration rate just for that product. Simply put, one-third of our second mortgage customers buy our credit life insurance without, I might add, "tie-in" pressure. We are also beefing up our credit-related first mortgage insurance products. In this area, however, due to a quirk in the federal regulations, we can earn only commissions rather than direct underwriting income. We already generate more than a billion dollars of first mortgages annually and intend to improve our performance overtime. Again, we will utilize the savings and loan network to build up our mortgage-generating capability and penetration rate. First Federal's penetration experience with credit-related first mortgage insurance is 20% while some of its healthier competitors enjoy up to a 60% penetration ratio. Our intermediate-term goal is 50%.
The Garn-St. Germain Bill outlaws new property and casualty insurance opportunities for bank holding companies. However, we had a homeowners property and casualty business operation through seventeen agencies across the United States and some of our programs have been grandfathered. Hence, we are now offering home-owners insurance out of several vehicles including agencies in Arizona, California, Missouri and, in the near future, Illinois. Using First Federal again as an example, the penetration rate has been at least 40% and we think we can raise it to 60%.
Operating under the current restrictions, we believe our consumer insurance business can contribute over $50 million to earnings over the next few years. As we penetrate our mortgage customers and offer creative insurance products covering the balances on our private-label credit cards, our existing potential is exciting. Over the decade, as the regulations change, this potential is explosive. We will engage in all forms of life underwriting, as well as offer the more conservative end of the property and casualty spectrum, such as insurance for houses and mobile homes, automobiles, recreational vehicles, and the very profitable title insurance. We basically intend to utilize pure actuarial techniques here similar to the way we price and score our credit business on the consumer side.
We will initially engage in a strategy of commercial insurance distribution, as opposed to underwriting, as the legal barriers fall in the United States. We will ultimately become all underwriter for target markets focusing on financial guarantees and the funds flow side of the business, which is growing at a 20% to 40% rate. When you think about it, a financial guarantee in the insurance business does everything a letter of credit does. The skills necessary are banking skills, not insurance skills. Finally our customers want an insurance company that can handle all of their global needs. They don't want to deal with twenty companies in twenty separate locations. Everyone does business in London but not everyone is active in Kuala Lumpur. Our customers want international capabilities and electronic capabilities because as in every other part of the financial services business, access to information electronically will be key.
It is logical to believe that commercial insurance and interstate banking in the United States may evolve in a similar fashion. We may not wake up one day with a law enacted that gives us the green light for our insurance activities but bit-by-bit the pieces will fall. Citicorp, once again, will take advantage of each opportunity to engage in this business.
What is the potential of this business? When we dreamed in the middle 70s of a consumer business, we did not project a growth from $4 billion in loans to $29 billion in 10 years but we did dream of a significant business. When we dream of insurance, a business we already know well, we haven't actually defined the limits. Based on what we now know it would not be unreasonable to believe that we could be generating hundreds of millions of dollars in earnings by the turn of this decade.
The fifth 'I,' information, while more difficult to articulate may be more important and more fundamental to our basic business. We want to be ill the information business simply because we are in the information business. Information about money has become almost as important as money itself. As bankers, we are very familiar with the time value of money. As investors, we must think of the time value of information. The central core of any decision making process is information. The fact that you know something relevant before, or more clearly than one of your competitors may lead you to act sooner, to your advantage. Herein lies the problem; determining what is relevant. Hence, the packaging of information and its distribution will be critical. If one is interested in the chemical industry it is not enough (or perhaps it's too much) to have access to the Encyclopedia Britannica chemical section; you must be able to segment and refine down to the smallest subset the particular chemical product you are seeking, the regulatory requirements surrounding its use, perhaps even climate conditions under which the product is impotent. Only then will the information you are distributing become useful.
We eventually intend to become a main competitor, as a preeminent distributor of financial data-base services worldwide. This is only possible with a truly global system, one through which information is distributed via electrons rather than the mail. In tandem, we will integrate banking, electronic publishing and telecommunication services and with that integration we intend to become a leader in value-added information distribution.
We started building this information network 10 years ago. It is coming into its own right now and will become a separate, stand-alone profit center in the '90s; a profit center, I might add, that could be as important as one of our three banks is today. I noted some eyebrows raised when I made that last statement but think about the parameters of this industry. The 1983 revenues of the worldwide information industry were $15 billion, 81%o of which were generated in the ITS. By 1987 most forecasters look for revenues to exceed $25 billion, again over 85% of which will be generated domestically. Assuming the present growth pattern is only maintained at 13%, revenues by 1994 would be $61 billion. Gross margins in this business averaged between 15% and 20%, and we wouldn't need much more than a 10% market share to become a major factor.
Our international franchise differentiates us in this business. Less than 20% of the companies producing primary information today distribute outside the United States. Hence, most of our competitors have no international network or marketing staff and little likelihood of being able to develop one over the near term. Our global presence in 95 countries gives us a tremendous advantage.
Let me repeat: we already are an information company. By year end, we will have over 12,000 Citibank electronic connections to our Institutional Bank customer base. Each of these customers generates over $100,000 in information industry revenues. Citicorp's revenues benefited by approximately $40 million from these connections in 1983. Our connections will rise to 20,000 in 1985 and our customer base should generate close to $150,000 of unit information industry revenues. These numbers are impressive, but we have only recently organized our- selves to be fully cognizant of this position. A major breakthrough for us came when we began to look at ourselves the way our information competitors look at themselves. The information industry is conceptually a passive industry while the banking industry has a transaction orientation. In other words, we move or we lend money that we get back-usually. We are being forced to change our mentality because in reality 80% of the credit, currency and financial-related information we offer is passive while only 20% is active. Once you succeed in orienting a customer toward utilizing your services passively over time he can be shifted into an active mode, then he can move cash balances, enter into swap agreements, order products through you and through your system.
So what kind of passive information will we be providing? How might our strategy develop? We are now and will be in the business of supplying information in the fastest possible way via the most conveniently packaged mechanism. Our control over the packaging of information will enable us to regulate the fundamental data sources behind our products.
What types of information products will we offer? Financial and credit information on line will continue to be of the highest priority. We have segmented our customers' needs into information categories: financial and economic news, currency markets, specific industry trends, specific country trends, financial regulations and credit data. Demand for this type of information is projected to explode over the decade with the demand for current economic news and currency movements especially buoyant.
Information needs vary geographically regionally and nationally Furthermore, within a company itself, the requirements of the various users differ from the chief financial officer down to the credit analyst or the country risk specialist. Citicorp will utilize a two-prong strategy for addressing these needs. First, through our vast commercial relationships we have established the proprietary customer base and we have a franchise with the decision makers within this base. We will complement this franchise with a network of joint ventures in order to focus on packaging, contain operating costs and reach downward within an organization so that our distribution network can be enhanced.
One collaboration with Reuters that was signed last year may serve as an example. Through our banking operations, we have direct access to chief financial officers of world-class companies. They are our customers. Reuters, on the other hand, distributes its news services primarily to a broader range of executives. We plan to offer a diversified package of services to the customers of both our companies, focusing not only on the chief financial officer but the portfolio and credit analyst as well. In fact, Leif Olsen's economic newsletter is already being distributed over Reuters. This is the tip of the iceberg.
As I said we have 12,000 electronic banking connections; Reuters has 20,000 terminals, 75% of which are in Europe. This could be a joint venture made in heaven.
Joint ventures aren't limited to Reuters. Other well-known information companies may also fit in with Citicorp's partnership strategy. Corporate decision makers will want information on a real-time basis. While we can currently deliver foreign exchange quotes in that fashion, we don't have a real-time price network in other valuable commodities: for example, crude oil, soy beans, or copper. We are currently contemplating a joint venture with another information company in order to offer a package concerning a vast array of commodities with our partner providing the price information while we provide the country risk and foreign exchange part of the deal. In essence, we believe our customers will engage in an information network at the corporate level. We will create this network and simply joint venture with any entity capable of expanding our customer base.
Our strategy is predominantly oriented towards software products. While the landmark Citishare decision does allow us to provide hardware as part of an information package, a machine doesn't provide the revenue stream inherent in a floppy disk. Every time one of our customers puts that floppy disk into his machine, he has the opportunity to buy something from us.
As I look out today I am very excited about the Citi of Tomorrow. The structure of "I" to the fifth power corporation may change, but the principles will remain. We have identified our businesses and we are working to place each of them in a class by themselves. These businesses will prosper as we further the five values that have formed the Citicorp culture for the past twenty years: integrity a passion for customer service, a truly decentralized operating network overlaid by a central accounting and control system, visible rewards for innovation and an empathy for our people.
Our five separate businesses in the '90s will be of equal importance, if not equal economic impact. Each segment will have taken banking to its second derivative and by leveraging off each other, may well bring new respectability to the term synergism. The insurance business will be enhanced by our consumer mortgage and merchant base while the Institutional Bank will be providing the assets for the Investment Bank to syndicate. The information business will permeate them all.
We have a plan for the '90s, the people to make it happen, and I am going to love watching from the side lines, when that plan comes together.