Citigroup Gets Ahead by Going Abroad

An emphasis on the international consumer is Citigroup's secret weapon for growth.
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NEW YORK (TheStreet) -- Growth prospects for the big U.S. banks are dim these days, but after sifting through the second-quarter reports, Citigroup (C) - Get Report looks like the most convincing long-term growth story.

That's because the most convincing case for growth -- especially in the banking industry -- is outside the United States, and Citigroup clearly has the most diversified business model beyond U.S. borders. The strategy is

already paying off

as CFO John Gerspach noted Asia and Latin America accounted for less than 40% of revenue in the latest quarter, but contributed more than 50% of net income.

Bank Earnings Preview Bank Earnings: What to Expect in Q3

While

Goldman Sachs

(GS) - Get Report

,

Morgan Stanley

(MS) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

and

Bank of America

(JPM) - Get Report

all have strategies for international growth, only Citigroup is focused on the consumer outside the United States, which is one of the most exciting growth stories in the banking industry.

Citigroup is also the clear leader among these institutions in a business known as transaction services, according to Richard Bove, analyst at Rochdale Securities.

To oversimplify a bit, transaction services is merely the keeping track of money changing hands. Transaction services amounted to $2.5 billion of Citigroup's $30 billion in second-quarter revenue. Citigroup's chief competitors in this area are

State Street Corp.

(STT) - Get Report

,

Bank of New York Mellon

(BK) - Get Report

and JPMorgan, Bove says, but Citigroup does the most international business in transaction services, Bove says.

The only other big U.S. bank,

Wells Fargo

(WFC) - Get Report

has said it will not look to expand internationally.

"When you play Wells Fargo, you're playing the cycle: you're playing the move from no increase in loans, no increase in fees, and a large amount of loan losses to a small increase in loans and fees and a big reduction in loan losses," Bove says. "When those things come together and they happen, that's when you sell the stock." (Bove upgraded Wells Fargo to a "buy" rating on Thursday, arguing the improving U.S. economy was a big reason behind the call.

The big question mark with Citigroup is whether it can avoid the mishaps and infighting that have plagued it in the past. At the moment, JPMorgan appears to be the better managed institution. And Bove believes JPMorgan will buy banks outside the United States to position itself to target consumers in countries with bigger growth prospects.

JPMorgan Chairman and CEO James Dimon acknowledged losing investment banking market share outside the United States during the bank's second-quarter conference call last week, saying it was the inevitable result of competitors returning to health now that the worst of the crisis appears to be in the rear view mirror.

"I think that's a good thing. We're going to have to fight for it inch by inch, foot by foot, yard by yard, mile by mile," Dimon told analysts. He also said JPMorgan's transaction services business is focused on global expansion.

Bank of America is far more international than it was before its acquisition of Merrill Lynch at the start of 2009, but Bove says it has "dropped the ball," in terms of going after consumer business in emerging markets countries.

Bank of America recently sold stakes in Brazil's

Itau Unibanco

(ITUB) - Get Report

and the Mexican unit of Spain's

Banco Santander

(STD)

, and while it retains a significant international footprint in its investment banking business, comments by management during the second-quarter conference call did not suggest a major growth initiative in this area.

Banks may talk about growth in U.S. markets, but it's hard to see how that happens without a rebound in the U.S. economy. Even when that eventually happens, the upside can only go so far.

If you're thinking long-term, you've got to be thinking internationally, and whatever you may say about the bank's past missteps, the U.S. bank with the biggest potential for growth outside the U.S. is clearly Citigroup.

--

Written by Dan Freed in New York

.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.