At its somewhat underwhelming Investor Day, Citigroup (C 1.81%) offered a rare glimpse into its strong-performing treasury and trade solutions (TTS) unit that operates within the bank's institutional clients group. CEO Jane Fraser has long said that TTS is the "crown jewel" of Citigroup.
Along with the bank's upcoming investments into its regulatory infrastructure and modernization of its technology and data systems, Citigroup also plans to continue to invest in TTS. It's clear that TTS will play a critical role if Citigroup is to bounce back from years of poor performance and succeed. Here's why.
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Why TTS is so valuable
As Citigroup's TTS head Shahmir Khaliq said at Investor Day, TTS is the reason Citigroup "can call ourselves the world's most global bank." TTS helps businesses that are global or want to go global with payments, liquidity management, and trade and working capital. The unit's main clients are large corporations, although TTS does also have many financial institutions and commercial clients as well. TTS clients come from all over the world and 75% of revenue in the unit comes from large institutional clients that use TTS services in at least five different countries.
TTS connects to 270 different clearing systems and has built the largest proprietary cross-currency payment transfer system supporting 140 different currencies, playing a big role in helping clients pay their suppliers and employees and collect money from their customers. Other capabilities in TTS include virtual accounts, notional pooling, and cash concentration, which can help companies properly distribute their various cash balances in multiple currencies, and lending as well. Khaliq said some real-world examples include a large energy company using TTS to manage its digital consumer collections and a large bank using TTS to enable its retail customers to make digital cross-border payments.
Google also uses TTS to ensure its payments around the world are correctly flowing at the right time and in the right currency. Citigroup's connectivity to the world's clearing systems helps the tech giant get its products and information out across the world, and Citigroup also played a key role in helping Alphabet's Google establish its global liquidity and in-house banking architecture a few years ago.
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Key Data Points
Citigroup is the market leader in this space when it comes to serving large institutional clients and therefore has put up some pretty impressive returns in the business. TTS is the source of about half of Citigroup's total deposits and generated $9.2 billion of revenue in 2021. Fees have also been growing in recent years, and rising interest rates should also benefit the unit. Between 2017 and 2021, TTS has generated an average return on tangible common equity (ROTCE) of 22%, which is shareholder capital after subtracting goodwill, intangible assets, and preferred equity.
At Investor Day, management said it only expects the full bank to achieve between an 11% and 12% ROTCE over the next three to five years, so you can see how much stronger of a performer TTS really is for the bank.
How TTS is critical to Citigroup's future
Citigroup has established an extremely attractive moat with its TTS business. Stuart Riley, head of technology in Citigroup's Institutional Clients Group, said that what sets Citigroup apart is the fact that it has boots on the ground in so many of the countries it operates in. It has spent decades building relationships with different regulators and central banks. "It would be very difficult for others to replicate," he said.
Now Citigroup wants to create more holistic relationships with the large institutional clients that begin their relationship with Citigroup through TTS. CFO Mark Mason said there are "natural linkages" between its businesses, like equity markets, securities services, and banking that Citigroup can take advantage of by becoming more "client-centric."
Furthermore, Citigroup is continuing to invest in TTS. Khaliq said the bank is preparing to roll out a next-generation platform within the next 18 to 24 months. While Citigroup already has around 10% market share in this space for large institutional clients, the bank expects to be able to increase this market share by 0.50% to 0.75% in the medium term. In particular, Citigroup sees more opportunities to better serve e-commerce and fintech companies. In 2021, TTS generated roughly $1 billion of revenue from servicing 450 of the largest global e-commerce and fintech companies. The bank has created a new global e-commerce solutions coverage team and also sees opportunities in banking as a service for fintech companies.
Success in TTS is critical
Citigroup's high-performing TTS division is clearly a big reason investors are still interested in Citigroup after years of lagging performance. Citigroup must not lose market share in this space. It must expand its market share and also use the moat it has built to bring clients into the bank's ecosystem and then further expand those relationships to other divisions of the bank. There's not a lot of room for error in TTS, but if executed well, success in this division could play a key role in helping Citigroup rebound.
