Citi senses opportunity amid European crowds

“When you manage wealth, the first thing you need to look at is where wealth is growing the fastest,” says Luigi Pigorini, CEO of Citi Private Bank Emea and a veteran of 28 years with the firm.

This consideration is particularly relevant for the region Mr Pigorini oversees. “The Emea region is a bit of a microcosm of the world,” he explains. While the majority of Western Europe is going through a recession, as the eurozone crisis unravels, the oil and energy based economies, including the Middle East, Russia, and some countries in Africa such as Nigeria are growing extremely fast, having benefited from the surge in industrial commodity prices driven by Chinese demand.

“Wealth is growing the fastest in the oil and energy based economies and we are really pushing in some of these areas,” he says, warning however that if China slows down, some parts of the region, in particular in Africa, are also likely to slow down. “In Western Europe, we are essentially competing on market share; each bank is trying to grab market share from the others.”

Nevertheless, the more mature European economies do offer considerable growth potential, Mr Pigorini believes, as many established players are exiting the market or are refocusing on core regions or segments. Bank of America ML, for example, just sold its non-US wealth management business to Julius Baer.

“We are doing a lot of soul searching too and we are trying to come up with a model which allows us to be the best in class, but also allows us to increase our profitability.”

Citi has traditionally focused on the ultra-high net worth segment, as many of its clients are entrepreneurs that own companies and are clients of Citi corporate or investment bank, he explains. “Several wealthy families like to trade a lot and they like the institutional type of service Citi offers out of its capital markets division.”

Most of the revenues sourced from the large family offices in Western Europe come from trading. This activity generates very tiny margins but as volumes are large, it tends to be highly profitable.

Over the past two years, since Mr Pigorini has been at the helm of the private bank in Emea, there has been an increasing focus on gaining market share with the top families in Western Europe. “Our approach to family offices is beginning to bear fruit, but we have just scratched the surface,” he says, explaining that, although in parts of the region such as Middle East, the private bank has penetrated this segment well, it deals only with 1-2 per cent of family offices in Europe.

Citi started “relatively late” in this space, acknowledges Mr Pigorini, stating that the bank’s attempt to go onshore in the Western European markets during the 1990s and the earliest part of the last decade was not a profitable proposition. However, although many competitors have been targeting family offices for long time, “nobody has done it in an organised way,” he believes.

“Once you have decided you are committed to the space and you have selected the types of product solutions you want to offer, then it is not difficult to identify the top 30 or 40 family offices in the bigger countries,” he says. “Then in a much more disciplined manner you target all of them and you start building a relationship. In some cases it is virgin ground.”

Thanks to the type of product solutions Citi offers, especially around capital market solutions, he is confident of the bank’s success.

Riding the trends

In order to succeed, there are specific trends in the industry that a private bank must be able to ride, says Mr Pigorini. The first is the emergence of the global client. “Large, wealthy families in any country have complex needs; they are becoming global and need a global bank.”

Secondly, a private bank must be able to ride the wealth transfer trend. “Around $5tn to $6tn (€4tn to €5tn) of wealth will be transferred from one generation to the next within the next five to 10 years, so it is extremely important for a private banker to be able to capture the transfer of wealth,” he says.

Revenues of Citi private bank in Emea are believed to have grown by more than 20 per cent last year and around 10 per cent during this year’s first quarter versus the same period last year. Both Western Europe and emerging markets in Emea contribute to asset and revenue growth in equal measure and this balance is expected to continue.

“This may sound easy to do, but it is not,” says Mr Pigorini. “It is a constant battle to make sure you meet your customer needs; in private banking it is a constant focus on execution.”

Some key factors have driven the growth of the private bank in Emea. “First of all, we are trying to rebuild trust with clients and offer them solutions and not products.” Having sold its asset management division a decade ago, the bank looks for the best solutions on the market in open architecture fashion, he adds.

Also, Citi boasts “one of the lowest client/private banker ratios in the industry,” with each private banker serving only 30 clients, which ensures good customer service. “The private banker is a bit of an “orchestrator of the relationship”, he says, as each of them can rely on a whole host of product professionals.

The bank moved away from a formula-based remuneration at the beginning of 2010 and today private bankers’ compensation is “completely discretionary”, based on a variety of factors, including growth of share of wallet and portfolio performance but also compliance to regulation.

More and more today, a critical success factor for a private bank is its ability to craft the regulatory agenda with the regulator, he says. “Regulators look for best practices which they impose on the rest of the industry. If you are ahead, you have a competitive advantage.”

Looking ahead

In offshore private banking, when wealth is legal and declared, banks have to be highly focused on the segment of the market they want to serve, otherwise the business will become unprofitable, he states.

With the changes in private banking secrecy laws, the banks that manage undeclared, offshore wealth will face monumental costs. Some of the smaller Swiss private banks will be forced to exit the market, believes Mr Pigorini, as the cost of administering bilateral tax treaties for undeclared moneys escalates. And onshore private banking will be profitable only for those Swiss banks that have very long-term horizons, as in the first few years of operations they may rack up huge losses.

Looking ahead to the next 10 years, he predicts undeclared wealth will disappear.

Also, he says, real wealth concentrates in the hands of very few families, but so far governments have taxed only common people, professionals or executives. “If governments want to address their budget deficits, they will find a way to act in unison to be able to tax some of this declared wealth, which at the moment perhaps is not getting taxed, because it’s structured in a very fiscally efficient way.”

An increasingly level playing field and changes in regulation are driving wealthy clients to bank with those institutions that are considered very transparent. “Clients believe that if they make their suppliers, friends or governments aware they are banking with a specific institution, they will know they will have passed all their compliance tests too. That’s extremely important.”

Another notable trend, which may not only be due to the eurozone crisis, is that many investors have started feeling uncomfortable holding their accounts in domestic banks, notes Mr Pigorini. “Wealthy and sophisticated individuals would rather bank with banks that have booking capabilities in London, because of its transparency. In general they know they will get the best service and will access the best professionals and the best ideas. Overall, clients believe London is more transparent that Switzerland, Liechtenstein or Luxembourg.”

A lot of banks will “retrench to their home turf” and therefore opportunities will arise for institutions that have had a presence in some of these countries for many years, such as Citi.

“We have put the firm’s solidity beyond question four years ago, when we went through the recapitalisation of Citi,” says Mr Pigorini. “A lot of the banks are now going through the same process. I don’t envy them, because it was very painful.”

CV

Luigi Pigorini

1985 Relationship Manager in shipping finance department of Citibank’s Global Relationship Bank, and then covered variety of roles in fixed income, risk management, and corporate finance

1996 managed Citi’s investment bank in Italy

1999 joined Private Bank as head for Italy, Spain and Portugal

2004 appointed group executive and global head for technology, media and telecom sector in Citi’s Global Corporate Bank

2009 assumed global responsibilities for lending team of Citi Private Bank

2010 became CEO for Europe, Middle East and Africa of Citi Private Bank