Small banks need to do a SWOT analysis - An interview with Arif Usmani, Managing Director & Citi Country Officer, Citibank N.A

In one of the most candid interviews, Usmani asserts why the consumer banking boom in Pakistan 'was a 'mistake' and how his bank has been moving away from the consumer business to focus more on its strength. Commenting on Pakistan's macroeconomic picture Usmani highlights the country's fiscal deficit woes, and how high interest rate would keep stoking the NPLs. The following are edited transcripts.
BR Research: Citibank has had such strong presence in Pakistan for the last 50 years, but it has been cutting down on its operations of late. Why is that so?
Arif Usmani: Businesses survive when they produce sustainable returns for their shareholders and those businesses which do not, need to be reviewed and fixed. Our consumer businesses since 2005 have been in the latter category.
Citi designated Pakistan as a consumer business country in 1992 and gradually became a steady contributor to our revenue in Pakistan - though it had its ups and downs during this period. Our credit card business which was a Citi first in Pakistan did quite well and was a market leader.
Post 2004, there was a change in strategy and new management that took over, decided to grow the business much faster than the capacity of the market. In my opinion that was a mistake. We simply pressed the accelerator too hard in 2005 and ultimately had an accident. We had to write-off and provide for over Rs5 billion in the consumer business over 2007 - 2009. Also, at that point the credit bureau was not established - it was like driving in pouring rain without wipers.
BRR: Was the change in strategy back in 2005 specific to Pakistan or was it a global strategy?
AU: It was specific to Pakistan and was driven by regional and local management. In my opinion, banking is a long term business which needs to be built carefully. Also, you need scale in the consumer business and compared to the large domestic banks, we are very small. That is why, we are gradually moving out of the consumer segment - we just don't have the competitive advantage to deliver value to our clients.
BRR: Why don't you target cities other than Karachi, Lahore and Islamabad more aggressively?
AU: We were in Faisalabad, Multan, Sialkot, Gujranwala and Hyderabad but our business model was not right. It was asset driven and given the poor quality of loans we sourced, the costs killed this small city initiative and we had to get out.
BRR: Do you have any plans to come back to the consumer business in the next four five years?
AU: Pakistan is a bankable consumer environment and we provide best-in-class consumer deposit services supplemented by our state-of-the art on-line platform. So we are in consumer but not in consumer lending.
Today with interest rates so high, it is difficult to design credit products for consumers. For example, a mortgage at commercial rates with Kibor at 14 percent would probably be priced at 20 percent per annum. That is difficult to service for the salaried segment. For example, if I give you a Rs5 million for mortgage on 20 percent p.a., you will have to pay at least Rs85,000 per month on interest and principal payments for 20 years. Basically, there is a very limited target market for consumer credit here.
BRR: What is Citi's strategy in Pakistan going forward?
AU: One needs to look at one's strengths and competitive advantages and make business plans accordingly. Our strength is our globality and the products that we can bring for our clients - there is no other bank in the world that is present in more than 100 countries.
Our basic business is providing banking services to the top tier companies operating in Pakistan particularly the various multinational clients who work with us in multiple countries. We do everything for the multinationals irrespective of the size because in some other countries, they are very customers of Citi. Other international banks are not as focused globally on this business and are trying to replicate Citi's processes but this will take time. We are cognizant of increasing competition and are ready to respond.
We are also focused on large local companies and in our target segments; there has not been a single corporate opportunity where we have not been involved. We are also, bankers-to-bankers i.e. our Financial Institutions business is strong and again our advantage comes from our global network. .
I know we get criticized for working only with the large local companies. However, the reason is that we cannot meet the needs of the smaller companies. It is not our strength given our limited local distribution/network. The "Jodia Bazar" trader does not need us, we add no value to his business but we support him indirectly by working with his local banker.
BRR: What is your strategy regarding CASA?
AU: Just like all banks, we also want to increase the share of CASA in our deposit mix and lower our costs. But being a tiny bank, we need to be creative about this. Our strategy is to go after operating accounts of our consumers rather than their savings accounts by supplementing our offering with technology.
We have two consumer operating account products - one is called Citi-at-Home and the other is called Citi-at-Work. We do not want the consumers to ever have to come to the bank. We encourage online transactions as technology is our key strength. We will even work with internet providers and facilitate internet connectivity if you don't have one. However, online banking is not the final frontier; the final frontier is mobile-phone banking. Citi-in-your-pocket is ultimately where we see this going.
BRR: What is your view on Pakistan's macroeconomic picture?
AU: One view is that Pakistan's economy is simple to analyse. Our economic fate depends on the price of energy. If oil prices are higher than $90 a barrel for a while, we will be hit hard. If oil prices come down, we have less pressure on our reserves. Basically, our poor energy policy has really hit us hard and has made our entire economy vulnerable in many ways. If we get this right, we will fix a lot of our problems.
In my view the budget deficit of Pakistan is not 5-6 percent, it is much higher! The ~5 percent is because we don't have the funds to build infrastructure e.g. dams, schools or roads. I think, our 'should-be' deficit is probably over 20 percent. I think this is an exercise we should work on - set ourselves some medium-term developmental goals (e.g. the millennium development goals) and make a theoretical budget against these. We will then see the real gap - it is a scary thought as it has significant social implications.
BRR: What is your view on the NPLs? Do you see them further accelerating?
AU: The high interest rate scenario is a problem for the corporate sector. One simple view is to consider the debt-to-sales ratio of the various sectors. This is a key parameter in this interest rate environment, if your debt/sales ratio is more than 50 percent, you have a problem - unless your EBIT margins are high enough to allow such leverage. NPLs are bound to rise in this environment.
BRR: What is your word on the future of small banks in Pakistan?
AU: They are in trouble and have to find an alternative business model. I guess they should do a SWOT analysis and devise a strategy to address their weaknesses. If you don't bring value to your customers, very soon you will not have customers. It is as simple as that.
One way out could be for the small banks to focus on the SME sector and develop solutions for such companies. This is not easy given the credit quality of our SMEs. Small banks have to create a niche in order to survive - an activity or a service that they can do best - otherwise I am afraid they will not be around for long.