An International Banking Showdown

 | Feb 13, 2014 | 6:30 PM EST  | Comments
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HSBC

The financial crisis of 2008 resulted in the consolidation of the U.S. based banks that had global operations, called money centers, from about 12 to the current four: JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C). Each of those remaining has focused their businesses in different directions.

Wells Fargo and Bank of America remained dedicated to the domestic U.S. market, while JPMorgan and Citigroup were more internationally focused. I discussed in May in my column, This Indicator Shows Trouble for Big Banks, which also references earlier columns on the subject.

The short version of the story is that prior to the 2008 crisis, there were two dominant international banks, Citigroup and HSBC (HSBC). HSBC is London based, so I won't discuss it here. Of the remaining three U.S. money centers, Bank of America, Wells Fargo and JPMorgan were all were U.S. focused. JPMorgan, Bank of America and Citigroup all had problematic U.S. banks assets of their own and absorbed even more domestic issues when they absorbed the other problematic banks and investment banks during the consolidation.

Wells Fargo was the only one of the four to have not had much in the way of problem loans and had been lucky enough to absorb Wachovia's assets, which were also largely portfolio based. This allowed it to deal with its issues internally.

Although Wells Fargo had absorbed great Charlotte, N.C.-based commercial banking operations and people from Wachovia (which had previously absorbed First Union), its management team was not and is not competent to deploy or manage them. That's an issue I'll write about in another column because it is going to cause problems for Wells Fargo in the future.

Wells Fargo, however, had an open avenue to extend its reach into the only market it did understand: residential mortgages. Its primary competitor in that space, Bank of America, has spent the last five years focused on legacy issues and not new business.

Because of the domestic legacy issues and regulatory uncertainty concerning them and new domestic business, JPMorgan Chase set its focus on extending its international reach. That opening was available to JPMorgan because Citibank, having essentially been nationalized by the U.S. government in the bailouts, was concentrating exclusively on cleaning its domestic U.S. balance sheet and less focused on maintaining its international business.

Wells Fargo has about 8% of its deposits in foreign offices, and that's only because of what it had inherited from Wachovia. Bank of America has about 7%. Citibank, however, has a majority of its private sector deposit assets in foreign offices; currently at about half of all of their deposits but down from about the two thirds level just three years ago. JPMorgan has about one-quarter of its private sector deposits in foreign offices, although this is also down from about one-third just three years ago.

The competition for the U.S. based private sector international banking business is clearly between JPMorgan and Citigroup though. Where the competition gets interesting right now is in the business for deposits from foreign governments.

For the past three years, until the fourth quarter of 2013, Citi's foreign government deposits have waffled between $500 million and $1 billion dollars, which is an almost insignificant figure as it is less than one-tenth of 1% of its total deposits.

In the fourth quarter of 2013, Citi's holdings of foreign government deposits increased to about $6 billion from the $880 million it had in the third quarter; this is about a 700% increase in one quarter.

The reason for the sudden interest in attracting deposits from foreign governments, including central banks, appears to be that JPMorgan has been aggressively moving into this space for the past year. For most of 2011 and 2012, JPMorgan's foreign government deposits held close to around $5 billion. So, Citi was already losing ground in this space to JPMorgan. But between the beginning of 2013 and the end, JPMorgan tripled its foreign government deposits to just shy of $15 billion. From the first through the fourth quarter, it successively went from $5 billion to $7 billion to $10 billion to $14.5 billion.

JPMorgan is still way behind Citi on foreign income, which gets about 30% of interest income from loans made outside of the U.S.; at JPMorgan, it's only about 4.5%. This does not include foreign debt securities and bonds though, just loans made and serviced directly by the banks.

JPMorgan has been backing away from the foreign bond market over the past year with those assets declining from each quarter from about $117 billion in the first quarter of 2013 to $91 billion at the end of the fourth quarter. But Citi has been doing the opposite – its foreign debt holdings increased from about $74 billion to $84 billion over the same period.

In sum, although JPMorgan has increased its participation in the international banking business since the crisis of 2008, Citigroup is now beginning to push back in an attempt to reassert its  historical dominance in the role of U.S.-based international banker.

Now that both JPMorgan and Citigroup have resolved most of their domestic U.S. legacy issues, it will be interesting to see how the competition for international business shapes up in the future.

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