Good afternoon. It's a pleasure to be here with you all, and an honor to be asked to speak at your conference. I know you must have some questions and I am looking forward to answering them.
But first I want to say a few words about the environment for banks. Most would agree that the financial crisis is now behind us. Yet many of the structural problems that created the crisis are still with usparticularly excessive leverage. In the short-term, we can expect a recovery, but it is likely to be slow and uneven. Impediments to growth in the developed world include continued weakness in housing markets, public and private over-leverage, and stubbornly high unemployment. In addition, many of the emerging markets are operating at or near capacity and are therefore at risk of overheatingand must deal with the possible consequences of inflation.
One consequence of these issues is that "the macro will dominate the micro" for bank earnings over the medium term. On a longer-term basis, most banks will be searching to find growth opportunities and working to develop new business models that serve both clients and shareholders in the new regulatory environment. That is what I want to talk about today from the point of view of one bank.
At Citi we are doing three things. First, we are getting back to the basics of bankingtaking deposits, making loans, focusing on clients, and supporting the real economy. And in response we have sold many businesses and assets. Second, we are adjusting our business model in light of the new regulatory environment. And third, we are aligning our businesses with the new drivers of global growthparticularly the rise of the emerging market consumer and the explosion in trade and capital flows within emerging markets. We intend to help our clients navigate this new economic environment, and in the process drive our own growth.
On the first point: the role of banks is to support the real economy. We all know what that means. Yet for some years banks lost sight of this basic fact. We tried to do too much and lost focus on clients. Getting back to basics is less about economics and more about behavior.
It's no secret that the financial services industry lost many people's trust as a result of the crisis. Marketing efforts, branding initiatives, or spending millions on ad campaigns alone will not regain that trust. We believe the way to win back trust is by consistently practicing responsible financethe unifying idea upon which we have organized our bank in the wake of the crisis. And by practicing responsible finance we serve the real economy.
At Citi, before we enter into a transaction, we ask ourselves three questions:
1. Is it in the best interest of our client?
2. Does it create economic value?
3. And is it systemically responsible?
The answer to all three of these questions must be "yes."
To support responsible finance, we have organized our bank around serving our clients, sold businesses that are not core to the services we provide, totally overhauled our risk structure and process, and taken steps to ensure that our customers are matched with appropriate products.
On the second point, among the goals of financial regulation are to increase the safety of the financial system, to make any future crises less severe, and to put in place resolution mechanisms to deal with failing institutions. We can all agree that these are the right goals. We should also agree that achieving these goals requires casting a wide net to include the shadow banking system, creating a global level playing field for all institutions, and improving transparencyparticularly around consumer banking.
Bank business models are still evolving in response to new regulationprimarily because the regulation itself is still evolving. The work on reform is not done. Rules and regulations remain to be written and finalized at the national and international levels. In particular, regulators are working to properly calibrate capital and liquidity requirements that strike the appropriate balance between stability and economic growth. And the ultimate test of good regulation is to minimize "regulatory arbitrage" by those entities or jurisdictions that fall outside the net. That is no easy feat.
But what we know so far will definitely change business models. The CARD Act and Dodd-Frank, with their rules that limit proprietary trading, derivatives, and interchange and overdraft fees, will change banking. On the institutional side, proprietary trading-based profits will be impacted. On the retail side, margins will tighten, requiring banks to reevaluate the feasibility of extensive branch networks, think hard about who they serve, and devise new fee and cost structures. One inadvertent impact could be an increase in people in this country who lack access to financial services.
Our "back to basics" strategy addresses these regulations. Although Citi maintains a smaller U.S. retail and debit interchange business and charged fewer fees than other banks, we consider the reforms to be a call to action to find alternative approaches to serving all consumers.
One of Citi's key priorities is digital banking. With the digital divide closing fast, it has never been easieror cheaperto provide access to banking services. We are bringing to the U.S. the approaches Citi has used in Asia and Latin America in mobile payments and digital banking. It's an important way to appeal to both the affluent and those entering the banking system for the first time. Upper income consumerswith their plethora of digital devicesdemand and expect ubiquitous, always-on connectivity. At the other end of the scale, there are 2.5 billion unbanked people in the world. One billion of them have cell phonesa technology that grows both more affordable and more feature-laden every year. Reaching those unbanked will be easier and cheaper through digital technology. We can reduce the cost of serving our customers and increase customer satisfaction at the same timeusing the same tools.
I want to spend the balance of my time on the third topichow banks, and especially Citi, can grow and help clients navigate the new economic environment, especially in the emerging markets, and in the process drive our own growth and earnings.
It's clear that the growth model of the last decade cannot be the model for the future. Growth was predicated on excessive borrowing and consumptionand one result was the financial crisis. Its legacies include high deficits and unemployment. New growth areas are yet to be defined but we know we can count on two: the growth of the emerging market consumer and increasing globalization, particularly through growing global trade and capital flows within emerging markets.
For banks and companies to grow and compete in this world, they need to be able to do three things well. First, they must be capable of serving clients and selling their products around the world. Second, they must be positioned to participate in the growing intra-EM trade and capital flows. Third, they must be active in the restructuring of the developed world's economies.
The first point is critical because of the rise of the emerging market consumer and that new consumer bloc's power to drive global growth. Emerging markets' share of global trade has risen from 21% in 1995 to 35% in 2009and today is rising slightly faster than their share of global GDP. According to one estimate, by 2020, three-quarters of incremental consumer spending will come from emerging markets. If that estimate is correct, then by that year Asia will overtake North America as the world's largest consumer bloc.
Essentially, for developed economies and their companies to succeed, what needs to happen is a role reversal. For the last few decades, consumer demand in the developed world helped the emerging markets to build their exports and their economies. In the process, the developed world ceded much of its manufacturing base to emerging economies. Today we need to flip roles. The developed economies have a huge opportunity to appeal to the burgeoning emerging market consumer bloc, in the process boosting their own economies. But to do that, they have to revive their export sectors.
Conventional wisdom says that manufacturing is in the developed world's past. The future is information and services. No doubt those latter two will continue to play strong roles in rich countries' economies and exports, particularly if intellectual property rights are respected in the emerging markets. And despite all you've heard about the decline of manufacturing in the West, the world's #1 manufacturing economy remains ... the United States. And it's not even close.
Even more promising, other countries have demonstrated that it's possibleeven with high labor costs and expensive productsto succeed in selling briskly to customers outside the developed world.
Germany is the best example. In the mid-1990s, Germany's economic performance was starting to lag. Growth was sluggish, and the scale of the structural reforms needed to deal with the implications of reunification was significant. Yet by the early years of the new century, the German economy had reestablished itself. Labor productivity rose and costs fell, helping German exports to rise, bucking the trend of many developed economies. This was not a happy accident but the product of designgood policy and careful planning. Germany shows that, even in a high-wage, high cost economy, building exports is not only possibleit's profitable.
Government and business leaders within emerging markets understand clearly the implications of a rising consumer bloc in their backyardsand they are also working to harness it.
That brings me to the second necessary element of success: the ability to harness the rise of trade and capital flows within emerging markets. Intra-EM trade has risen sharplyfrom 6% of world trade in 1995 to 13% in 2009. Their trade with advanced economies is still larger than their trade with each other, but the gap is closing.
Moreover, the advanced economies' share of global trade is now 65%, down from 79% in 1995. Brazil, South Korea and China help to illustrate the trend. Brazil's trade with Asia represented just 6% of its total in 1995. In 2009 it was 18%a tripling in less than 15 years. In 1995, South Korea's trade with China was 9% of that country's total. By 2009 it had more than doubled to 20%.
That's just what has already happened. More is on the way. Just this past December, the Indian and Chinese governments agreed to double trade between the two powerhouses to $100 billion by 2015. FedEx announced just a few weeks ago the establishment of direct service from India to China.
To thrive in the coming years, Western companies need to figure out how to capture an increasing share of intra-EM trade. Concentrating on East-West flows won't be enough anymore. The successful multinationals of the future will intermediate these flows. Given our deep roots and long histories in the emerging markets, no bank is better positioned to do this than Citi.
The thirdand finalelement is more of an aspiration than a genuine trend. The advanced economies will need to be restructured in fundamental ways. The most important will be to encourage the rise of a renewed and strengthened consumer blocnot fueled by leveragein the developed world.
The way to achieve this is through closer cooperation between Europe and the US and between other developed OECD economies such as Japan, Australia and South Korea. Together, all these countries form a bloc of nearly a billion consumers, rivaling the huge, billion-plus consumer blocs in India and China.
Specifically, we need to make cross-border capital flows easier and stimulate domestic demandthrough, for instance, deregulation of Eurozone product and labor markets. And while tariff barriers between the E.U. and the U.S. are relatively low, regulatory divergence remains a real threat to trans-Atlantic trade. Whether in trade policy or in financial market regulation, divergence of rules leads to segmentation of markets, which raises both uncertainty and costs. For example, the current regulatory divergence between E.U. and U.S. standards for the cosmetics sector equate to a de facto tariff of around 33 percent.
The financial sector's role in this new world should be obvious: to support the real economy ... to enable growth ... to finance needed infrastructure and other projects ... to ensure smooth, rapid and efficient capital flows ... to reach underserved populations ... and to do all this responsibly, in ways that support the stability of the system and the global economy.
As the emerging market consumer bloc grows in size and purchasing power, people in these countries will need more and deeper access to financial services. Local banks will be able to meet much, but not all, of this rising demand.
With Citi's physical presence in more than 100 countries and ability to serve clients in some 60 more, helping our clients capture these seismic changes in the world economy is a core part of our growth strategy. More than half of Citicorp's revenues and earnings come from the emerging markets. Our businesses such as cash management, custody, capital markets and retail banking are uniquely positioned. In many of these countries we have been on the ground for more than a century. And helping companies globalize and capture trade is not new to us. We've been doing that since 1812for 199 years.
In sum, our role will be to do what we have always doneonly more so ... and more safely ... and better.