Why is Citi closing branches in China?

Reversing its plan to double the number of branches in mainland China to 100 by the end of this year, Citi has shuttered several branches in Beijing, Dalian and Shenzhen’s Qianhai free-trade zone over the past month, amid what the bank says is a sharp decline in footfall as clients go online.

The Qianhai branch was closed last week only a year after it was opened.

Citi’s spokesman in Hong Kong acknowledged the China branch closures but declined to say how many branches the bank will close down this year. The Shenzhen bureau of the China Banking Regulatory Commission confirmed through a disclosure document that Citi has already handed back the Qianhai licences to its local office. The total number of branches Citi has after the latest closures is 46, spread across 13 cities.

The Citi branches are being shuttered at a time when foreign and domestic banks are reporting a record surge in non-performing loans in China as their traditionally comfortable margins come under pressure.

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In its 2014 report, Citi disclosed the amount of impaired loans in China increased 196 per cent from 2013, noting that it had discovered a suspected case of commodities finance fraud in its China business.

Citigroup on Friday reported that its quarterly profit plunged 27 per cent in the first quarter as the bank set aside money to cover losses on energy loans and costs related to shrinking some businesses rose. The No 4 US bank by assets said its net income fell to US$3.5 billion in the quarter.

“Citigroup has done by far the most restructuring. They’re still getting rid of businesses and exiting geographies,” said Jim Sinegal, a Morningstar senior equity analyst based in Chicago.

Sinegal earlier told US press that the cuts in businesses would make Citi a safer and more profitable bank as it allows them a respite from its high exposure to emerging markets, which have been sharply hit by China’s slowdown and the slump in oil prices.

Citi, however, offered a completely different explanation for shutting the branches.

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“The number of clients visiting branches has fallen dramatically,” said James Griffiths, Citi’s spokesman in Hong Kong. “Ninety-five per cent of the transactions in China happen outside our branches. People are banking on their smartphones. A smartphone is now the new branch, and we are adjusting to that new trend and investing heavily in our digital offering in China.

“It is important to have a branch network in China in the key cities but the nature of that network is changing given the rapid advance in digital banking. Our priority is to be China’s leading digital bank.

Overall, the China business is growing at double digits, making it one of Citi’s fastest growth markets globally and one where we will continue to invest to support our clients,” Griffiths said.

Shailesh Raikundia, a bank analyst at Haitong Securities in London, said he does not see a massive change in the competitive landscape for foreign banks after Citi’s cuts to its physical branch presence in China.

“Citi has got less than 2 per cent of assets in China, while there are a lot of costs in its product offering. There is a lack of scale. All overseas banks have very low profitability in China, which is also a reason why we think HSBC would struggle in its Pearl River Delta strategy. It should be a more long-term strategy,” he said.

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“To a certain extent, there is some logic in what they are saying. But Citi’s franchise still needs to be invested on. Your brick-and-mortar is going to run alongside digital. You need presence to build the branding. You need some presence before you can take advantage of the digital strategy.”

Citi’s Qianhai closure reverses ambitious targets laid out more than a year ago by Andrew Au, chief executive of Citi China. Au said at the time that Citi was confident of the Qianhai free-trade zone’s differentiated strategy vis-a-vis the Shanghai free-trade zone, and that the Qianhai branch would play a strategic connector role linking up Hong Kong and Shenzhen.

Hubert Tse, partner at Shanghai law firm Boss & Young, said Qianhai’s murky policies compared to Shanghai raised question marks over the free trade zone.

The Citi spokesman declined to comment on whether the Qianhai branch closure had anything to do with the policy environment at the free-trade zone.

With the branch closures, Citi will slip on the network ranking table for foreign banks in China, which is now led by HSBC. It is followed by Bank of East Asia and Singapore’s OCBC, and Standard Chartered.

In February, Citi exited from a 20 per cent stake in China Guangfa Bank through a US$3 billion sale to China Life Insurance. There is no record of applications or approvals for new business units on the China Banking Regulatory Commission’s database over the same period to show Citi is making new investments in China.

Griffiths said Citi’sQianhai services will be maintained for corporate customers.