INSIGHT-Citigroup's crown jewel is losing some luster

By David Henry

NEW YORK, July 2 (Reuters) - Citigroup may be losing groundin a business that is central to its recovery plan, as rivalscatch on to how much money the unit makes.

The bank's transaction services unit, which moves $3trillion around the world daily for companies, banks andnational governments, received scant attention from competitorsand investors for years. But it has done wonders for Citigroup:About a third of its profits since the financial crisis havecome from the unit. Best of all, the business used littlecapital at a time when the bank - which required three rescuesduring the credit crunch - had little to spare.

With regulators pressing banks globally to find more capitalto support most traditional lending and trading businesses,transaction services suddenly look more interesting tocompetitors.

JPMorgan Chase & Co and Bank of America Corp have made transaction services a priority in the past two years,and have hired key senior executives from Citigroup. Regionalbanks such as Singapore-based DBS Group Holdings andAustralia and New Zealand Banking Group have ramped uptheir efforts, too.

There are early signs that rivals are eroding some of Citi'sprofits. In the treasury and trade part of the business, whichis most directly comparable to other big banks' business lines,Citigroup's revenue fell 5 percent in the first quarter from thesame quarter last year, while Bank of America's dropped 3percent and JPMorgan's slipped a fraction of a percent.Competitors don't disclose profit for their units, butCitigroup's pretax income for transaction services fell 8percent in the first quarter, one of the biggest drops since thefinancial crisis.

The percentage of large corporations using Citigroup forcash management slipped in Europe and in the United States froma year earlier, according to recent surveys by consulting firmGreenwich Associates. And in the United States, prices for manytransaction services are dropping, reflecting competitivepressure.

"Other participants in the market have woken up to thepotential of this business," said Citigroup's Naveed Sultan,global head of treasury and trade solutions, which is thebiggest part of Citigroup's transaction services segment.

Transaction services include a wide array of products, butthe business boils down to collecting deposits and transferringmoney, processing transactions and providing trade financing andother forms of secured lending. Microsoft Corp, forexample, uses Citigroup to help collect excess cash from morethan 350 subsidiaries in 100 countries and put the money intocentral treasury accounts. The U.S. government uses Citigroup tohelp process passport applications and remit application fees.

Even if the bank is finding itself in a more crowded field,the unit is still performing well. In the first quarter, whenthe bank's revenue fell, it still earned a 73 percent return onits capital by one measure, when most banks are struggling toearn 15 percent returns. And in Asia, the bank gained ground inthe cash business, according to Greenwich.

The bank's business is bigger than its rivals'. Its annualrevenue from treasury and trade services reached $8 billion lastyear, while JPMorgan's most comparable businesses booked $6.7billion and Bank of America reported $6.2 billion.

Citigroup's executives said they think their franchise willbe hard to catch up with. The technology and regulatory effortrequired to operate in so many countries is tough for rivals tobuild, Sultan said. Contracts tend to last for a few years, andcustomers are often reluctant to change systems so they can usea new bank, he added.

JPMorgan and Bank of America do not have internationalnetworks as big as Citi's. And while Citigroup has been pullingout of consumer businesses in countries such as Turkey, Pakistanand Paraguay, it is being careful not to cut back where it wouldlose valuable corporate business.

Investors are hopeful that Sultan is right, and will watchCitigroup's transaction services unit closely when the companyreports second-quarter results on July 15.

"It is a big business for them, and it is an importantbusiness for them," said Chris Bingaman, who owns Citigroupshares as a portfolio manager at Diamond Hill Investments, whichhas $10 billion under management.

RIVALS READY FOR LONG BATTLE

Competitors say they are prepared for a long fight.

Bank of America CEO Brian Moynihan said at an investorconference in December that the business "is an important growtharea for us - not capital-intensive and produces good profits."

Mike Cavanagh, co-CEO of JPMorgan's corporate and investmentbank, acknowledged that winning new clients can be a multiyearprocess. But he said the prospects for profits and closer tieswith corporate clients as the bank expands around the world makecontinued investments worthwhile.

"We're following our clients and willing to take the time tobuild this business," he said.

In Citigroup's estimation, there's another benefit totransaction services: They can bring in business to other partsof the bank. Companies that use Citigroup's treasury managementare more likely to use the bank for securities underwriting andmerger advisory deals, the way a consumer with a Citi checkingaccount turns to the bank for a mortgage.

Jamie Forese, co-president at Citigroup who oversees theunit along with corporate and investment banking businesses,said, "Our transaction services businesses are the backbone ofour global network and are central to Citi's overall strategy."

A BIGGER BAZAAR

With competition heating up, many banks are discountingservices in the U.S. ranging from balance reporting to acceptingcurrency deposits at a branch, according to data in the mostrecent Blue Book of Bank Prices from industry research firmPhoenix-Hecht.

Some items have been discounted more than 50 percent, butconsultants who have worked on the deals say the privatecontracts have so many unique terms that is impossible to put afirm number on how much prices have come down.

For the largest corporations that Citigroup focuses on,banks are increasingly willing to cut prices to hold or winbusiness, said Daniel Blumen, a partner at Treasury AllianceGroup who consults companies contracting for treasury services.

"If you are a large corporation and you are shopping smart,you are seeing better deals from the banks," Blumen said.

Customers are taking notice of the wider array of banks inthe sector.

The World Bank, for example, counts on Citigroup to providetrade finance - a form of secured lending - to small and midsizecompanies in emerging markets. But it also wants other bigglobal banks and regional and local banks to do more in theprogram, which will help the group meet its goal of bringingmore credit to emerging markets, said Bonnie Galat, head ofbusiness development for IFC Trade and Supply Chain Solutions, apart of the World Bank.

Galat has found that in the last year a number of banks havebecome more interested in working with her program. BNP Paribas, Societe Generale and a Bank of Tokyo unitof Mitsubishi UFJ Financial Group Inc have made dealswith her agency.

"Citi is a great partner, but we would like to work withmore banks," she said. (Reporting by David Henry, additional reporting by Saeed Hasanin Singapore. Editing by Dan Wilchins, Peter Henderson andDouglas Royalty)