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NEW YORK (Reuters) - Citigroup may be losing ground in a business that is central to its recovery plan, as rivals catch on to how much money the unit makes.
The bank's transaction services unit, which moves $3 trillion around the world daily for companies, banks and national governments, received scant attention from competitors and investors for years. But it has done wonders for Citigroup: About a third of its profits since the financial crisis have come from the unit. Best of all, the business used little capital at a time when the bank - which required three rescues during the credit crunch - had little to spare.
With regulators pressing banks globally to find more capital to support most traditional lending and trading businesses, transaction services suddenly look more interesting to competitors.
JPMorgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N) have made transaction services a priority in the past two years, and have hired key senior executives from Citigroup. Regional banks such as Singapore-based DBS Group Holdings (DBSM.SI) and Australia and New Zealand Banking Group (ANZ.AX) have ramped up their efforts, too.
There are early signs that rivals are eroding some of Citi's profits. In the treasury and trade part of the business, which is most directly comparable to other big banks' business lines, Citigroup's revenue fell 5 percent in the first quarter from the same quarter last year, while Bank of America's dropped 3 percent and JPMorgan's slipped a fraction of a percent. Competitors don't disclose profit for their units, but Citigroup's pretax income for transaction services fell 8 percent in the first quarter, one of the biggest drops since the financial crisis.
The percentage of large corporations using Citigroup for cash management slipped in Europe and in the United States from a year earlier, according to recent surveys by consulting firm Greenwich Associates. And in the United States, prices for many transaction services are dropping, reflecting competitive pressure.
"Other participants in the market have woken up to the potential of this business," said Citigroup's Naveed Sultan, global head of treasury and trade solutions, which is the biggest part of Citigroup's transaction services segment.
Transaction services include a wide array of products, but the business boils down to collecting deposits and transferring money, processing transactions and providing trade financing and other forms of secured lending. Microsoft Corp (MSFT.O), for example, uses Citigroup to help collect excess cash from more than 350 subsidiaries in 100 countries and put the money into central treasury accounts. The U.S. government uses Citigroup to help 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, when the bank's revenue fell, it still earned a 73 percent return on its capital by one measure, when most banks are struggling to earn 15 percent returns. And in Asia, the bank gained ground in the cash business, according to Greenwich.
The bank's business is bigger than its rivals'. Its annual revenue from treasury and trade services reached $8 billion last year, while JPMorgan's most comparable businesses booked $6.7 billion and Bank of America reported $6.2 billion.
Citigroup's executives said they think their franchise will be hard to catch up with. The technology and regulatory effort required to operate in so many countries is tough for rivals to build, Sultan said. Contracts tend to last for a few years, and customers are often reluctant to change systems so they can use a new bank, he added.
JPMorgan and Bank of America do not have international networks as big as Citi's. And while Citigroup has been pulling out of consumer businesses in countries such as Turkey, Pakistan and Paraguay, it is being careful not to cut back where it would lose valuable corporate business.
Investors are hopeful that Sultan is right, and will watch Citigroup's transaction services unit closely when the company reports second-quarter results on July 15.
"It is a big business for them, and it is an important business for them," said Chris Bingaman, who owns Citigroup shares as a portfolio manager at Diamond Hill Investments, which has $10 billion under management.
Competitors say they are prepared for a long fight.
Bank of America CEO Brian Moynihan said at an investor conference in December that the business "is an important growth area for us — not capital-intensive and produces good profits."
Mike Cavanagh, co-CEO of JPMorgan's corporate and investment bank, acknowledged that winning new clients can be a multiyear process. But he said the prospects for profits and closer ties with corporate clients as the bank expands around the world make continued investments worthwhile.
"We're following our clients and willing to take the time to build this business," he said.
In Citigroup's estimation, there's another benefit to transaction services: They can bring in business to other parts of the bank. Companies that use Citigroup's treasury management are more likely to use the bank for securities underwriting and merger advisory deals, the way a consumer with a Citi checking account turns to the bank for a mortgage.
Jamie Forese, co-president at Citigroup who oversees the unit along with corporate and investment banking businesses, said, "Our transaction services businesses are the backbone of our global network and are central to Citi's overall strategy."
With competition heating up, many banks are discounting services in the U.S. ranging from balance reporting to accepting currency deposits at a branch, according to data in the most recent Blue Book of Bank Prices from industry research firm Phoenix-Hecht.
Some items have been discounted more than 50 percent, but consultants who have worked on the deals say the private contracts have so many unique terms that is impossible to put a firm 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 win business, said Daniel Blumen, a partner at Treasury Alliance Group 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 in the sector.
The World Bank, for example, counts on Citigroup to provide trade finance - a form of secured lending - to small and midsize companies in emerging markets. But it also wants other big global banks and regional and local banks to do more in the program, which will help the group meet its goal of bringing more credit to emerging markets, said Bonnie Galat, head of business development for IFC Trade and Supply Chain Solutions, a part of the World Bank.
Galat has found that in the last year a number of banks have become more interested in working with her program. BNP Paribas (BNPP.PA), Societe Generale (SOGN.PA) and a Bank of Tokyo unit of Mitsubishi UFJ Financial Group Inc (8306.T) have made deals with her agency.
"Citi is a great partner, but we would like to work with more banks," she said.
Reporting by David Henry, additional reporting by Saeed Hasan in Singapore. Editing by Dan Wilchins, Peter Henderson and Douglas Royalty