Global Financial Institutions Are in Retreat

At WSJ, "When Bigger Isn’t Better: Banks Retreat From Global Ambitions":

Eighteen years ago, Sanford Weill declared the dawn of a new era in banking.

Mr. Weill, then chief executive of Travelers Group Inc., had agreed to merge with John Reed’s Citicorp, forging what would become the first financial supermarket to the world.

“Our company will be so diversified and in so many different areas that we will be able to withstand” the inevitable downturns to come, Mr. Weill said in April 1998.

Citigroup Inc., as it was christened, is still intact. But confidence in the model Messrs. Weill and Reed espoused is in decline.

After nearly two decades of breakneck expansion into ever more countries and ever more businesses, global banks are in retreat. For most of them, it is no longer a viable strategy to try to be all things to all customers around the world.

A McKinsey & Co. review of 10 global banks, conducted for The Wall Street Journal, found that those lenders were present on average in 65 countries in 2008. By last year, the average footprint had shrunk to 55 countries. And the McKinsey research doesn’t include Citigroup, which has unveiled plans in recent years to exit retail-banking businesses in at least 20 nations.

The pace has quickened this year. Barclays PLC said it would sell much of its business in Africa, while HSBC Holdings PLC is pulling out of Brazil, one of about 83 businesses around the world it has shed since 2011.

Mr. Weill, who retired as CEO in 2003, still sees value in being global.

“The economy is a global village, and we need global financial institutions that bring it together,” he said in an interview. “What would happen if we had a telecommunications system that was locally based, and couldn’t connect? It wouldn’t be very good.”

That view is now out of favor. Analysts have called for J.P. Morgan Chase & Co. and Citigroup to break up, and the issue of whether banks are too big is a recurring topic on the presidential campaign trail.

Pressured by stricter regulations, banks including Citi aren't just shrinking their geographic footprint but also getting out of a range of businesses that require too much capital or make too little money, further eroding the model Mr. Weill helped create.

In Europe, new CEOs at Barclays, Credit Suisse Group AG and Deutsche Bank AG are putting in place restructuring plans that have already been criticized by some investors for not going far enough to slim down the banks.

The expansion of global banks was initially urged on by investors, tempted by the promise of rich returns. Banks built disparate franchises on the basis they could save money by offering a wide number of services. By diversifying, the model offered additional security and the impression that size alone would produce safety.

“The financial crisis laid waste to that theory,” said Fred Cannon, director of research and Keefe, Bruyette & Woods, a boutique investment bank focused on financial companies.

Investors now complain that they can’t get their heads around huge opaque balance sheets. Large cross-border lenders have also been deemed “globally systemic” by regulators and forced to set aside billions of dollars more in capital.

Average precrisis return on equity of 14% has given way to the new normal of about 7% for big global banks.

Investors also worry chief executives can’t control franchises that stretch across multiple countries and business lines.

George Mathewson, who leading up to the crisis helped build Royal Bank of Scotland Group PLC into the world’s biggest bank by assets, is among those who now believes the global diversified bank should become extinct...

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