Citi on alert for spending pull-back due to rising costs

Banking giant Citi is closely watching for a potential softening in consumer spending later this year due to rising interest rates and cost of living pressures, ahead of its formal exit from Australia’s retail banking market.

Credit cards, where Citi is the fifth-biggest local player after the big four banks, are traditionally seen as a “canary in the coal mine” for banks, as this type of unsecured lending tends to experience rising bad loans early on in an economic slump.

Citi consumer bank CEO Alan Machet.
Citi consumer bank CEO Alan Machet.

But in an interview marking the upcoming transfer of Citi’s local retail bank to National Australia Bank, chief executive of Citi’s consumer bank Alan Machet said stressed loans in its credit card, mortgage and personal loan portfolios were at “generational lows.” He did not expect a rise in stressed loans for “some time.”

While customers were not under credit stress today, Machet said the lender would be watching for softer discretionary spending on credit cards later in the year, as the impact of interest rate rises and inflation was expected to hit home. He said this change in spending behaviour would be visible before any rise in bad debts.

“People are looking forward – their rent’s going up, their mortgage payments are going up, their food bill is going up, their fuel, everything is going up – and they’re starting to get nervous,” Machet said.

“Now, we aren’t seeing that flow through yet, we’re still seeing people booking holidays, and spending money out at restaurants very actively. That’s where I think we’ll start to see a little bit of retrenchment, not quickly, but we’re expecting, maybe it’s later this year, maybe it’s two or three more interest rate rises, more news about inflation, I think [that] is what we’ll be watching for.”

This week marks the end an era for the United States banking giant, which is the biggest issuer of credit cards in the world, and was the first foreign bank granted a retail banking licence in Australia during the 1980s era of financial deregulation.

Pending final approvals, it will formally end its 37-year presence in Australian retail banking this week, with the business and its 800 staff set to become part of NAB, following a $1.2 billion sale announced last year. Citi, which has also announced plans to withdraw from 13 retail banking markets globally, will continue to serve Australian institutional clients, such as corporations and governments.

Machet said Citi’s retail customers did not need to do anything, and Citi would keep its branding for a couple of years, before its wealth, deposits, mortgages and cards businesses were re-branded as part of NAB.

Advertisement

Citi’s key asset in Australia is a credit card portfolio, and the deal will result in NAB becoming the country’s second-biggest credit card lender behind Commonwealth Bank.

Australians’ credit card balances plunged during the pandemic, as people cut spending and used government payments to pay off expensive debt, but in recent times there have been signs of recovery.

In mortgages, despite its global size, Citi’s loan book of $9 billion makes it a relatively small local player, though it has posted strong growth of 17 per cent in the last year.

Machet conceded its push into Australian’s mortgage market had not been a major success, but he said this was because it put little focus on mortgages until around two years ago, after Citi’s problems with mortgages in the US after the global financial crisis.

NAB chief executive Ross McEwan this month highlighted the market share NAB would gain in credit cards from buying Citi’s consumer bank, alongside its plan to boost its card platform.

“With this scale, we can invest in better systems to deliver market-leading capabilities and drive product innovation,” McEwan said.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.

Most Viewed in Business

Source: Thanks smh.com