These 2 Charts Show Citigroups Greatest Vulnerability Right Now

By John

No bank is more globally interconnected than Citigroup. Image source: iStock/Thinkstock.

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It was about a century ago that Citigroup (NYSE: C) decided to chart a separate course from the rest of the bank industry. It continued to build its domestic operations, but shifted much of its focus to creating a vast network of banking offices around the world.

That decision has defined Citigroup ever since. It also represent the biggest risk facing Citigroup today, as the clamor for heightened protectionism and trade wars is beginning to reach a fevered pitch.

A vast global network

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Citigroup's strategy of looking abroad for growth propelled the New York City-based bank in the postwar period to the top of the industry in terms of size. A mere decade ago, it was the biggest bank in America.

The downside to Citigroup's strategy, however, was that ratcheted up its operational risk -- or, more specifically, its so-called "country risk." Citigroup's investments in Cuba and other Latin American countries at various times in history nearly drove it out of business on multiple occasions. A steep drop in sugar and other commodity prices after World War I caused countries and companies throughout Latin America to default on their bank loans. Volatile energy prices in the 1970s and 80s triggered a similar wave of defaults. Citigroup nearly failed both times.

It was the third time that Citigroup was nearly driven asunder that it decided to retreat from this business model. Following the financial crisis it sold off major pieces of its international operations. These weren't the main source of Citigroup's problems in 2008 and afterward, but they served as a source of capital and unloading them was consistent with current CEO Michael Corbat's strategy to slim down and simplify the New York City-based bank.

But even though it's taken considerable steps in this regard, Citigroup remains the most internationally focused universal bank in the United States. Given the threats of protectionism and trade wars coming from the White House under the new administration, this will present the bank with a unique set of challenges, as any move that would clamp down on trade would almost certainly weigh on cross-border capital flows.

Charts showing Citigroup's global exposure

To get a sense for just how much more Citigroup is exposed to these trends, I dug around in its financial filings in an effort to gauge its cross-border exposure. What I found reaffirms the fact that the $1.8 trillion bank's greatest vulnerability continues to be its vast international operations.

This first chart compares Citigroup's exposure to its 20 largest international markets compared to the same figure at its two closest competitors: JPMorgan Chase and Bank of America.

Data source: Company regulatory filings. Chart by author.

As you can see, despite the vastness of both of these other banks' own global operations, neither of them comes close to Citigroup. JPMorgan Chase and Bank of America each have less than $300 billion worth of exposure to their 20 largest foreign markets. Meanwhile, Citigroup's is nearly twice that, at $525 billion.

These figures relate loans made to foreign governments and companies, as well as investment securities and trading account assets emanating from abroad. It isn't a precise estimate, in other words, of precisely how much revenue these banks earn by facilitating international capital flows. At the same time, however, the comparison serves as a helpful proxy to gauge the relative risk of a trade war to each of these three banks.

The second chart is a derivation of the first. It shows the percentage of Citigroup's international exposure relative to its total assets.

Data source: Citigroup's 3Q16 10-Q. Chart by author.

As you can see, Citigroup's $525 billion in international exposure equates to just under a third of its total assets. That's a healthy chuck. To put it in perspective, the same figure at JPMorgan Chase is 11.6% and at Bank of America it's 9.7%.

This obviously confirms the takeaway from the first chart i.e., that Citigroup remains the most globally oriented big bank in the United States. This isn't necessarily good or bad, but it could very well mean that Citigroup will be impacted more than its peers in the event that higher protectionism or even a trade war were to break out.

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John Maxfield owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.