Why the Smart Money Is So Optimistic
The economy has reached the hand-wringing stage. More and more of the nation’s banks are facing losses on commercial real estate loans, and interest rates that had been expected to come down are going up instead.
Yet amid the gathering gloom, prominent people are making encouraging statements.
John Reed, chairman of Citicorp, the largest U.S. bank company at $231 billion in assets, told financial analysts recently that Citi’s profits would grow to $5 billion in this decade, three times the $1.6-billion operating profit the company earned in 1989.
Reed was looking beyond this year--when, he said, writeoffs on commercial real estate loans will hold down earnings--to the rest of the 1990s. That’s when Citicorp’s earnings will triple as millions of consumers in Europe and Japan, and perhaps Latin America too, get the American credit card habit.
Interesting, perhaps, that plastic money is spreading overseas, but does that mean anything to you? Yes, it means that living standards are on the rise worldwide. And that should give you a star to steer by when contemplating your own investments--whether interest on savings deposits or mortgages or the outlook for stocks. Reed’s optimism, and the reasons for it, give you a perspective in anxious times.
For others see better times as well. John Paulus, chief economist of Morgan Stanley, the investment firm, predicted last week that interest rates in the 1990s would remain at the relatively high levels of the past decade--that is, about 4 percentage points over the rate of inflation, or 8.5% to 10%.
Interest rates historically have been lower than that but, as Paulus points out, worldwide consumer demand has seldom been as strong as it’s likely to be this decade. So the bad news in his forecast--high interest rates--is more than offset by the good news--rapid economic growth in Europe and Asia--plus a continuation of the U.S. economic expansion right on through 1991.
Peter Lynch agrees. The renowned investment manager of Fidelity Magellan Fund, who last week announced his retirement at 46, says the only thing that investors should fear is double-digit inflation--which might happen if, say, the Soviet Union disintegrated and oil became scarce. High inflation would sink both stocks and bonds. But short of catastrophe, Lynch says, the economies of Europe, and quite possibly Mexico and Brazil too, will be growth markets for consumer goods and services. “There are 350 million people in Europe, and yet they’re nowhere near the consumers Americans are.”
Which is good news for Citicorp, the worldwide bank that for 10 years, under Reed and his predecessor, Walter Wriston, has invested $1 billion a year in building up consumer banking operations.
The effort has paid off. Citicorp’s consumer business, a money loser in 1980, has grown to become the bank’s largest profit maker--$842 million of operating income last year. And before the new decade is over, according to Reed, Citi’s consumer earnings will have grown to roughly $3.25 billion. That’s a fourfold increase, thanks in large part to growing business in Europe, where the 12 Common Market nations will unify their economies in 1992. A new report from the Salomon Bros. investment firm calls Citi “the only clear-cut American bank winner” in Europe.
Why? A big reason is credit cards. Citi has become a leading issuer of Visa and MasterCards in the United States, where 23% of all retail sales--excluding automobiles--are done on plastic.
Now it sees opportunity in Europe, where fewer people have credit cards. And almost no one uses the card as Americans do, as a revolving credit line--paying interest but also increasing purchasing power.
It’s not that European consumers are necessarily different from Americans but that European banks have been fearful of handing out credit lines to the masses. But Citi has no such fears, having learned from experience that credit card losses are consistently less than 5% of loan balances outstanding. Its research tells it that lending money to everyday consumers is often a safer and more profitable business than lending to big corporations. And so it sees the global consumer as a great opportunity.
What’s the upshot? It’s not merely that Citicorp’s future is bullish. In fact, says analyst Raphael Soifer of Brown Bros. Harriman, the outlook for Citi’s stock price might be bearish because Reed may have to sell common stock to finance growth, possibly diluting the value of the current shares.
But Citicorp’s vision of the future is immensely bullish, raising the prospect of a decade in which people all over the world get to buy a little better standard of living.
And make no mistake, for all the jokes about plastic money and lectures about spendthrift shoppers, that’s what increased consumer credit means: higher living standards and more individual choice.
It’s a trend everywhere these days, and no better illustrated than in the bid of Mars Inc., the McLean, Va., candy bar company, to win an institutional catering contract at Czechoslovakia’s famed Skoda Works industrial complex. Mars, which is enthusiastic about prospects in Eastern Europe, proposes not only to serve hot meals but also to give Skoda workers a credit card with which they can purchase hot drinks, or even the occasional Snickers bar, during the day.
It’s really not hard to be encouraged in these times.
