Citigroup Inc. C Moat

Key data

The moat

A bank's moat is the money it does not have to pay for. A corporate treasurer keeps an operating account with the bank that clears its payments, and that balance sits there earning nothing because moving it would break the payment plumbing the company runs on. Multiply by every client and the bank funds its loan book below what anyone else can.

Citigroup's version of this is unusually good in one place and unusually weak overall. Its treasury and payment services business clears cross-border transactions for corporations in roughly ninety countries, and no competitor replicates that footprint. Those relationships produce genuinely sticky operating deposits.

What the moat produces is the spread between what the bank pays for money and what it earns lending it, and the cheap share of the funding base is the direct measurement.

Widening or narrowing

The measurement has moved one way.

The deposit base grew $177B while the free portion of it shrank by nearly two points. That is the bank buying deposits rather than attracting them, and it is the clearest possible evidence of a funding moat narrowing.

The margin held anyway, at 2.54%, because rate cuts reduced what Citi pays on the interest-bearing majority faster than the mix deteriorated. That is a cyclical offset to a structural decline.

The overrated case. Services and Banking revenue rose steadily across the period, from $5.43B to $6.38B and from $1.43B to $1.92B, which is the treasury franchise working. Those are genuinely good numbers and they do not change the funding mix, which is the thing that determines what the bank earns on every dollar it lends for the next decade.

Capital fell from 13.5% to 12.8% over the same year, faster than the larger competitor's, as risk-weighted assets grew ahead of capital generation.

On profit pool, Citi takes a spread on money it holds plus fees on the payments it moves. The fee half is the moat; the spread half is what the funding mix is eroding.

The moat is narrowing.