Citi is reasonably insulated from inflation but its clients aren’t, says chief executive Mark Woodruff

It’s the question on economists’ minds – just how well is Australia doing? Citi chief Mark Woodruff is confident it’s in better shape than expected and we should avoid a recession in 2024.

Citi Australia chief executive Mark Woodruff with head of investment banking Alex Cartel. Picture: John Feder

How is inflation and the prospect of higher-for-longer interest rates affecting your business? Importantly, is the behaviour of your customers changing?

The diversified nature of the business means that overall, we can benefit from higher-for-longer rates and sticky inflation. As we come to the end of the monetary tightening cycle, we expect confidence to come back through increased deal activity. However, household balance sheets will come under more pressure, and despite the health of corporate balance sheets, those exposed to the consumer cycle will be limited in their ability to pass through price increases as demand falls, in turn squeezing margins.

How would you rate the shape of the Australian economy as we head into the New Year?

The economy is in better shape than expected and we should avoid a recession in 2024. But economic growth will remain below potential at just below 2 per cent and inflation will remain relatively high. We expect the CPI by year-end to be 3.5 per cent, above the top of the RBA’s target band.

We see sticky inflation as a domestically generated problem. Prices for domestically purchased services and some goods continue to increase. Labour costs continue to increase and combined with weak productivity growth are incompatible with anything except inflation remaining stickier for longer. Long-term enterprise agreements locking in substantial wage increases will continue to delay the RBA’s wish for inflation to return to the targeted band.

 

What is the big reform needed so the Australian economy (and your business) can sustainably reach full potential?

This could be one or two ideas across any area from education, housing, training, labour shortages, infrastructure, tax, supply chains, regulation, immigration, etc. Tax reform remains the No.1 policy issue that needs to be addressed. Australia relies too heavily on income tax and inefficient state taxes that distort investment and the labour market.

The high reliance on income tax makes it harder for Australia to increase the participation rate – particularly of women – at a time when we need more people in the labour force. Inefficient taxes like stamp duty distort investment decisions. Tax reform has been left in the too-hard basket for too long and I would like to see the federal government turn their attention to some genuine reforms, if not this term early in the next.

For the long term, education remains critical and I have been encouraged by some state and he federal governments recognising the importance of retaining and developing talent.

If the migration policy can be aligned with improving skills, Australia will be well placed to start to improve productivity.

Australia has six years to meet its 2030 targets for a 43 per cent reduction in baseline emissions. What needs to happen here?

I am not alone in saying that the strong desire to make meaningful changes towards the energy transition is very real, but progress has not been as fast as we would like. Both investor appetite and available capital is present but there are headwinds in permitting and licensing, hindering our ability to put that capital to work.

Aggressive targets are helpful in driving change and developing urgency, but policy at all levels of government needs to be aligned to facilitate the ambition. We continue to see significant demand from local and offshore firms to invest in the transition and beyond.

What level of adoption is your business currently at with the use of AI technology?

The potential use cases for artificial intelligence across many of our business streams are boundless, but at this stage in the game they’re not without risks.

Citi has several centres of excellence that guide our innovation strategies with governance and risk management parameters, and we have a centre that is solely focused on exploring opportunities in AI. We want to dedicate the right level of due diligence to explore these opportunities.

Around 70 per cent of Citi’s use cases for AI are focused on enhancing productivity in the bank’s internal operations, but that is likely to shift as we learn more about leveraging the technology is a safe and responsible way.

What external issues do you expect to impact or disrupt your business within the next 12 months – the so-called 3am thought?

It is difficult to move past the impact of cyber risk. While our infrastructure is extremely strong, impacts through third-party cyber events continue to stretch scenario planning and impact assessments. The amount of regulatory change locally and globally continues to challenge businesses to invest with confidence. Any acceleration of regulatory impost would disrupt the investment cycle and reduce competitiveness at a time in the business cycle where confidence will be key to avoiding a significant economic downturn.

Is business getting the balance right between investor, customer and other stakeholder demands when it comes to ESG issues?

ESG has evolved from a corporate PR exercise to top-down, truly integrated corporate strategies that impact the way that business gets done. That is probably the biggest shift that I have seen in the last five to 10 years. For example, Citi’s ESG commitments are embedded into the layers of our business, and each year we report on our activities and performance.

In the past, most organisations probably had programs that were focused on the environment, sustainability and governance but they weren’t threaded together in a cohesive strategy, and they probably weren’t being reported on in a measurable way. This has changed significantly and will continue to accelerate as the demand from end users drives change in corporate behaviour.

Governance is very top of mind for the C-suite individuals and board members we are talking to. The level of scrutiny has never been higher, and the margin for error has never been more acute.

Are we all striking the right balance 100 per cent of the time? Probably not. But we shouldn’t let perfection get in the way of progress. You would be hard pressed to find any large corporate or listed company that isn’t taking the ESG conversation extremely seriously.

How has your organisation’s approach to staff working from home evolved since the pandemic?

Banking is a relationship-driven business, so a good proportion of our workforce needs to be in the office most days, because nothing can replicate the advantages of those face-to-face interactions.

We are finding that the majority of our team want to be in the office.

They want to be out and about talking to clients. They don’t want to be talking to people from behind screens.

Citi offers a hybrid working environment, which we believe delivers the right balance.

Employees need to be in the office for a minimum of three days per week to foster a culture of ­collaboration, idea sharing and creativity.

Mark Woodruff chief executive of Citi Australia