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| - | {{hide_logo|path=[[Image:citi.jpg|150px|left]]}} | + | '''Citigroup''' ([[NYSE Euronext (NYX)|NYSE]]:C) is one of the world's largest diversified [[financial services]] firms, which means that it makes money by loaning out money and receiving interest on the loans.<ref>[http://www.samaylive.com/news/citi-to-split-itself-into-citicorp-citi-holdings/604709.html Samay Live, "Citi to split itself into Citicorp, Citi Holdings," 01/16/2009]</ref> <ref>[http://www.bloomberg.com/apps/news?pid=20601103&sid=a86BGz.hIWd0&refer=us Bloomberg "Citigroup’s Vikram Pandit to Take $1 Salary, No Bonus" 11 Feb 2009]</ref> . |
| - | + | ||
| - | '''Citigroup''' ([[NYSE Euronext (NYX)|NYSE]]:C) is one of the world's largest diversified [[financial services]] firms, which means that it makes money by loaning out money and receiving interest on the loans. Citi had significant exposure to the [[subprime mortgage]] industry and suffered considerable losses in 2007, 2008 and 2009 from large [[write-downs]] and [[write-offs]] on many of its [[mortgage-backed securities]] and [[collateralized debt obligations]]. As a result, Citi announced in 2009 that it would be splitting into two businesses to focus on its core business. Citicorp acts as a traditional bank with $1.1 trillion in assets, while Citi Holdings manages its riskier assets, which it will try to sell to raise cash. In an effort to avoid considerable future losses due to mortgage-backed securities and collateralized debt obligations, Citicorp is be 65% deposit funded.<ref>[http://www.samaylive.com/news/citi-to-split-itself-into-citicorp-citi-holdings/604709.html Samay Live, "Citi to split itself into Citicorp, Citi Holdings," 01/16/2009]</ref> To reduce operating costs, Citi has sold branches such as CitiStreet, CitiBank, and its banking operations in Germany.<ref>[http://money.cnn.com/news/newsfeeds/articles/djf500/200807110344DOWJONESDJONLINE000359_FORTUNE5.htm Credit Mutuel to Buy Citi's German Operations for EUR4.9 Billion]</ref><ref>[http://biz.yahoo.com/e/080801/c10-q.html Yahoo Finance "Form 10-Q for Citi Group Inc" 1 Aug 2009]</ref> Citi's efforts to cut costs has stretched up to its CEO, Vikram Pandit, who announced that he would accept only a salary of $1 and no bonus until the firm was returned to solvency<ref>[http://www.bloomberg.com/apps/news?pid=20601103&sid=a86BGz.hIWd0&refer=us Bloomberg "Citigroup’s Vikram Pandit to Take $1 Salary, No Bonus" 11 Feb 2009]</ref> These efforts represent a shift away from an investment bank into a standard holding bank. | + | |
| In 2010, Citigroup reached a turning point in which the company was able to achieved its | In 2010, Citigroup reached a turning point in which the company was able to achieved its | ||
| - | primary goal of returning to profitability, posting positive net income in each quarter and a full-year profit of $10.6 billion.<ref name = Citi2010>[http://www.citigroup.com/citi/corporategovernance/ar.htm Citi Annual Reports 2010]</ref> | + | primary goal of returning to profitability, posting positive net income in each quarter and a full-year profit of $10.6 billion.<ref name = Citi2010>[http://www.citigroup.com/citi/corporategovernance/ar.htm Citi Annual Reports 2010]</ref> The company was forced to alter its operations in order to reach this point. Citi sold branches such as CitiStreet, CitiBank, and its banking operations in Germany. In addition the company reshuffled and changed its management<ref>[http://money.cnn.com/news/newsfeeds/articles/djf500/200807110344DOWJONESDJONLINE000359_FORTUNE5.htm Credit Mutuel to Buy Citi's German Operations for EUR4.9 Billion]</ref><ref>[http://biz.yahoo.com/e/080801/c10-q.html Yahoo Finance "Form 10-Q for Citi Group Inc" 1 Aug 2009]</ref> These efforts represent a shift away from an investment bank into a standard holding bank. |
| ==Business Overview== | ==Business Overview== | ||
| - | Citigroup operates four business segments in four regions. The four regions include '''North America''' (including US, Canada, and Puerto Rico), '''EMEA''' (Europe, Middle East & Africa), '''Latin America''' (including Mexico, and '''Asia''' (including Japan). It's divided into two business: Citicorp, which encompasses Citi's core businesses, the Regional Consumer Banking Division and Institution Clients Group, and Citi Holdings, which overseas Brokerage and Asset Management, Local Consumer Lending, and Special Asset Pool, all of which are businesses which Citi wishes to shrink. | + | Citigroup operates in four regions include '''North America''' (including US, Canada, and Puerto Rico), '''EMEA''' (Europe, Middle East & Africa), '''Latin America''' (including Mexico, and '''Asia''' (including Japan). It's divided into two business: Citicorp, which encompasses Citi's core businesses, the Regional Consumer Banking Division and Institution Clients Group, and Citi Holdings, which overseas Brokerage and Asset Management, Local Consumer Lending, and Special Asset Pool, all of which are businesses which Citi wishes to shrink. |
| ===Citicorp (75.7% of 2010 Net Revenue)=== | ===Citicorp (75.7% of 2010 Net Revenue)=== | ||
| Line 20: | Line 18: | ||
| ==Trends & Forces== | ==Trends & Forces== | ||
| - | ===Impact of Basel III Rules on Big Banks=== | + | ===Government Regulation=== |
| - | The Basel Committee on Banking Supervision announced new regulations which ultimately will force banks to have 10.5% of total capital on hand against liabilities. The new rules are likely to affect the credit industry by imposing stricter discipline on credit cards, mortgages and other loans. Requiring banks to hold more capital on hand will limit the amount of money they can lend out, but also reduce the risk of insolvency given many loan defaults. | + | |
| - | Under the new regulations, the mandatory Tier 1 capital reserve would rise from 4 percent to 4.5 percent by 2013 and reach 6 percent in 2019. Banks would also be required to keep an emergency reserve, or "conservation buffer," of 2.5 percent. Ultimately, the amount of rock-solid reserves each bank is expected to have will amount to 8.5 percent of assets. Also, the rules eliminate the ability to count deferred tax assets, some mortgage servicing rights and trust preferred securities as assets. | + | An increase in US Government regulation could have a substantial impact on the operations of Citi as well as the rest of the financial industry.<ref>[http://www.washingtonpost.com/wp-dyn/content/article/2010/07/12/AR2010071202628.html The Washington Post "Financial regulation bill nears finish line with support from Snowe, Brown" 13 July 2010]</ref> |
| + | All holding banks will be prevented from engaging in proprietary trading and in any trades where there is a "material conflict of interest". In addition, "material exposure to high-risk assets or high-risk trading strategies" will be banned. While the impact may be large, the true extent depends on the interpretation and implementation of the regulation.<ref name=secpage>[http://www.marketwatch.com/story/new-regs-may-cut-big-bank-profit-13-goldman-2010-06-28?pagenumber=2 Market Watch "New regulations may cut big bank profit 13%, Goldman says" 28 June 2010 pg. 2]</ref> | ||
| - | The potential impact of the regulations on US banks is rather limited because as of September 2010, 61 of 62 US banks with assets of more than $10 billion meet the requirements, therefore, banks such as [[Morgan Stanley]], [[Goldman Sachs Group (GS)]], [[J P Morgan Chase (JPM)]], and [[Citigroup (C)]] will not see their businesses change with the passing of these rules.<ref>[http://www.huffingtonpost.com/2010/09/13/basel-iii-rules-market-we_n_714263.html The Huffington Post "Basel III Rules: Banks Given Until 2019 To Fully Comply With New Global Regulations" 9/13/10]</ref> | + | The Basel III rules will force banks to increase the amount of money they hold against liabilities. While the goal of the regulation is to prevent banks from becoming over leveraged, they may also prevent the banks from creating the same profit margins that they previously were able to attain.<ref>[http://www.huffingtonpost.com/2010/09/13/basel-iii-rules-market-we_n_714263.html The Huffington Post "Basel III Rules: Banks Given Until 2019 To Fully Comply With New Global Regulations" 9/13/10]</ref> |
| - | ===Government influences and regulations will greatly affect Citi's future=== | + | Other regulation may place limits on the extent to which banks may invest in hedge funds or in private equity funds. This is commonly referred to as the [[Paul Volcker|Volcker Rule]].<ref>[http://www.businessinsider.com/frontpoint-morgan-stanley-bargain-price-buyout-mike-kelly-dan-waters-2010-8 Business Insider "Morgan Stanley Will Take Huge Loss On FrontPoint Because It's Bleeding Money On Losses And Lobsters" 8/5/10]</ref> In order to improve their returns, Citi, like many of its peers, invests in organizations like hedge funds and private equity funds. These funds tend to have higher returns, but also tend to be higher risk. While the regulation aims to lower speculation and high risk investments, it may also prevent Citi from achieving the returns it has historically gotten. Swaps, which are used by banks to offset their risk or hedge against potential outcomes, may also be regulated. This would prevent banks from taking certain positions because the risk would be too high without the possibility of a swap.<ref name = derivativesBill>[http://blogs.forbes.com/streettalk/2010/04/29/swaps-split-could-cost-banks-85-billion-in-capital/ Forbes 'Swaps Split Could Cost Banks $85 Billion In Capital']</ref> <ref>[http://www.theoptionsinsider.com/industry/?id=5014 The Options Insider "Permissible Bank Derivatives Trading" 2010]</ref> |
| - | ====$45 Billion Bailout and Repercussions and Subsequent TARP Repayment==== | + | |
| - | By February 2009, the government had given Citi $45 billion in [[Troubled Assets Relief Program (TARP)]] funds, giving government a 35% stake in Citi. As part of its agreement with Citi, the government had opted to take on more risk and convert $25 billion of its [[Preferred Stock| preferred stock]] to [[Common Stock| common shares]]. The government beared more risk by converting its shares because it became subject to the volatility of Citi's stock prices. By converting its shares, Citi gained more tangible equity available to improve its balance sheet. Its equity-to-asset ratio improved from 1.5% to approximately 4%.<ref name=CNN>[http://money.cnn.com/2009/02/27/news/companies/citigroup/index.htm CNN Money,"http://money.cnn.com/2009/02/27/news/companies/citigroup/index.htm," 02/27/09]</ref> The [[Federal Deposit Insurance Corporation (FDIC)]] defines a bank as being critically under-capitalized with a ratio under 2%.<ref name= CNN/> | + | |
| - | This move negatively effected stockholders because the huge conversion to common stock will lead to a [[Dilution| dilution]] of shares, and Citi had agreed to stop paying dividends for at least the next 3 years. In addition, the government has the right to convert its remaining $20 billion in shares to common stock in the future. This would further dilute the stock and give the public even less of a stake in Citi.<ref name= CNN/> | + | Furthermore, regulation imposing a fee to financial institutions that keep their money in the Federal Reserve would increase the cost of operation for Citi.<ref>[http://www.boston.com/news/nation/articles/2010/07/13/brown_will_back_financial_overhaul/?page=2 The Boston Globe "Brown will back financial overhaul" 13 July 2010]</ref><ref name=first>[http://www.marketwatch.com/story/new-regs-may-cut-big-bank-profit-13-goldman-2010-06-28?pagenumber=1 Market Watch "New regulations may cut big bank profit 13%, Goldman says" 28 June 2010 pg. 1]</ref><ref>[http://www.financialfeed.net/vague-business-tax-cuts-for-the-new-tax-law/851353/ Financial Feed "Vague Business Tax Cuts for the New Tax Law" 12/27/10]</ref> |
| - | On December 14, 2009, Citi announced that it reached an agreement with the U.S. government and its regulators to repay U.S. taxpayers for the $20 billion in TARP trust preferred securities held by the government. Citi also decided to cancel its loss-sharing agreement with the government, which will increase its risk-weighted assets by approximately $144 billion. As a result of the repayment of TARP trust preferred securities and the termination of the loss-sharing agreement, Citi expects a net reduction in annual interest expense of approximately $1.7 billion as well as $0.5 billion in lower amortization expense associated with the loss-sharing agreement. Once the repayment and agreement cancellation are official, Citi will no longer be deemed a beneficiary of "exceptional financial assistance" under Tarp beginning in 2010, restoring some credibility and stability to the company. <ref name = Citi_Tarp_Repayment/> | ||
| - | |||
| - | On March 10, 2010, agreed to sell its real estate unit, Citi Property Investors, to private equity investor Apollo Management LP, giving Apollo 65 real estate investments that span across 26 countries with a total net asset value of just under $3.5 billion. The sale was another effort by Citi to raise capital to repay the remaining $25 billion which it still owes the government. Such efforts to repay government debt ultimately shrink Citi's net assets and overall business, which may not be beneficial to the bank in the long run.<ref name = CitiReal>[http://www.americanbankingnews.com/2010/03/10/citibank-nyse-c-to-sell-citi-property-investors-unit/ CNN Money,"Citibank (NYSE: C) to Sell Citi Property Investors Unit," 02/10/10]</ref> | ||
| - | |||
| - | ====Obama's Bank Plan Restricts Banks' Profit Potential==== | ||
| - | United States President Barack Obama presented a plan on January 21, 2010 to restrict the activities of commercial banks, specifically outlawing [[proprietary trading]] and preventing commercial banks and institutions that own banks from owning, investing in or sponsoring [[private equity]] and [[hedge funds]].<ref name = ObamaPlan>[http://www.foxbusiness.com/story/markets/industries/finance/hedge-funds-private-equity-seen-hit-obamas-bank-plan/ Hedge Funds, Private Equity Seen Hit By Obama's Bank Plan]</ref> The Obama administration also plans to limit the ability of the largest banks to use borrowed money to fund expansion plans, which calls for an expansion of a 1994 law that forbids banks from acquiring another bank if the deal would give the bank more than 10% of the nation's insured deposits.<ref name = VolckerRule>[http://onlinehttp://www.istockanalyst.com/article/viewarticle/articleid/3806659 'Volcker Rule' Socks Bank Trading, Funding For Hedge funds And Private Equity]</ref> | ||
| - | |||
| - | ====New Tax Bill Protects Bank's Foreign Profits==== | ||
| - | President Obama signed a new tax bill in December 2010 that offers a plethora of new tax breaks impacting various companies. There will be exemptions allowing banks, insurance companies and other financial firms to be protected from U.S. taxes for foreign profits until 2011, which will cost the U.S. gov is $9.2 billion. According to Washington Research Group director Anne Mathias, this will benefit multinational banks and financial firms like Citigroup, Bank of America, Goldman Sachs and Morgan Stanley and financing operations of other international companies.<ref>[http://www.financialfeed.net/vague-business-tax-cuts-for-the-new-tax-law/851353/ Financial Feed "Vague Business Tax Cuts for the New Tax Law" 12/27/10]</ref> | ||
| - | |||
| - | ===Barring of Swaps Could Cost Banks $85 Billion in Capital=== | ||
| - | On April 29th, 2010, debate on financial reform entered into the Senate with the new provision of the Senate Agriculture committee's derivatives bill that would bar [[swaps]] dealers from accessing the Federal Reserve's discount lending window or any other government guarantees. Swaps are [[derivative]] trades used by banks, financial firms and commercial companies to offset risks or hedge for or against certain outcomes. The biggest U.S. banks such as Morgan Stanley, [[Goldman Sachs Group (GS)]], and [[J P Morgan Chase (JPM)]] are the biggest swaps dealers, controlling 96% of the swaps market.<ref name = derivativesBill>[http://blogs.forbes.com/streettalk/2010/04/29/swaps-split-could-cost-banks-85-billion-in-capital/ Forbes 'Swaps Split Could Cost Banks $85 Billion In Capital']</ref> | ||
| - | |||
| - | The new derivatives bill would force banks to spin off their swaps desks and create new entities for swaps dealing activities. The cost of doing is estimated to be about $85 billion in capital. The ultimate purpose of the bill is to separate riskier trading and securities activities of investment banks from federally insured and implicitly guaranteed commercial banks.<ref name = derivativesBill/> | ||
| ===Corporate Restructuring and Focus on Core Business=== | ===Corporate Restructuring and Focus on Core Business=== | ||
| - | ====Citicorp and Citi Holdings==== | + | After the financial crisis, Citi announced its plans to split Citigroup into Citicorp, its $1.1 billion traditional banking arm, and Citi Holdings, for its riskiest investment assets. Citi stated that the split would allow the company to focus on its core business, and allow Citicorp to return to profitability and stabilize sooner than Citigroup could have as a single firm.<ref>[http://news.bbc.co.uk/2/hi/business/7833090.stm BBC News, "Citigroup to split as losses grow," 01/16/2009]</ref> <ref>[http://edition.cnn.com/2009/BUSINESS/01/16/citigroup.split.losses/ cnn.com, "Citigroup to split after $8.3B loss," 01/16/2009]</ref><ref>[http://edition.cnn.com/2009/BUSINESS/01/16/citigroup.split.losses/ cnn.com, "Citigroup to split after $8.3B loss," 01/16/2009]</ref> This move reflects a broader shift in the company's focus towards that of a traditional holding bank. While this move will likely decrease the company's exposure to risk, it may also prevent the company from achieving the same level of returns it has in the past. |
| - | In January 2009, Citi announced its plans to split Citigroup into Citicorp, its $1.1 billion traditional banking arm, and Citi Holdings, for its riskiest investment assets. Citi stated that the split would allow the company to focus on its core business, and allow Citicorp to return to profitability and stabilize sooner than Citigroup could have as a single firm.<ref>[http://news.bbc.co.uk/2/hi/business/7833090.stm BBC News, "Citigroup to split as losses grow," 01/16/2009]</ref> The split was triggered by a tumultuous 2007 and 2008. In 2008, Citi reported an almost $19B loss in 2008, and $8.3B in the fourth quarter alone.<ref>[http://edition.cnn.com/2009/BUSINESS/01/16/citigroup.split.losses/ cnn.com, "Citigroup to split after $8.3B loss," 01/16/2009]</ref> In addition, it cut approximately 52,000 jobs.<ref>[http://edition.cnn.com/2009/BUSINESS/01/16/citigroup.split.losses/ cnn.com, "Citigroup to split after $8.3B loss," 01/16/2009]</ref> | + | |
| - | + | ||
| - | In the Jan 2011, Citi announced that it was selling its consumer finance division CitiFinancial as part of its continued effort to restructure the company and focus on its core businesses.<ref>[http://www.tradingmarkets.com/news/stock-alert/c_citigroup-puts-citifinancial-up-for-sale-1408615.html Trading Markets "Citigroup puts CitiFinancial up for sale" 1/7/11]</ref> | + | |
| - | ===Macroeconomic Factors=== | + | ===Interest Rates=== |
| - | ====Interest Rates==== | + | Rising interest rates raise the cost of borrowing for all lenders, dampening the overall [[U.S. Housing market|demand for mortgages]] and other home loan products. The U.S. [[Federal Funds Rate]] could help to stimulate demand for loans and lower default rates by allowing people to refinance their homes at lower rates. <ref>[http://www.bloomberg.com/apps/quote?ticker=FDFD:IND Bloomberg.com, US Rates and Funds]</ref><ref>[http://www.federalreserve.gov/fomc/fundsrate.htm Federal Reserve Board "Open Market Operations" 16 Dec 2008]</ref> |
| - | [[Image:Interest Rate Trends.png|thumb|right|350px]] | + | |
| - | Rising interest rates raise the cost of borrowing for all lenders, dampening the overall [[U.S. Housing market|demand for mortgages]] and other home loan products. The U.S. [[Federal Funds Rate]] could help to stimulate demand for loans and lower default rates by allowing people to refinance their homes at lower rates. The Fed has been consistently lowering rates since 2007. For example, in July 2009 it was 0.5%, compared to 2% in July 2008 and 5.25% in September of 2007.<ref>[http://www.bloomberg.com/apps/quote?ticker=FDFD:IND Bloomberg.com, US Rates and Funds]</ref><ref>[http://www.federalreserve.gov/fomc/fundsrate.htm Federal Reserve Board "Open Market Operations" 16 Dec 2008]</ref> | + | |
| - | [[Image:ldcr.jpg|thumb|300px|right|Citi's loan to deposits ratio is justified by the company's diversified income statement]] | + | |
| Housing loans have traditionally been a strong source of revenue for banking firms. With the current interest rate environment, owners of [[Residential Real Estate Prices|real estate]] are selling to take advantage of the high short-term rates. With low interest rates in the future, prospective home owners are staying out of the market and waiting for short-term rates to drop before looking for a loan. This over-arching attitude has weakened the housing loans business for banks, such as Citi. | Housing loans have traditionally been a strong source of revenue for banking firms. With the current interest rate environment, owners of [[Residential Real Estate Prices|real estate]] are selling to take advantage of the high short-term rates. With low interest rates in the future, prospective home owners are staying out of the market and waiting for short-term rates to drop before looking for a loan. This over-arching attitude has weakened the housing loans business for banks, such as Citi. | ||
| - | ====The Yield Curve==== | + | ===The Yield Curve=== |
| Typically banks charge higher interest rates on loans which qualify as long term debt than they they pay on deposits (short term debt). A flat or inverted [[yield curve]], implies that long-term rates are the same or lower than short-term rates. This drastically reduces the profitability of loans. Citi is particularly vulnerable to interest rates fluctuations as it depends more heavily on wholesale funds than its competitors. This means that its cost of borrowing is higher than that of many rival bank. | Typically banks charge higher interest rates on loans which qualify as long term debt than they they pay on deposits (short term debt). A flat or inverted [[yield curve]], implies that long-term rates are the same or lower than short-term rates. This drastically reduces the profitability of loans. Citi is particularly vulnerable to interest rates fluctuations as it depends more heavily on wholesale funds than its competitors. This means that its cost of borrowing is higher than that of many rival bank. | ||
| - | ====Corporate Tax Rates==== | + | ===Benefits of Changes in Tax Law=== |
| - | Rising corporate income tax rates directly increase costs for taxes paid to the government, which decreases the amount of profits left for banks to fund investments and reinvest in operations. However, changes in tax law can also benefit banks. Newly proposed fiscal legislative reform for 2011, which will effectively increase the capital gains tax paid by private equity firms and other money managers from 15% to between 20% and 30%. This tax increase creates incentives for such firms to exit their profitable positions and move to launch initial public offerings (IPO) before the change in tax law takes effect in 2011. This is increase in IPO activity directly translates into an increase in fee for investment banks handling the private equity IPO deals.<ref>[http://www.huliq.com/9990/us-tax-law-changes-2011-increase-private-equity-deals Huliq "US tax law changes in 2011 increase private equity deals" 18 Jan 2010]</ref> | + | Rising corporate income tax rates directly increase costs for taxes paid to the government, which decreases the amount of profits left for banks to fund investments and reinvest in operations. However, changes in tax law can also benefit banks. Proposed fiscal legislative reform which would effectively increase the capital gains tax paid by private equity firms and other money managers could increase the rate of IPOs in the short term. The rise in IPOs would be a result of money managers and PE firms attempting to avoid an increase in capital gains tax.<ref>[http://www.huliq.com/9990/us-tax-law-changes-2011-increase-private-equity-deals Huliq "US tax law changes in 2011 increase private equity deals" 18 Jan 2010]</ref> |
| ===Fed Proposes New Legislation to Prevent Money Laundering=== | ===Fed Proposes New Legislation to Prevent Money Laundering=== | ||
| - | The U.S. Treasury has proposed a rule requiring U.S. banks to report all electronic transfers of funds in and out of the country. Previously, banks were required to report only fund transfers in excess of $3,000 and cash transfers over $10,000. The new rule would not apply to credit card and ATM transactions. The rule is an attempt by U.S. government officials to crack down on money laundering. Several global banks have lately had issues with money laundering probes. [[Barclays]] and Wachovia, now part of [[Wells Fargo (WFC)]] have agreed to large settlements in 2010. UBS has suffered a substantial $780 million fine due to such issues.<ref>[http://www.thestreet.com/story/10872169/1/feds-push-banks-on-money-laundering.html The Street "Feds Push Banks on Money Laundering" 9/27/10]</ref> | + | The U.S. Treasury has proposed a rule requiring U.S. banks to report all electronic transfers of funds in and out of the country. Previously, banks were required to report only fund transfers in excess of $3,000 and cash transfers over $10,000. The new rule would not apply to credit card and ATM transactions. The rule is an attempt by U.S. government officials to crack down on money laundering. This new regulation may deter customers, but also may increase the cost of operation for Citi.<ref>[http://www.thestreet.com/story/10872169/1/feds-push-banks-on-money-laundering.html The Street "Feds Push Banks on Money Laundering" 9/27/10]</ref> |
| ==Competitive Landscape== | ==Competitive Landscape== | ||
| The major players in Citi's league are [[Bank of America (BAC)]], [[Deutsche Bank AG (DB)]] and [[J P Morgan Chase (JPM)]]. These firms typically operate on a business model that gradually introduces clients to complex financial services and solutions as the client matures. In this way, these banking firms try to cater to the client's entire life span by offering as many products as possible. For this reason some have identified this strategy as building "banking supermarkets." This mode of thinking has changed recently, as Citigroup increasingly focuses on its most profitable products, continues to cut costs and personnel, and relocates offices to regions that are experiencing robust growth. | The major players in Citi's league are [[Bank of America (BAC)]], [[Deutsche Bank AG (DB)]] and [[J P Morgan Chase (JPM)]]. These firms typically operate on a business model that gradually introduces clients to complex financial services and solutions as the client matures. In this way, these banking firms try to cater to the client's entire life span by offering as many products as possible. For this reason some have identified this strategy as building "banking supermarkets." This mode of thinking has changed recently, as Citigroup increasingly focuses on its most profitable products, continues to cut costs and personnel, and relocates offices to regions that are experiencing robust growth. | ||
| - | |||
| - | Sub-prime loans composed 70% of the CitiFinancial lending portfolio which put the company under extreme stress. The high default rates forced Citi to keep the [[Troubled Assets Relief Program (TARP)]] funding longer than some of its rivals. While JP Morgan and other investment based firms were able to repay their loans in under a year, Citi was not given permission from the US Treasury to repurchase the loans. | ||
| {{clr}} | {{clr}} | ||
Revision as of 13:47, May 1, 2011
Citigroup (NYSE:C) is one of the world's largest diversified financial services firms, which means that it makes money by loaning out money and receiving interest on the loans.[1] [2] .
In 2010, Citigroup reached a turning point in which the company was able to achieved its primary goal of returning to profitability, posting positive net income in each quarter and a full-year profit of $10.6 billion.[3] The company was forced to alter its operations in order to reach this point. Citi sold branches such as CitiStreet, CitiBank, and its banking operations in Germany. In addition the company reshuffled and changed its management[4][5] These efforts represent a shift away from an investment bank into a standard holding bank.
Business Overview
Citigroup operates in four regions include North America (including US, Canada, and Puerto Rico), EMEA (Europe, Middle East & Africa), Latin America (including Mexico, and Asia (including Japan). It's divided into two business: Citicorp, which encompasses Citi's core businesses, the Regional Consumer Banking Division and Institution Clients Group, and Citi Holdings, which overseas Brokerage and Asset Management, Local Consumer Lending, and Special Asset Pool, all of which are businesses which Citi wishes to shrink.
Citicorp (75.7% of 2010 Net Revenue)
Regional Consumer Banking (38.2% of 2010 Net Revenue)
This division provides traditional commercial banking services. Lending opportunities are also available under this arm of Citi, including loans for housing, auto-financing, and for students. Citi also issues credit cards under the Visa, MasterCard, Diners Club, and American Express networks, with around 120 million cardholders globally.[3]
Institutional Clients Group (37.5% of 2010 Net Revenue)
This unit, also referred to as corporate and investment banking, offers financial advice to companies interested in raising capital or involved in mergers and acquisitions and provides clients with cash management and treasury services, such as streamlining multiple asset classes under one processing system. In addition, its Global Capital Markets division provides sales, trading, and research services, and is the second largest brokerage system in the U.S. [3]
Citi Holdings (22.3% of 2010 Net Revenue)
Citi Holdings is the division put in place to handle the divestiture of assets that are generally unwanted on Citi's balance sheet. It exists to hold businesses which Citi does not consider to be its core businesses, which are held in Citicorp.[3]
Trends & Forces
Government Regulation
An increase in US Government regulation could have a substantial impact on the operations of Citi as well as the rest of the financial industry.[6] All holding banks will be prevented from engaging in proprietary trading and in any trades where there is a "material conflict of interest". In addition, "material exposure to high-risk assets or high-risk trading strategies" will be banned. While the impact may be large, the true extent depends on the interpretation and implementation of the regulation.[7]
The Basel III rules will force banks to increase the amount of money they hold against liabilities. While the goal of the regulation is to prevent banks from becoming over leveraged, they may also prevent the banks from creating the same profit margins that they previously were able to attain.[8]
Other regulation may place limits on the extent to which banks may invest in hedge funds or in private equity funds. This is commonly referred to as the Volcker Rule.[9] In order to improve their returns, Citi, like many of its peers, invests in organizations like hedge funds and private equity funds. These funds tend to have higher returns, but also tend to be higher risk. While the regulation aims to lower speculation and high risk investments, it may also prevent Citi from achieving the returns it has historically gotten. Swaps, which are used by banks to offset their risk or hedge against potential outcomes, may also be regulated. This would prevent banks from taking certain positions because the risk would be too high without the possibility of a swap.[10] [11]
Furthermore, regulation imposing a fee to financial institutions that keep their money in the Federal Reserve would increase the cost of operation for Citi.[12][13][14]
Corporate Restructuring and Focus on Core Business
After the financial crisis, Citi announced its plans to split Citigroup into Citicorp, its $1.1 billion traditional banking arm, and Citi Holdings, for its riskiest investment assets. Citi stated that the split would allow the company to focus on its core business, and allow Citicorp to return to profitability and stabilize sooner than Citigroup could have as a single firm.[15] [16][17] This move reflects a broader shift in the company's focus towards that of a traditional holding bank. While this move will likely decrease the company's exposure to risk, it may also prevent the company from achieving the same level of returns it has in the past.
Interest Rates
Rising interest rates raise the cost of borrowing for all lenders, dampening the overall demand for mortgages and other home loan products. The U.S. Federal Funds Rate could help to stimulate demand for loans and lower default rates by allowing people to refinance their homes at lower rates. [18][19] Housing loans have traditionally been a strong source of revenue for banking firms. With the current interest rate environment, owners of real estate are selling to take advantage of the high short-term rates. With low interest rates in the future, prospective home owners are staying out of the market and waiting for short-term rates to drop before looking for a loan. This over-arching attitude has weakened the housing loans business for banks, such as Citi.
The Yield Curve
Typically banks charge higher interest rates on loans which qualify as long term debt than they they pay on deposits (short term debt). A flat or inverted yield curve, implies that long-term rates are the same or lower than short-term rates. This drastically reduces the profitability of loans. Citi is particularly vulnerable to interest rates fluctuations as it depends more heavily on wholesale funds than its competitors. This means that its cost of borrowing is higher than that of many rival bank.
Benefits of Changes in Tax Law
Rising corporate income tax rates directly increase costs for taxes paid to the government, which decreases the amount of profits left for banks to fund investments and reinvest in operations. However, changes in tax law can also benefit banks. Proposed fiscal legislative reform which would effectively increase the capital gains tax paid by private equity firms and other money managers could increase the rate of IPOs in the short term. The rise in IPOs would be a result of money managers and PE firms attempting to avoid an increase in capital gains tax.[20]
Fed Proposes New Legislation to Prevent Money Laundering
The U.S. Treasury has proposed a rule requiring U.S. banks to report all electronic transfers of funds in and out of the country. Previously, banks were required to report only fund transfers in excess of $3,000 and cash transfers over $10,000. The new rule would not apply to credit card and ATM transactions. The rule is an attempt by U.S. government officials to crack down on money laundering. This new regulation may deter customers, but also may increase the cost of operation for Citi.[21]
Competitive Landscape
The major players in Citi's league are Bank of America (BAC), Deutsche Bank AG (DB) and J P Morgan Chase (JPM). These firms typically operate on a business model that gradually introduces clients to complex financial services and solutions as the client matures. In this way, these banking firms try to cater to the client's entire life span by offering as many products as possible. For this reason some have identified this strategy as building "banking supermarkets." This mode of thinking has changed recently, as Citigroup increasingly focuses on its most profitable products, continues to cut costs and personnel, and relocates offices to regions that are experiencing robust growth.
References
- ↑ Samay Live, "Citi to split itself into Citicorp, Citi Holdings," 01/16/2009
- ↑ Bloomberg "Citigroup’s Vikram Pandit to Take $1 Salary, No Bonus" 11 Feb 2009
- ↑ 3.0 3.1 3.2 3.3 Citi Annual Reports 2010
- ↑ Credit Mutuel to Buy Citi's German Operations for EUR4.9 Billion
- ↑ Yahoo Finance "Form 10-Q for Citi Group Inc" 1 Aug 2009
- ↑ The Washington Post "Financial regulation bill nears finish line with support from Snowe, Brown" 13 July 2010
- ↑ Market Watch "New regulations may cut big bank profit 13%, Goldman says" 28 June 2010 pg. 2
- ↑ The Huffington Post "Basel III Rules: Banks Given Until 2019 To Fully Comply With New Global Regulations" 9/13/10
- ↑ Business Insider "Morgan Stanley Will Take Huge Loss On FrontPoint Because It's Bleeding Money On Losses And Lobsters" 8/5/10
- ↑ Forbes 'Swaps Split Could Cost Banks $85 Billion In Capital'
- ↑ The Options Insider "Permissible Bank Derivatives Trading" 2010
- ↑ The Boston Globe "Brown will back financial overhaul" 13 July 2010
- ↑ Market Watch "New regulations may cut big bank profit 13%, Goldman says" 28 June 2010 pg. 1
- ↑ Financial Feed "Vague Business Tax Cuts for the New Tax Law" 12/27/10
- ↑ BBC News, "Citigroup to split as losses grow," 01/16/2009
- ↑ cnn.com, "Citigroup to split after $8.3B loss," 01/16/2009
- ↑ cnn.com, "Citigroup to split after $8.3B loss," 01/16/2009
- ↑ Bloomberg.com, US Rates and Funds
- ↑ Federal Reserve Board "Open Market Operations" 16 Dec 2008
- ↑ Huliq "US tax law changes in 2011 increase private equity deals" 18 Jan 2010
- ↑ The Street "Feds Push Banks on Money Laundering" 9/27/10
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