|Revision as of 14:02, June 27, 2011 (edit)
RCossart - Sr. Director (Talk | contribs)
← Previous diff
|Revision as of 19:25, July 31, 2011 (edit) (undo)
RCossart - Sr. Director (Talk | contribs)
Next diff →
|Line 17:||Line 17:|
|===New Updates===||===New Updates===|
|-||In 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://news.yahoo.com/s/nm/20110617/bs_nm/us_citigroup Yahoo News "Citigroup's sale of consumer finance unit hits block: report" 6/7/11]</ref> This fits into a broader ongoing process by which Citi has worked to sell or decrease its exposure to riskier aspects of the business. This shift in business has been undertaken since the financial crisis.||+||In 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://news.yahoo.com/s/nm/20110617/bs_nm/us_citigroup Yahoo News "Citigroup's sale of consumer finance unit hits block: report" 6/7/11]</ref> This fits into a broader ongoing process by which Citi has worked to sell or decrease its exposure to riskier aspects of the business. This shift in business has been undertaken since the financial crisis. However, the company has had difficulty selling the business as it received a lower credit score than expected. This may result in Citi receiving less money for the business than originally hoped.<ref>[http://www.reuters.com/article/2011/07/07/us-onemain-citigroup-idUSTRE76600J20110707 Reuters "Citi hit Moody's hurdle in OneMain sale: source" 6 July 2011]</ref>|
|==Trends & Forces==||==Trends & Forces==|
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.  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. 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 These efforts represent a shift away from an investment bank into a standard holding bank.
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.
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.
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. 
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.
In 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. This fits into a broader ongoing process by which Citi has worked to sell or decrease its exposure to riskier aspects of the business. This shift in business has been undertaken since the financial crisis. However, the company has had difficulty selling the business as it received a lower credit score than expected. This may result in Citi receiving less money for the business than originally hoped.
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. 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.
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.
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. 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. 
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.  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.
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.  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.
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.
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.
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.
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.