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. Citi had significant exposure to the subprime mortgage industry and suffered considerable losses in 2007 and 2008 from large write-downs and write-offs on many of its mortgage-backed securities and collateralized debt obligations. Citi posted a loss of $6,733 million in 2009, a 66.6% decrease from a loss of $20,326 million in 2008.
On 16 January 2009, Citi announced 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. To reduce operating costs, Citi has sold branches such as CitiStreet, CitiBank, and its banking operations in Germany. 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 These efforts represent a shift away from an investment bank into a standard holding bank.
Citi has continued to focus on growing its core businesses in Citicorp while divesting its troubled assets in Citi Holdings. Citi remains one of the best capitalized banks with $125.4 billion of Tier 1 Capital and a Tier 1 Common ratio of 10.3% at the end of the 3rd quarter.
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)
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. On July 17, 2008, Citi announced that it had received approval from the Chinese government to issue debit cards to its customers in China, giving it access to the booming market there (in 2007, the number of card transactions in China totaled roughly 13.5 billion).
On June 1, 2010, CitiFinancial, the firm's consumer finance arm announced plans to reorganize its North American business. CitiFinancial will be separating its US businesses into two segments: CitiFinancial's Full Service Branches and CitiFinancial Servicing. Each segment will leverage the local, community based approach to service clients. The restructuring of the unit will also involve the closing of 330 U.S. branches and cutting 500-600 jobs in an effort to reduce costs at the business and make it more attractive to potential buyers. Approximately 18% of CitiFinancial's 1,833 U.S. branches will be shut down and an additional 182 branches will stop making loans.
In the 3rd quarter of 2010, net income of $1.2 billion was up $59 million, or 5%, sequentially, mainly driven by lower credit costs and higher revenues in both North America and Latin America.
Revenues were $8.2 billion, an increase of $129 million or 2% sequentially, driven by Latin America and North America. Average retail banking loans grew 2% to $112 billion and average Citi-branded cards loans increased 1% to $110 billion, both driven by Asia and Latin America. Average deposits were up 1% to $296 billion, driven by Asia. International investment sales declined 9% to $21.3 billion and total investment assets under management grew 7% to $125 billion, both driven mainly by Latin America.
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.
In the 3rd quarter of 2010, net income of $1.4 billion was down $292 million, or 17%, from the prior quarter, driven by North America and Asia. The net income decline in North America was mainly due to higher credit costs related to a restructuring of a specific corporate credit.
Revenues were $5.6 billion, a decrease from $362 million, or 6%, sequentially, driven by lower Lending and Fixed Income Markets revenues, partially offset by growth in Equity Markets and Investment Banking revenues.
This unit provides high-net worth individuals and institutions with trust maintenance and advisory services in over 30 countries. The latter includes governments, private firms, companies, and foundations. It includes Smith Barney, its private wealth management unit that manages more than $1.2 trillion in assets, and Citigroup Investment Research, which covers 90% of the companies featured in major international benchmarks. In addition, this unit encompasses an alternative investment arm, which includes a private equity division and a hedge fund.
The Global Cards segment includes the handling and management of credit cards, such as Visa, MasterCard, Diners Club, and American Express. It is the world's largest provider of credit cards with over 200 million accounts, both consumer and business. In addition, it is the largest earning segment for Citi's consumer business. On June 14th, 2010, Canada's Imperial Bank agreed to purchase Citi's Canadian MasterCard business, representing another instance of Citi selling off assets in order to pay off government debt.
|Annual income data, in millions||2005||2006||2007||2008||2009|
|Net Interest Income||$39,240||$39,488||$46,936||$53,692||$48,914|
|Loan Loss Provision||$9,046||$6,320||$16,832||$33,674||$38,760|
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.
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.
Some major European banks, specifically Switzerland's two largest UBS and Credit Suisse, may face additional requirements because of the their immense to the Swiss economy and the possible harm a collapse would pose to the country.
The rules must still be presented to the leaders of the Group of 20 rich and developing nations at a meeting in November 2010 before they can be ratified by national governments, but the general consensus is that these rules will pass.
In February, Secretary of Treasury Timothy Geithner announced that banks with more than $100 billion in assets will be required to participate in a "stress test" -- a series of financial assessments to determine the health of the bank and if the bank needs additional capital. On May 7 2009, the government determined that Citi must raise an additional $5.5 billion. Citi ranked 4th in the amount of capital it has to raise to help buffer themselves for a continued difficult economic situation through 2010. Additionally, Citi, along with nine other banks required to raise approximately $75 billion in capital to help buffer the potential substantial losses in 2009-2010.
The Fed's criteria for the Stress Test included measures such as, GDP, unemployment rates, and housing prices. These measures were used to simulate two economic scenarios: one similar to what has been predicted and one that is worse-than-expected. To measure how the bank could withstand such scenarios, the banks were asked to report estimated numbers, such as the amount of write downs and the bank's loan loss provision. Write downs occur when the bank's assets are overvalued compared to market value, so a high write-down number brings uncertainty in the true value of a bank's balance sheets. As "bad loans" were a key driver of the crisis, a bank's loan loss provision (LLP) provides information as to how many "bad loans" the bank has. In short, including write-downs and LLP helps to measure how much public shareholders would receive if the bank were nearing bankruptcy and had to sell most of its portfolio for cash (liquidation).
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 to 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%. The Federal Deposit Insurance Corporation (FDIC) defines a bank as being critically under-capitalized with a ratio under 2%.
This move negatively effected stockholders because the huge conversion to common stock will lead to a dilution of shares, and Citi has 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.
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. 
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.
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. 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.
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.
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.
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.
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. 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. In addition, it cut approximately 52,000 jobs.
However, Citicorps's pledge to focus on its core business will make profitability difficult in the current economic situation. The recession has effected its entire business and it remains at the will of major macroeconomic factors such as consumer spending, the U.S. housing market, and consumer confidence in the finance industry. For example, Global Cards revenue, Citi's highest earning consumer business unit, decreased 10% from 1Q2008 because of a decreased amount of purchase sales (17% in North America, 16% in EMEA, 19% in Asia, and increased 10% in Latin America). The decreased amount of purchases and overall spending can be attributed to the current recession and high credit rates. In addition, Consumer Banking's revenue declined 12% from 1Q2008 because of lower volumes of deposits, investment sales, and loans. Interest revenue from loans also declined due to the decreased volume and amounts of loans. The Institutional Clients Group (ICG) and Global Wealth Management also suffered 24% and 22% year-over-year declines, respectively. ICG and Global Wealth Management revenues were mainly attributed to lower client activities (i.e. mergers, acquisitions, IPOs, personal investments, etc).
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.
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. 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.
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. 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.
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 $780 million fine due to such issues.
The major players in Citi's league are Bank of America (BAC), Deutsche Bank AG (DB) and J P Morgan Chase (JPM). These firms typically operate on a business model that gradually introduces clients to complex financial services and solutions as the client matures. In this way, these banking firms try to cater to the client's entire life span by offering as many products as possible. For this reason some have identified this strategy as building "banking supermarkets." This mode of thinking has changed recently, as Citigroup increasingly focuses on its most profitable products, continues to cut costs and personnel, and relocates offices to regions that are experiencing robust growth.
|2009 data||Assets ($B)||Revenue ($B)|
|Bank of America (BAC)||$2,300||$113|
|J P Morgan Chase (JPM)||$2,000||$101|
|Wells Fargo (WFC)||$1,200||$51.7|
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.