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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.[1]

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 will be 65% deposit funded.[2] To reduce operating costs, Citi has sold branches such as CitiStreet, CitiBank, and its banking operations in Germany.[3][4] 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[5] These efforts represent a shift away from an investment bank into a standard holding bank.

In June 2009, Citi was removed from the Dow Jones Industrial Average (.DJIA). The move was prompted by a number of issues, including its share price dropping more than 90% over the year and receiving $45B in Troubled Assets Relief Program (TARP) funds, which it used to extend $36.5B in loans - mostly to mortgage backed securities. The $45B bailout has given the government a 34% stake in Citi through ownership of common stock. This size stake has called into question whether Citi is a nationalized bank.

In addition, in mid December 2009 Citi reached an agreement with U.S. government and its regulators to repay the $20 billion the government holds in TARP trust preferred securities. In order to finance the repayment, Citi will issue $17 billion of common stock and $3.5 billion of tangible equity units. Citi has also decided to terminate its loss sharing agreement with the government and cancel $1.8 billion of the $7.1 billion in trust preferred securities it originally issued to the government as consideration for the benefits provided by the agreement. Termination of the agreement will increase Citi's risk-weighted assets by approximately $144 billion.[6]

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)

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Consumer Banking (25% of 2009 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. 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).[7]

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.[8]

Institutional Clients Group (-12% of 2009 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.

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Operating Leverage has fallen as the income statement continue to be diversified

Global Wealth Management (34% of 2009 Net Income)

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.

Global Cards (11% of 2009 Net Revenue)

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.[9] In addition, it is the largest earning segment for Citi's consumer business.[9] 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.[10]

Annual income data, in millions 2005 2006 2007 2008[11] 2009[1]
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
Non-interest Income $44,396 $48,399 $33,117 ($2,150) $31,371
Net Income $19,806 $21,249 $3,617 ($27,684) (1,606)

Trends & Forces

Government influences and regulations will greatly affect Citi's future

Stress Test Asks Citi To Raise $5.5B

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.[12] On May 7 2009, the government determined that Citi must raise an additional $5.5 billion[13]. Citi ranked 4th in the amount of capital it has to raise to help buffer themselves for a continued difficult economic situation through 2010.[14] 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).

$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 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%.[15] The Federal Deposit Insurance Corporation (FDIC) defines a bank as being critically under-capitalized with a ratio under 2%.[15]

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.[15]

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. [6]

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.[16]

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.[17] 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.[18]

Such legislation is intended to reduce speculative activity by financial institution in order to avoid future financial crises similar to the 2008 Financial Crisis; however, Obama's plan also has the effect of slowing economic recovery by limiting banks' ability to generate earnings as well as limiting investment in private equity deals and funds. U.S. banks make immense contributions to the buyout sector and have raised 60 funds since 2006, with a total value exceeding $80 billion. Such investments are crucial to driving economic growth and development, which will be greatly hindered with the imposition of such limits on the investment activities of major banks such as Citi. Since U.S. banks also manage more than $180 billion in hedge funds of funds subsidiaries, any restriction on banks' management of funds would affect hundred of hedge funds worldwide, which generate profits from such funds of funds.[17]

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.[19]

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.[19]

Corporate Restructuring and Focus on Core Business

Citicorp and Citi Holdings

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.[20] 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.[21] In addition, it cut approximately 52,000 jobs.[22]

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).[13] 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.[13] 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.[13] ICG and Global Wealth Management revenues were mainly attributed to lower client activities (i.e. mergers, acquisitions, IPOs, personal investments, etc).[13]

Macroeconomic Factors

Interest Rates

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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.[23][24]

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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 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.

Corporate Tax Rates

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.[25]

Competitive Landscape

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Global M&A market share for the first 7 months of 2010[26]
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A comparison shows other banks currently maintain higher net interest margins than 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.

2009 data Assets ($B)[27] Revenue ($B)
Bank of America (BAC) $2,300 $113
J P Morgan Chase (JPM) $2,000 $101
Citigroup (C) $1,800 $106
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.

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Citi is one of the most popular cards in the industry


  1. 1.0 1.1 1.2 Citigroup 2009 Quarterly Financial Data Supplement
  2. Samay Live, "Citi to split itself into Citicorp, Citi Holdings," 01/16/2009
  3. Credit Mutuel to Buy Citi's German Operations for EUR4.9 Billion
  4. Yahoo Finance "Form 10-Q for Citi Group Inc" 1 Aug 2009
  5. Bloomberg "Citigroup’s Vikram Pandit to Take $1 Salary, No Bonus" 11 Feb 2009
  6. 6.0 6.1 Citigroup, U.S. Government and Regulators Agree to TARP Repayment
  7. Citigroup Debit Cards for China - WSJ.com
  8. Reuters, "Citigroup Inc.'s CitiFinancial Reorganizes US Franchise" 6/1/10
  9. 9.0 9.1 Citi About Us
  10. Reuters "Canada's Imperial Bank Purchases Citigroup's Card business" 6/14/10
  11. C 10-K 2008 "Selected Financial Data" p.116
  12. Board of Governors of the Federal Reserve System, "The Supervisory Capital Assessment Program:Design and Implementation," 04/24/09
  13. 13.0 13.1 13.2 13.3 13.4 Citi 10-Q, March 31, 2009
  14. MSNBC "Ten of the largest U.S. banks need $75 billion," 05/08/2009
  15. 15.0 15.1 15.2 CNN Money,"http://money.cnn.com/2009/02/27/news/companies/citigroup/index.htm," 02/27/09
  16. CNN Money,"Citibank (NYSE: C) to Sell Citi Property Investors Unit," 02/10/10
  17. 17.0 17.1 Hedge Funds, Private Equity Seen Hit By Obama's Bank Plan
  18. 'Volcker Rule' Socks Bank Trading, Funding For Hedge funds And Private Equity
  19. 19.0 19.1 Forbes 'Swaps Split Could Cost Banks $85 Billion In Capital'
  20. BBC News, "Citigroup to split as losses grow," 01/16/2009
  21. cnn.com, "Citigroup to split after $8.3B loss," 01/16/2009
  22. cnn.com, "Citigroup to split after $8.3B loss," 01/16/2009
  23. Bloomberg.com, US Rates and Funds
  24. Federal Reserve Board "Open Market Operations" 16 Dec 2008
  25. Huliq "US tax law changes in 2011 increase private equity deals" 18 Jan 2010
  26. The Wall Street Journal "Barclays Makes a Splash in Financing" 7/29/10
  27. Herald Tribune "Bank of America claims top spot in assets" 15 June 2009
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