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Citigroup (NYSE:C) is one of the world's largest diversified financial services firms, and generated revenues of over $81 billion in 2007. The firm's principal businesses include: Global Consumer Group, Corporate and Investment Banking, Global Wealth Management, and Alternative Investments. Citigroup makes money by underwriting debt and equity issues, meaning that Citigroup helps other companies issue bonds or stocks to raise money. The firm also provides wealth management advice to wealthy clients in addition to providing mortgages, credit cards, and other financial services through its commercial banking division. The firm had over $2.1 trillion in assets as of December 30, 2007, serves clients through 2,900 retail branch locations and 1,800 consumer finance locations, and employs 332,000 people in 50 different countries.
Citi had significant exposure to the subprime mortgage industry and suffered considerable losses in 2007. After large write-downs and write-offs on many of its mortgage-backed securities and collateralized debt obligations, Citi's net income for the year fell 83% to $3.6 billion from $21.5 billion in 2006; for the first nine months of 2008, Citi posted a net loss of $10.4 billion.[1] Citi has also sold stakes of itself to several outside investors to shore up the capital necessary to ride out the credit crunch. Along with these measures, Citi has sold non-core parts of its business; the most recent example was the July 2008 sale of its German retail banking operations to French firm Credit Mutuel.[2]
The financial crisis took a worse turn in September 2008, forcing some of the banks notable rivals, such as Lehman Brothers (LEH) and Washington Mutual (WM) to to declare bankruptcy. While in the month of September 2008, Citi's share price plunge nearly 35% in September, the pressure on Citigroup was significantly lower than some of its peers. Morgan Stanley shares, for example, traded at $14 on September 17, 2008 -- down from $40 range it had been trading at during the beginning of the month. Citigroup's large deposits, has allowed it to keep its leverage ratio, relatively low -- and hence kept the banks creditors at peace.
On September 28, 2008 Citigroup announced plans to acquire the banking operations of Wachovia (WB) in a $2.16 billion, all-stock transaction. The acquisition would create the third-largest branch network in the U.S., behind Bank of America (BAC) and J P Morgan Chase (JPM) and give Citigroup a 9.8% share of total U.S. deposits.[3] On Thursday, October 2, however, rival Wells Fargo (WFC) submitted a $15.1 billion bid for all of Wachovia, a significant premium to the price offered by Citi. Wachovia accepted the offer on Friday, though Citi's CEO Vikram Pandit pledged to fight the deal, citing an exclusivity agreement signed between Citi and Wachovia preventing negotiations with other firms.[4] Citi has since abandoned plans to fight the merger and is instead filing a number of lawsuits to the tune of over $60 billion.[5]
Contents |
[edit] History and Business Overview
Citigroup was formed through the combination of a number of different firms over the last two hundred years. This process culminated in the merger of Citicorp and Travelers Group in 1998. The principal components of today's Citigroup are: Citibank (founded in 1812), Bank Handlowy (founded in 1870), Smith Barney (founded in 1873), Banamex (founded in 1884), and Salomon Brothers (founded in 1910). The firm traded its investment management arm to Legg Mason in exchange for the latter's brokerage operations; the name "Travelers" and the umbrella logo were later removed from Citigroup's branding. The firm is now commonly referred to (and brands itself) as "Citi."
| Annual income data, in millions | 2003 | 2004 | 2005 | 2006 | 2007 | 9M08[6] | |
|---|---|---|---|---|---|---|---|
| Net Interest Income | $37,330 | $41,617 | $39,240 | $39,488 | $46,936 | $40,439 | |
| Loan Loss Provision | $8,046 | $6,233 | $7,929 | $6,738 | $17,424 | $22,019 | |
| Non-interest Income | $34,264 | $38,018 | $44,402 | $50,127 | $34,762 | $6,759 | |
| Net Income | $17,058 | $16,054 | $19,806 | $21,249 | $3,617 | ($10,421) | |
Citigroup maintains 4 main business lines, each with a global emphasis:
- Consumer Banking,
- Corporate & Investment Banking,
- Wealth Management, and
- Alternative Investments.
[edit] Consumer Bank
This division provides traditional commercial banking services. The firm maintains an extensive ATM network in many parts of Manhattan, and all across the globe. 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]
The deteriorating credit environment has proved challenging for Citi. In addition to detailed client background checks, the firm has placed limits on balance transfers between credit card accounts, a tactic expected to bolster the consumer bank's bottom line in the short-term. On August 1, 2008, Citi announced a $176 million loss in its credit card securitization business, reflecting the impact of higher charge offs among borrowers.[8]
[edit] Corporate & Investment Bank
Global Banking offers financial advice to companies raising capital or involved in mergers and acquisitions. As a global enterprise, Citi is known for leading very large transactions. The strength of the company's balance sheet allow it to bid aggressively for business by offering potential customers financing as an added incentive for doing business with them.
Global Capital Markets provides sales, trading, and research services. Like the Corporate & Investment Bank, the company's focus is on large transactions for companies and high-net worth retail investors. To provide clients with a global reach, the firm frequently relies on its strength in local areas of expertise. This network has attracted enough clients to make Citi the second largest brokerage system in the U.S.
Transaction Services provides clients with cash management and treasury services. As a corporate banking function, Citi provides custody services, ensuring that substantial amounts of capital are transferred to the appropriate recipients. The firm is known for having clients who hold global accounts under multiple asset classes whose reporting must be streamlined into one processing system.
[edit] Wealth Management
The Citigroup Private Bank provides high-net worth clients with trust maintenance and advisory services--including managing relationships with clients and referring them to other divisions/product offerings of Citi. The Private Bank maintains a network of 470 professionals and 290 specialists in over 30 countries.
Smith Barney is the traditional private wealth management unit of Citigroup. The division's clients are high-net worth individuals and institutions. The latter includes governments, private firms, companies, and foundations. International in its reach, the Smith Barney network has over 13,000 financial advisors in over 600 offices. Smith Barney is responsible for more than $1.2 trillion in client assets.
Citigroup Investment Research is founded on over 390 research professionals across 22 geographies. The research team covers 3,100 companies, representing 90 percent of all the companies featured in the major international benchmarks. Other specialists provide macroeconomic and other quantitative analyses of markets and sector trends. The goal of this arm is to assist clients in making investment decisions through careful and insightful analysis and examination.
| 2007 Metrics | Citigroup | Morgan Stanley | Merrill Lynch | |
|---|---|---|---|---|
| Revenue per adviser | $742,000 | $853,000 | $860,000 | |
| Total advisers | 14,858 | 8,429 | 16,740 | |
| Total assets (bn) | $2,182 | $1,045 | $1,020 | |
| Fee-based assets as % of total | 28.8% | 27% | 37.4% | |
| Total client assets (bn) | $1,548 | $758 | $1,751 | |
[edit] Alternative Investments
Founded in 2005, this arm represents Citi's endeavor to enter the booming market for assets not highly traded in the public capital markets. Citi Alternative Investments is composed of 11 separate investment groups, providing a range of investment guidance across asset classes and geography. Complete with its own hedge fund (Tribeca) and venture capital group (Citi Venture Capital International), the firm recently hired Mr. Vikram Pandit, former head of Institutional Securities at Morgan Stanley, to lead CAI into the coming year.
Although Citi Private Equity and Citi Venture Capital are known for engaging in deals with well known financial sponsors, Tribeca's performance has been flat since inception. This may be a sign that the hedge fund market is saturated and that Citi must focus on other countries that have yet to receive substantial investment. Mr. Pandit established a strong reputation at Morgan Stanley, but whether this will directly translate into success in alternative investments remains to be seen.
[edit] Trends & Forces
[edit] Interest Rates
Loan defaults, particularly in the subprime market, have increased throughout 2007. As interest rates on adjustable-rate mortgages reset, some borrowers find themselves unable to afford the higher monthly payments. 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 Reserve's rate cuts in 2007 and 2008 could, however, 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 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 attitude has weakened the housing loans business for banks and encouraged them to expand their portfolio into other markets (e.g., Morgan Stanley's recent purchase of hotel properties in Japan).
On October 1, 2007 Citigroup announced that it expected third quarter profits to be down 60% compared to the same period last year, indicating that its exposure to the subprime market is greater than originally anticipated. In its fourth-quarter earnings release, Citi announced an 82% drop in net income for the year, citing weak performance in its fixed-income division and the general contraction in the subprime mortgage and credit markets.
[edit] 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 banks.
[edit] Advisory Services and growth abroad
Both activity in mergers and acquisitions and private equity deals have continued to rise since the tech boom of the 1990s. Aggressive merger activity is present in Latin America, as industry is recovering and the regulatory environment is becoming increasingly amenable. A particular focus is seen in emerging markets including Central America and India, both of which are recording a large inflow of capital investment.
Citi has capitalized on its global reach, especially in emerging markets, by taking on a substantial share of both markets. This strength is expected to be bolstered as the company establishes a foothold both in Japan and in Latin America. Benefits have already been experienced as the company ranked fourth in total global transaction volume completed in 2006. However, as financial conditions worsen, Citi has slowed its expansion in Japan and other foreign markets. In Japan, it sold its Japanese trust banking unit NikkoCiti Trust & Banking Corp. and decided to delay its mergers of Japanese units. Instead, Citi has focused on making its US units more efficient and lean.[9]
[edit] Corporate Developments
Mobile Banking: Banks across the industry have made progress into mobile banking issues. In 2006, the major banks including J P Morgan Chase (JPM), Citigroup, and Commerz Bank launched a campaign to open as many ATMs as possible, Citigroup embraced this by opening 5500 new ATMs (according to its 2006 Annual Report). The idea of convenience is extended to a new level by phone-based mobile banking. Basic services like account management and fund transfers are among the possible options for mobile banking. Most importantly, it represents an outlet for those lacking bank accounts, are undocumented, and poor.
Remittances: With Bank of America (BAC) taking the first move into the remittances market, competitors and start-ups are taking small steps into the industry. At present, this segment represents a significant source of untapped revenue with very little competition.
Technology: In 2006, Citigroup created the first (per their 2006 annual report) "biometric credit card." Launched in Singapore, this lending product verifies customers by fingerprint, rather than using a plastic card, providing increased protection against credit fraud.
[edit] Competitive Landscape (2006)
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 firm's consumer bank contained their exposure to the sub-prime market by focusing on wholesale products and loans with strong covenants. As a result, these loans have been repaid for the most part as the debtors who signed for loans are less likely to default. Regarding those who have defaulted, the bank has had to make up for these losses by increasing their account for losses by compensating itself. Sub-prime loans composed 70% of the CitiFinancial lending portfolio in 2006.
A key factor of the consumer bank's growth concerns this net interest margin metric. By accepting a lower return, the bank is able to attract and maintain clients. As recently as summer 2006, the bank administered a set of benefits for new applicants including higher interest rates paid on deposits, and cash back. Citi launched an active marketing campaign to streamline the transfer of accounts and attract clients from rival banks.
[edit] Financial Condition (2007)
On October 15, 2007 Citigroup reported net income for the 2007 third quarter of $2.38 billion, or $0.47 per share, a decline of 57 percent from the third quarter of 2006. The company wrote down $1.56 billion pre-tax on the value of sub-prime MBSs warehoused for future collaterialized debt obligation securitizations, CDO positions, and leveraged loans warehoused for future collaterialized loan obligation securtizations. In addition to their sub-prime problems, Citigroup saw a decline in their fixed income business. It wrote down $1.35 bilion pre-tax on funded and unfunded highly leveraged finance commitments and faced losses of $636 million in fixed income credit trading due to significant market volatility and the disruptions of historical pricing relationships. On the flip side, international revenues were up 30 percent and their global wealth management franchise generated record revenues, up 41 percent. Citigroup's transaction services business posted record double-digit earnings growth increasing by 38 percent to $2.06 billion driven by higher customer volumes.[10]
Citigroup CEO Charles Prince stepped down on November 4, 2007 after a disappointing third quarter. His resignation came after Citigroup announced that it expects to write off an additional $8 billion to $11 billion on its $55 billion in exposure to subprime investments, $43 billion of which is exposure to collateralized debt obligations.[11]
Citi announced a fourth-quarter loss of $9.83 billion on $18 billion in write-downs on various types of securities and other holdings. For the full year of 2007, Citi's net income fell 83% from 2006 to $3.6 billion, reflecting the difficulties facing the company in 2007. Additionally, Citi received billions of dollars in capital infusions from several foreign investors in 2007; by selling shares of itself, Citi raised capital in order to boost its capital stock and maintain normal operations.
[edit] References
- ↑ Q2 2008 Financial Supplement
- ↑ Credit Mutuel to Buy Citi's German Operations for EUR4.9 Billion
- ↑ Bloomberg.com, Retrieved September 30, 2008
- ↑ Wachovia Chooses Wells Fargo, Spurns Citi - WSJ.com
- ↑ Citi Waves Goodbye to Wachovia - Forbes.com
- ↑ 3Q2008 Financial Supplement - Citigroup
- ↑ [Citigroup Debit Cards for China - WSJ.com]
- ↑ Citigroup Reports Loss on Credit Card Securitizations - Seeking Alpha
- ↑ MSN Money: "Citigroup to sell Japanese trust banking unit" 16 Dec 2008
- ↑ http://www.citigroup.com/citigroup/press/2007/071015a.htm
- ↑ http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-20750893.htm
