Citigroup Inc. – 2015 Forest R. David
A.
Case Abstract Citigroup is a leading global bank holding financial institution with more than 16,000 offices and 225,000 employees worldwide. Citigroup is the world’s largest credit card issuer with over 900 million retail accounts with various well-known well-known brands. Headquartered in Manhattan, New York, York, Citigroup has two major segments, Citicorp and CitiHolding, within four major regions of Latin America, North America, Asia, and EMEA (Europe and Middle East and Africa). The main segment is Citicorp. Citicorp has the following two major divisions: Global Consumer Banking (GCB) and Institutional Clients Group (ICG). The GCB segment offers traditional banking services such as lending and credit cards to individuals and small businesses. In contrast, the ICG segment services institutional, public sector, and high-net-worth clients, including such products and services as fixed income and equity sales and trading, foreign exchange, prime brokerage, derivative services, equity and fixed income research, corporate lending, investment banking and advisory services, private banking, cash management, trade finance, and securities services.
B.
Vision Statement (proposed) Our vision is to become world’s largest and best bank holding company providing all banking and financial products and quality services to individuals, businesses, communities, institutions, and nations globally.
C.
Mission Statement (proposed) We work tirelessly to serve individuals, businesses, communities, institutions and nations (1) globally (3) with 200 years of experience. Our highly recruited and talented employees (9) offer a diverse portfolio of banking banki ng and financial fi nancial solutions so lutions (2) ( 2) that are a re simple, creative, and responsible respo nsible (6, (6 , 7). Citigroup continues to grow (5) by providing modern digital banking technology options (4) through mobile banking, mobile deposits, and online bill pay. We enhance the lives of our communities (8) with teamwork from Citi Foundation. (69 words) 1. 2. 3. 4. 5. 6. 7. 8. 9.
Customers Products or services Markets Technology Concern for survival, growth, and profitability Philosophy Self-concept Concern for public image Concern for employees
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D.
External Audit Opportunities
1. 2. 3. 4. 5. 6. 7.
8. 9. 10.
Emerging markets for potential growth. Estimates 2.2 billion out of 2.5 billion people globally who do not use a bank live in Africa, Asia, Latin America, and the Middle East. The US Federal Reserve is expected to raise rates in late 2015 or 2016. Efficiency ratios (non interest expense / net revenues) are a key driver for bank profitability during periods of low rates with the lower percentage the better. JP Morgan and Bank of America have engaged heavily in retrenchment strategies over the last 5 years. Fixed income and other interest producing assets are leading to higher returns despite the low interest rate environment. Being less dependent on international finance results in significantly lower capital requirements. Industry-wide $16 billion in home equity loans where consumers are only paying interest amortize between 2015 and 2017. When adding in the new principal payments, monthly payments will rise 165%. Many interest-only loans will be refinanced by banks offering the best terms. Block trades often help land other business such as merger advisory and increase trading volume. Experts suggest even if you lose on the single transaction the net benefit could be greater. There are growing numbers of super-rich people in the world; banks are now targeting them to help finance many projects that once were only financed by large institutions.
Threats
1.
Senator Elizabeth Warren stated in December 2014, that Citi was bailed out with half a trillion dollars of taxpayer money, and then used their fortunes to buy Congress, and make it more likely they will be bailed out again. 2. JP Morgan and Bank of America reported higher net income and revenue than Citi in 2015. 3. Wells Fargo and Bank of America have started to waive ATM fees. 4. Increased competition from rivals on branches and ATM locations. Wells Fargo - 9,000/12,000 and JP Morgan – 5,614/18,699. 5. Yield curve in the US remains fairly flat with low rates on both short- and long-term options. 6. Europe, Japan, Australia and other regions of the world are expected to extend quantitative easing measures. 7. Wells Fargo was the only bank to achieve an increase in Q3 revenues from 2014 to 2015 at 3.2%, thanks in large part to being more focused on consumer and commercial banking than trading operations. 8. Trading income from currencies and securities has severely hurt banks over 2015. 9. Wells Fargo’s fixed income and interest operations resulted in a 4.7% increase year-over-year from Q3 2014 to Q3 2015. 10. Wells Fargo could overtake Citi as the third largest bank in the US by late 2016 based on total assets.
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Competitive Profile Matrix
Citigroup Critical Success Factors Advertising Customer Loyalty Custo mer Service Diverse Financial Solutions Global Presen ce Financial Position Digital Technology Bank Charges/Fees Percent US Focus ed Market Capitalization
Totals
Wells Fargo
JP Morgan Chase & Co.
Weight Rating Score Rating Score Rating
Score
0.05
4
0.20
3
0.15
2
0.10
0.10 0.10 0.15 0.09 0.10 0.20 0.08 0.08 0.05
3 3 4 4 3 3 2 3 2
0.30 0.30 0.60 0.36 0.30 0.60 0.16 0.24 0.10
4 4 2 1 4 4 4 4 4
0.40 0.40 0.30 0.09 0.40 0.80 0.32 0.32 0.20
2 2 3 3 2 2 3 2 3
0.20 0.20 0.45 0.27 0.20 0.40 0.24 0.16 0.15
1.00
3.16
3.38
2.37
Citi is performing relatively well on the CPM but Wells Fargo has the highest total score due in part to Wells Fargo’s focus on the US markets and less focus on trading of securities. In addition, Wells Fargo has no long-term debt and relatively little goodwill. Citigroup may need to divest its operations in poorer performing markets outside the US. EFE Matrix
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Weight Rating Weighted Score
Opportunities
1. Emerging markets for potential growth. Estimates 2.2 billion out of 2.5 billion people globally who do not use a bank live in Africa, Asia, Latin America and the M iddle East. 2. The US Federal Reserve is expected to raise rates in late 2015 or 2016. 3. Efficiency ratios (non interest expens e / net revenues) are a key driver for bank profitability during periods of low rates with the lower the p ercentage the b etter. 4. JP Morgan and Bank of America have engaged heavily in retrenchment strategies over the last 5 years. 5. Fixed income and other interest producing assets are leading to higher returns d espite the low interest rate env ironment. 6. Being less dependent on international finance results in significantly lower capital requ irements . 7. Indust ry-wide $16 billion in home equity loans where consumers are only paying interes t amortize between 2015 and 2017. When adding in the new principle payments, monthly payments will rise 165%. 8. Many interest-only loans will be refinanced by banks offering the bes t terms. 9. Block trades often help land other business s uch as merger advisory and increase trading volume. Experts s ugges t even if you lose o n the s ingle transaction the net benefit could be greater. 10. There are growing nu mbers of s uper-rich peop le in the world; banks are no w targeting th em to h elp finance many p rojects t hat once were only financed by large institutions.
0.03
3
0.09
0.03
2
0.06
0.06
4
0.24
0.04
2
0.08
0.06
3
0.18
0.05
2
0.10
0.05
3
0.15
0.05
2
0.10
0.06
2
0.12
0.03
3
0.09
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1.
2. 3. 4.
5. 6. 7.
8. 9. 10.
Threats Weight Rating Weighted Score Senator Elizabeth Warren stated in December 2014, that Citi was bailed out with half a trillion dollars of taxpayer money , and th en 0.04 2 0.08 used their fortunes to buy Congress, and make it more likely they will be ba iled ou t aga in. J. P. Morgan and Bank of America reported higher net income 0.08 1 0.08 and revenue than Citi in 2015. Wells Fargo and Bank of America have started to waive ATM 0.03 1 0.03 fees. Increased competition from rivals on branches and ATM locations . Wells Fargo - 9,000/12,000 and JPMorgan œ 0.03 2 0.06 5,614/18,699. Yield curve in the US remains fairly flat with low rates on both 0.11 2 0.22 sho rt and long term options. Europe, Japan, Australia and other regions of the world are 0.04 2 0.08 expected to extend quantitative eas ing measures . Wells Fargo was the only bank to achieve an increase in Q3 revenu es from 2014 to 2015 at 3.2%, than ks in large part to b eing 0.07 2 0.14 more focused on consumer and commercial banking than trading operations. Trading income from currencies and securities has severely hurt 0.05 2 0.10 banks over 2015. Wells Fargo‘s fixed income and interest operations resulted in a 0.05 2 0.10 4.7% increase year-over-year from Q3 2014 to Q3 2015. Wells Fargo could overtake Citi as the 3rd largest bank in the US 0.04 2 0.08 by late 2016 based on total ass ets. TOTALS 1.00 2.18
Citigroup is performing below average addressing its external issues. A weak block security trading market, low interest rates, and weak international markets have hurt the firm significantly. Despite low interest rates, fixed income has been the best option for banks over the last few years. Citi should work closely to expand its current credit card business as well as its home and auto loans in the US until foreign markets and investment banking improve.
E.
Internal Audit Strengths
1. 2. 3. 4. 5. 6.
Citigroup is the largest banking enterprise in the world based on geographic coverage with operations in 160 nations and over 16,000 offices. Citigroup is world’s largest credit card issuer with over 900 million retail accounts with various wellknown brands. In Q2 2015, Citi sold about $32 billion of the remaining assets in Citi Holdings, including OneMain Financial, the largest business remaining in Citi Holdings. Has about 90 million accounts including brands such as Home Depot, Macy’s, Sears, Shell, and others. In Q3 2015, Citi’s legal expenses dropped to $376 million from $1.3 billion Q3 2014 resulting in a net income increase of 51%. Citi’s efficiency ratio dropped from 66% to 55% from Q3 2014 to Q3 2015.
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7.
In 2015, Citigroup sold its Japanese retail operations to Sumitomo Mitsui Banking Corp. for $400 million, ending this Citigroup problematic segment. With this divestiture, Citigroup gave up 740,000 customers in Japan. 8. Citi is scaling back block trades where they buy millions worth of securities just below the market and try to quickly sell it back at the market price. 9. Citi plans to once again become heavy in block trading when the market improves. 10. Citi is offering deals to super-rich families to invest in large projects such as the tallest residential tower in Manhattan, Hooters hotel and casino in Las Vegas, tall residential buildings in Boston, and others. Weaknesses
1. 2.
3. 4. 5. 6. 7. 8. 9.
Citigroup does not have a publicly available mission or vision statement. Citigroup incurred charges of $3.5 billion Q4 of 2014 to cover legal and restructuring costs. The bank allocated $2.7 billion of that amount to cover legal costs associated with investigations into currency trading, the manipulation of a key interest rate, as well as anti-money laundering and related probes. Fraud issues in the past affect credibility of Citigroup, with $400 million stolen in Mexico and multiple high-level positions at Banamex terminated. Citi’s Q3 2015 revenues were 5% lower than Q3 2014. Retrenchment strategies at Citi partly resulted in a 4.4% decline in earnings from Q3 2014 to Q3 2015, the largest drop of any of the 4 big US banks. Citi’s fixed income and interest operations resulted in a 3.4% drop year-over-year from Q3 2014 to Q3 2015. Being focused heavily on international markets, Citi’s capital requirements are expected to rise 3.5% in 2016. Citi’s stock price as of late 2015 is 0.84x of book value according to many analysts. Citi is currently attempting to ramp up its stock trading business by courting hedge fund managers.
Financial Ratio Analysis
Current Ratio Quick Ratio Long Term Debt / Equity Inventory Turnover Total Assets Turnover Accounts Receivable Turnover Average Collection Period Net Profit Margin Return on Total Assets (ROA) Return on Equity (ROE)
Citigroup
Wells Fargo
0.36 0.36 1.72 NA 0.04
0.51 0.51 0.00 NA 0.05
2.44 149.75 11% 0% 3%
NA 0.00 26% 1% 13%
Wells Fargo is performing significantly better than Citigroup on both net profit margins and ROE. In addition, Wells Fargo has no long-term debt on its balance sheet. Citigroup is slowly improving its position as many litigation fees have been paid and as the firm moves away from trading of securities as heavily as it has historically.
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Net Worth Analysis (in millions)
Citigroup Stockholders' Equity - (Goodwill + Intangibles) Net Income x 5 (Share Price/EPS) x Net Income Number of Shares Outstanding x Share Price
Method Average
$210,534 $36,565 $87,261 $158,421
$123,195
Wells Fargo Stockholders' Equity - (Goodwill + Intangibles) Net Income x 5 (Share Price/EPS) x Net Income Number of Shares Outstanding x Share Price
$184,394 $115,285 $292,724 $268,476
Method Average
$215,220
While Citigroup may be more closely related to JP Morgan or Bank of America in how it allocates resources and conducts business, Wells Fargo clearly has the best competitive advantage of the 4 with its US focus and relatively little focus on securities and trading. The net worth analysis reveals Wells Fargo is worth significantly more than Citigroup as a result.
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IFE Matrix
Strengths Weight Rating Weighted Score 1. Citigroup is the largest banking enterprise in the world based o n geographic coverage with o perations in 160 nations an d o ver 0.06 3 0.18 16,000 offices. 2. Citigroup is world‘s largest credit card iss uer with over 900 0.08 4 0.32 million retail accounts with v arious well-known brands. 3. In Q2 2015, Citi sold abou t $32 billion of the remaining as sets in Citi Holdings, including OneMain Financial, the largest business 0.04 3 0.12 remaining in Citi Holdings. 4. Has about 90 million accounts including brands s uch as Home 0.06 4 0.24 Depot, Macys, Sears, Shell, and others. 5. In Q3 2015, Citi‘s legal expenses dropped to $376 million from 0.05 3 0.15 $1.3 billion Q3 2014 resulting in a n et income increase of 51%. 6. Citi‘s efficiency ratio dropped from 66% to 55% from Q3 2014 to 0.05 3 0.15 Q3 2015.
7. In 2015, Citigroup s old its Japanese retail operations to Sumitomo Mitsu i Banking Corp. for $400 million, ending this Citigroup prob lematic segment. With this dives titure, Citigroup gave up 740,000 customers in Japan. 8. Citi is s caling back block trades where they bu y millions worth of securities just below the market and try to quickly sell it back at the market price. 9. Citi plans to on ce again become heavy in block trading when the market improves. 10. Citi is offering deals to sub er rich families to invest in large projects such as t he tallest residential tower in Man hattan, Hooters hotel and casino in Las Vegas, tall residential buildings in Boston, and others.
0.03
3
0.09
0.04
3
0.12
0.04
3
0.12
0.02
3
0.06
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1. 2.
Weaknesses Citigroup does not have a publically available mission or vision statement. Citigroup incurred charges of $3.5 billion Q4 of 2014 to cover legal and rest ructuring cos ts. The bank allocated $2.7 billion of that amount to cov er legal costs as sociated with investigations into currency trading, the manipulation of a key interest rate, as well as anti-money laundering and related probes.
3. Fraud issu es in the past affect credibility of Citigroup, with $400 million stolen in Mexico an d multiple high-level pos itions at Banamex terminated . 4. Citi‘s Q3 2015 revenues were 5% lower than Q3 2014. 5. Retrenchment strategies at Citi partly resulted in a 4.4% decline in earnings from Q3 2014 to Q3 2015, the largest drop o f any of the 4 big US banks. 6. Citi‘s fixed income and interest operations resulted in a 3.4% drop year-over-year from Q3 2014 to Q3 2015. 7. Being focused heavily on international markets, Citi‘s capital requirements are expected to rise 3.5% in 2016. 8. Citi‘s s tock price as of late 2015 is 0.84x of book value according to many analyst s. 9. Citi is currently attempting to ramp up its stock trading bus iness by cou rting hed ge fund managers. TOTALS
Weight Rating Weighted Score
0.04
2
0.08
0.05
1
0.05
0.05
2
0.10
0.05
2
0.10
0.05
2
0.10
0.08
2
0.16
0.08
1
0.08
0.05
1
0.05
0.08
1
0.08
1.00
2.35
Citigroup is also performing below average on addressing internal issues with an IFE score of 2.35. Particularly troubling for Citi was the fraud scandal with Banamex in Mexico along with its poorly performing investment banking business and Citi Holdings. Moving forward it is important that Citi complete the divesture of OneMain Financial.
F.
SWOT SO Strategies
1. 2. 3. 4.
Increase credit card accounts by 40 million through offering attractive sign up bonuses at a cost of $6 billion (S2, O2, O5). Divest 20% of the poorest performing foreign markets (S7, O6). Spend $50 million marketing to rich families to entice them to invest in large scale projects (S10, O10). Cut block trade volume by 20% through 2017 (S8, S9, O9).
WO Strategies
1.
Spend $400 million advertising to refinance existing loans with Citi (W4, W5, W6, O2, O5, O7, O8). 2. Ensure any investment in foreign markets more than accommodates for the 3.5% extra percentage point requirements by the US government (W7, O6). 3. Invest an additional $400 million in emerging markets to ensure fraud is as limited as possible (W2, W3, O1). 4. Divest 20% of the poorest performing foreign markets (W4, O6).
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ST Strategies
1.
Increase credit card accounts by 40 million through offering attractive sign up bonuses at a cost of $6 billion (S2, T2, T7, T9, T10). Spend $2 billion to increase fixed income investments such as credit cards, and home and auto loans (S1, T2, T7, T9, T10). Spend $500 million on advertising that presents Citi as an ethical and responsible company (S1, S4, T1). Continue to divest markets such as Japan and parts of Europe where rates are expected to remain lower than in the US for an extended period of time (S7, T6).
2. 3. 4.
WT Strategies
1.
Develop a formal vision and mission that clearly states what Citi wishes to accomplish and what business they are focused on (W1, T2, T8). 2. Spend $2 billion to increased fixed income investments such as credit cards and home and auto loans (W6, T2, T7, T9, T10). 3. Cut block trade volume by 20% through 2017 (W4, W9, T8). 4. Continue to divest markets such as Japan and parts of Europe where rates are expected to remain lower than in the US for an extended period of time (W8, T6).
G.
SPACE Matrix FP
Conservative
Aggressive
7
6
5
4
3
2
1
CP
-7
-6
-5
-4
-3
-2
-1
1
2
3
4
-1
-2
-3
-4
X = 1.8 Y = -1.2
-5
-6
-7
Defensive
SP
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Competitive
5
6
7
IP
Inter nal Analysis: Financial Position (FP) Debt Ratio Litigation Issues Current Ratio EPS ROA
2 2 3 6 1
Financial Position (FP) Average Inter nal Analysis: Competitive Position (CP) Credit Card Market Share US Market Share International Market Share Service Varity Use of T echnology Competitive Position (CP) Average
2.8
-1 -3 -2 -2 -2
External Analysis: Stability Position (SP) Competitive Pressure Securities and Trading Business Interest Rates Product Line Diversity Government Regulations Stability Position (SP) Average
-7 -6 -2 -1 -4 -4.0
Externa l Analysis: Industry Position (IP) Growth Potential Yield Curve Ease of Entry into Market Profit Potential Leverage
-2.0 Industry Position (IP) Average
5 2 4 5 3 3.8
Citi is in the Competitive Quadrant of the SPACE Matrix in part because the bank is “too big to fail” and doing fairly well on its CP factors. The firm does need to improve its efficiency ratios moving forward though, as competing on efficiency is especially important during times of low rates and poor investment banking climate.
H.
Grand Strategy Matrix Rapid Market Growth
Quadrant II
Quadrant I
Weak Competitive Position
Strong Competitive Position
Citigroup
Quadrant III
Quadrant IV
Slow Market Growth
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The big banks are clearly in a mode of slow market growth. JP Morgan and Bank of America reported lower revenues in 2014 than in 2013, and Wells Fargo and Citigroup reported slightly higher revenues in 2014. Citi is also plagued by its dependence on foreign markets, the securities and trading business, and many legal and ethical issues that have resulted in significant fines. As Citi attempts to restructure with a more US focus, and less dependence on securities and trading, the firm can likely quickly move into Quadrant IV.
I.
The Internal-External (IE) Matrix The Total IFE Weighted Scores Strong
Average
Weak
4.0 to 3.0
2.99 to 2.0
1.99 to 1.0
4.0
I
II
III
V
VI
High
1
3.0
IV
The EFE Total Medium Weighted
3
4
Scores
Citigroup 2
2.0
VII
VIII
IX
Low
1.0
Region
1. North America
2014 Revenue
2014 Income
$31.9 B
$8.3 B
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2. EMEA 3. Latin America 4. Asia
$10.8 B $13.4 B $14.6 B
$2.0 B $2.5 B $3.6 B
Citi receives approximately half of its income from outside the US. Markets in EMEA and Latin America are not performing nearly as well as North America and Asia. Not revealed in the IE Matrix above is the segment data for Global Consumer Banking and Institutional Clients Group, which reported 2014 revenues of $37.7 and $33.2 billion respectively with income of $6.9 and $9.5 billion respectively. Citi Holdings lost $3.4 billion on $5.8 billion in revenue. Citi likely should continue to focus on the US and Asian markets.
J.
QSPM Actively Invest further divest poorer into fixed performing income international markets markets Opportunities 1. Emerging markets for potential growth. Estimates 2.2 billion out of 2.5 billion people globally who do n ot u se a ban k live in Africa, As ia, Latin America and the Middle East. 2. The US Federal Reserve is expected to raise rates in late 2015 or 2016. 3. Efficiency ratios (non interest expense / net revenues) are a key 4. JP Morgan and Bank of America have engaged heavily in retrenchment s trategies over the last 5 years.
5. Fixed income and other interest producing assets are leading to higher returns despite the low interest rate environment. 6.
Being less dependent on international finance results in significantly lower capital requirements .
7. Industry-wide $16 billion in home equity loans where consu mers are only paying interest a mortize between 2015 and 2017. When adding in the n ew principle payments , monthly payments will rise 165%. 8. Many interest-only loans will be refinanced by banks offering the bes t terms. 9. Block trades often help land other business s uch as merger advisory and increase trading volume. Experts s uggest even if you lose o n the s ingle transaction the net b enefit could be greater. 10. There are growing numbers of s uper-rich people in the world; banks are now targeting them to help finance many projects that once were only financed by large institutions.
Weight
AS
TAS
AS
TAS
0.03
1
0.03
4
0.12
0.03
4
0.12
1
0.03
0.06
4
0.24
3
0.18
0.04
2
0.08
4
0.16
0.06
4
0.24
1
0.06
0.05
1
0.05
4
0.20
0.05
4
0.20
1
0.05
0.05
4
0.20
1
0.05
0.06
0
0.00
0
0.00
0.03
0
0.00
0
0.00
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Threats Senator Elizabeth Warren stat ed in December 2014, that Citi was bailed out with half a trillion dollars of taxpayer money, and then used their fortunes to b uy Congress, and make it more likely they will be bailed out again. 2. J. P. Morgan and Bank of America reported higher net income and revenu e than Citi in 2015. 3. Wells Fargo and Bank of America have started to waive ATM fees. 4. Increased competition from rivals on branches and ATM locations . Wells Fargo - 9,000/12,000 and JPMorgan œ 5,614/18,699. 5. Yield curve in the US remains fairly flat with low rates o n bo th sho rt and long term options . 6. Europe, Japan, Australia and other regions of the world are expected to extend quant itative eas ing measures . 7. Wells Fargo was the only bank to achieve an increase in Q3 revenu es from 2014 to 2015 at 3.2%, than ks in large part to being more focused on cons umer and commercial banking than trading operations. 8. Trading income from currencies and securities has severely hurt banks over 2015. 9. Wells Fargo‘s fixed income and interest o perations resulted in a 4.7% increase year-over-year from Q3 2014 to Q3 2015. 10. Wells Fargo could ove rtake Citi as the 3rd largest ban k in the US by late 2016 based on to tal assets .
Weight
AS
TAS
AS
TAS
0.04
0
0.00
0
0.00
0.08
3
0.24
4
0.32
0.03
0
0.00
0
0.00
0.03
0
0.00
0
0.00
0.11
4
0.44
1
0.11
0.04
2
0.08
4
0.16
0.07
0
0.00
0
0.00
0.05
0
0.00
0
0.00
0.05
4
0.20
1
0.05
0.04
0
0.00
0
0.00
1.
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Actively Invest further divest poorer into fixed performing income international markets markets Strengths
1. Citigroup is the largest banking enterprise in the world based on geog raphic coverage with op erations in 160 nations and over 16,000 offices. 2. Citigroup is world‘s largest credit card issuer with over 900 million retail accounts with various well-known brands. 3. In Q2 2015, Citi sold about $32 billion of the remaining as sets in Citi Holdings, including OneMain Financial, the largest bus iness remaining in Citi Holdings . 4. Has about 90 million accounts including brands s uch as Home Depot, Macys , Sears, Shell, and oth ers. 5. In Q3 2015, Citi‘s legal expens es d ropped to $376 million from $1.3 billion Q3 2014 resu lting in a n et income increase of 51%. 6. Citi‘s efficiency ratio dropp ed from 66% to 55% from Q3 2014 to Q3 2015. 7. In 2015, Citigroup sold its Japanese retail operations to Sumitomo Mitsui Banking Corp. for $400 million, end ing this Citigroup problematic s egment. With th is divestiture, Citigroup gave up 740,000 cust omers in Japan. 8. Citi is scaling back block trades where they buy millions worth of secu rities just below the market and try to quickly s ell it back at the market price. 9. Citi plans to once again become heavy in block trading when the market improves. 10. Citi is o ffering d eals to s uber rich families to inves t in large projects such as the tallest residential tower in Manhattan, Hooters ho tel and c asino in Las Vegas, tall residential buildings in Boston, and others.
Weight
AS
TAS
AS
TAS
0.06
0
0.00
0
0.00
0.08
4
0.32
1
0.08
0.04
2
0.08
1
0.04
0.06
0
0.00
0
0.00
0.05
0
0.00
0
0.00
0.05
3
0.15
4
0.20
0.03
1
0.03
4
0.12
0.04
0
0.00
0
0.00
0.04
0
0.00
0
0.00
0.02
0
0.00
0
0.00
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Weaknesses
1. Citigroup do es not have a pub lically available mission or vision statement. 2. Citigroup incurred charges o f $3.5 billion Q4 of 2014 to cover legal and restructuring cost s. The ban k allocated $2.7 billion o f that amount to cover legal costs associated with investigations into currency trading, the manipulation of a key interest rate, as well as an ti-money laundering and related probes. 3. Fraud issu es in the past affect credibility of Citigroup, with $400 million stolen in Mexico and multiple high-level positions at Banamex terminated. 4. Citi‘s Q3 2015 revenues were 5% lower than Q3 2014. 5. Retrenchment strategies at Citi partly resu lted in a 4.4% decline in earnings from Q3 2014 to Q3 2015, the largest drop of any of the 4 big US banks. 6. Citi‘s fixed income and interest ope rations resu lted in a 3.4% drop year-over-year from Q3 2014 to Q3 2015. 7. Being focused heavily on international markets, Citi‘s capital requirements are expect ed to rise 3.5% in 2016. 8. Citi‘s s tock price as of late 2015 is 0.84x of book value according to many analysts. 9. Citi is currently attempting to ramp up its s tock trading business by courting hedge fund managers.
Weight
AS
TAS
0.04
0
0.05
AS
TAS
0.00
0
0.00
0
0.00
0
0.00
0.05
0
0.00
0
0.00
0.05
2
0.10
3
0.15
0.05
2
0.10
4
0.20
0.08
4
0.32
1
0.08
0.08
1
0.08
4
0.32
0.05
2
0.10
3
0.15
0.08
0
0.00
0
0.00
TOTALS
3.40
2.83
Investing further in fixed income markets wins out on the QSPM by a rather wide margin. Focusing on credit cards, and car and home loans is likely a key area for Citi to consider. However, it is also important to continue to divest poorer performing foreign markets, not only do they lose capital, but they are met with higher interest maintenance requirements from the US.
K.
Recommendations 1. 2. 3. 4. 5. 6. 7. 8. 9.
Increase credit card accounts by 40 million through offering attractive sign up bonuses at a cost of $6 billion. Divest 20% of the poorest performing foreign markets. Cut block trade volume by 20% through 2017. Spend $400 million advertising to refinance existing loans with Citi. Ensure any investment in foreign markets more than accommodates for the 3.5% extra percentage point requirements by the US government. Invest an additional $400 million in emerging markets to ensure fraud is as limited as possible. Spend $2 billion to increase fixed income investments such as credit cards, and home and auto loans. Continue to divest markets such as Japan and parts of Europe where rates are expected to remain lower than in the US for an extended period of time. Develop a formal vision and mission that clearly states what Citi wishes to accomplish and what business they are focused on.
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L.
EPS/EBIT Analysis (in millions except for EPS and Share Price) Amount Needed: $8,800 Stock Price: $52.86 Shares Outstanding: 2,997 Interest Rate: 5% Tax Rate: 39%
Common Stock Financing EBIT Interest EBT Taxes EAT # Shares EPS
Debt Financing
Recession
Normal
Boom
Recession
Normal
Boom
$20,000 0 20,000 7,800 12,200 3,163
$30,000 0 30,000 11,700 18,300 3,163
$40,000 0 40,000 15,600 24,400 3,163
$20,000 440 19,560 7,628 11,932 2,997
$30,000 440 29,560 11,528 18,032 2,997
$40,000 440 39,560 15,428 24,132 2,997
3.86
5.78
7.71
3.98
6.02
8.05
30 Percent Stock
EBIT Interest EBT Taxes EAT # Shares EPS
70 Percent Stock
Recessio n
Normal
Boom
Recessio n
Normal
Boom
$20,000
$30,000
$40,000
$20,000
$30,000
$40,000
308 19,692 7,680 12,012 3,047
308 29,692 11,580 18,112 3,047
308 39,692 15,480 24,212 3,047
132 19,868 7,749 12,119 3,114
132 29,868 11,649 18,219 3,114
132 39,868 15,549 24,319 3,114
3.94
5.94
7.95
3.89
5.85
7.81
The EPS/EBIT Analysis reveals debt financing is best under all economic situations.
M.
Epilogue Citigroup’s Q3 2015 earnings reported on October 15 increased by a whopping 51 percent year-over-year to $4.3 billion surpassed Wall Street’s expectations but the bank’s revenues declined 5 percent to $18.7 billion due in part to its consumer banking and credit card segments doing poorly. The bank’s operating expenses were $10.7 billion for the third quarter, mainly due to lower legal expenses compared to last year’s expenses. Legal and related expenses stood at $376 million, significantly down from the $1.6 billion reported in the prior year’s quarter. The company’s Citi Treasury and Trade Solutions (TTS) segment in fall 2015 began paperless processing for both Account Opening and Maintenance on accounts in the United States and Canada. This capability also provides a fully digital bank account management service for clients using eBAM via CitiDirect BE, Citi’s proprietary online banking platform. Analysts at Citigroup in October 2015, led by Tobias Levkovich, reported that nearly $4.5 trillion has been put into US equities through corporate buybacks since 2004, compared with less than $160 billion cumulatively from US-oriented mutual and exchange-traded funds in the same time period. The Citi analysts went on to say that companies that buy back their stock tend to outperform the broader index, but
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according to Citi it is not that one time big buybacks lead to higher performance but rather the consistent buybacks over an extended period of time. Finally, the Citi analysts said they expect the recent era of big stock buybacks to be drawing to a close, as mergers and acquisitions activity abounds and companies opt to buy other firms' shares instead of their own. Citi actively assists firms in merger deals.
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