Shadow banks2are financial institutions that developed mainly after World War II in the UnitedStates.3 Those institutions behave as if they are banks issuing liabilities that areperceived by investors to be as safe and liquid as traditional demand deposits, andthey are less regulated than depository institutions.
Source: Booz & Company “Capturing Growth in U.S. Retail Banking”
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AGENDA History of US Banking and Regulations Market Size of US Banking industry Effects of Recession 2008 Challenges and Outlook of US Banking About City Bank City Bank Performance City Bank Analysis
EFFECT OF THE 1930SBANKING CRISIS Federal Deposit Insurance Corporation (FDIC) is created to insure deposits in banks. This helps to restore confidence in the banking system. Securities and Exchange Commission (SEC) is created to regulate the securities industry. Banking and Securities Operations must be separated. Many banks gambled in the stock market and lost money during the stock market collapse of 1929. Banks are not allowed to operate nor own banks outside of their state jurisdiction.This was to protect against systematic risk. Start of Investment Banking Era
BANKING REGULATION banks • Commercial that accept deposits required to obtain FDIC insurance and to have a primary federal regulator FDIC(nonmemb er state banks) • Credit unions supervised by the National CreditRegulation State Federal UnionAdministration Reserve(memb ers state • The Federal Financial banks) Institutions Comptroller of Examination Federal Currency(National Banks) Council(FFIEC) establishes uniform principles, standards, addresses privacy, disclosure, fraud prevention, anti- and report forms for money laundering, anti-terrorism, anti-usury lending, and the other agencies. the promotion of lending to lower-income populations.
REGULATORY BODIES • conduct the nations monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institutions, the U.S. government, and foreign official institutions • Provides deposit insurance, which guarantees the safety of deposits in member banks, up to $250,000 per depositor per bank • serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States
US Banking IndustryIt illustrates the striking increase in banking industry capitalization inrecent years, due to the issuance of new seasoned equity by many firms,as well as in retained earnings.This measure of industry capitalization reached 11.5 percent in 2012:Q2,compared with a low of 6.2 percent in 2008:Q4.
THE 2008 SUBPRIMEMORTGAGE CRISISLed to the collapse of the United States housing bubble.Failure or collapse of many of the United States largestfinancial institutions: Bear Stearns, Fannie Mae, FreddieMac, Lehman Brothers and AIGContributed to a global financial crisis, even as oil and foodprices soaredCrisis in the automobile industryThe government responded with an unprecedented $700billion bank bailout and $787 billion fiscal stimulus package.
POST-RECESSIONEFFECTSIMF estimated that large U.S. and European banks lost more than$1 trillion on toxic assets and from bad loans from January 2007 toSeptember 2009.Over 100 mortgage lenders went bankrupt during 2007 and 2008Concerns that investment bank Bear Stearns would collapse inMarch 2008 resulted in its fire-sale to JP Morgan Chase.Several major institutions either failed, were acquired under duress,or were subject to government takeover.These included Lehman Brothers, Merrill Lynch, Fannie Mae, FreddieMac, Washington Mutual, Wachovia, Citigroup, and AIG
SIGNIFICANT GROWTH CHALLENGESMacroeconomic Consumer Regulatory• Unemployment Behaviour • Heightened consumer• Extended low-interest- • New Debt - Reduced protection laws rate environment willingness • Reducing fees• Slowly stabilizing home • Higher rate of savings • Increasing values • Deterioration in trust transparency leading to erosion of • Increased capital bank loyalty requirements Increased Stagnant More stringent Declining competition top-line risk profitability & High NPAs for revenue management Low ROE creditworthy growth practice customers
REVENUE ANDOPERATING PROFITGROWTH Source: Booz & Company “Capturing Growth in U.S. Retail Banking”Stagnate in many product segments
BANKS ARE INCREASINGLY COMPETING ON Segment Distribution Community Product Giants Banks Specialists Innovators• Extensive • Trusted • Targeting • Dense branch brand in the defined branch network community segments / network with• Competitive • Deep local products online, mobil pricing and relationships • Deep e etc. convenience • Traditional industry • Product• Broadest product set expertise innovation range of • Specialized • M&A to products products and expand solutions Wells PNC Fargo BB&T USAA Financial Citi Bank
CITIBANK• One of the major international banks is the consumer banking arm of financial services giant Citigroup• Founded in 1812 as the City Bank of New York, later First National City Bank of New York• Third largest bank holding company in the United States by total assets, after Bank of America and JPMorgan Chase• Has retail banking operations in more than 160 countries and territories around the world• In addition to the standard banking transactions, offers insurance, credit cards and investment products
CITIBANK- DURING RECESSION• Citi reported losing $8–11 billion from the subprime mortgage crisis in the United States.• On April 11, 2007, the parent Citi announced staff cuts and relocations.• On November 4, 2007, Charles Prince quit as the chairman and chief executive of Citigroup. To be replaced by United States Secretary of the Treasury Robert Rubin.• In August 2008, after a three-year investigation by Californias Attorney General Citibank was ordered to repay the $14 million that was removed from 53,000 customers accounts over an 11-year period from 1992 to 2003. The money was taken under a computerized "account sweeping program“.• On November 23, 2008, Citigroup was forced to seek federal financing to avoid a collapse. The U.S. government provided $25 billion and guarantees to risky assets to Citigroup in exchange for stock.• On January 16, 2009, Citigroup splitted into Citicorp and Citi Holdings Inc.• On October 19, 2011, Citigroup agreed to $285 million civil fraud penalty.
CITI BANK – GOALS & CHALLENGES Threats Opportunities Citi’s Goals Retain customers by Erosion customer delivering exceptional loyalty experiences "Well beat all our Leverage trust and competitors in provide a full-service productivity Regulations that relationship and clientrestrict future revenue satisfaction," sources said U.S. retail Expand the value offered to customers and commercial banking chiefNew technologies vs Cecilia Stewart traditional branch Monetize customer network data through analytics
FINANCIAL STATEMENT of dollars In millions Income Statement 2009 2010 2011Revenue 80285 86601 78353Operating 47822 47375 50933ExpensesProvision for 40262 26042 12796credit lossesNet Income (1606) 10602 11067
INCOME STATEMENT100000 90000 80000 70000 60000 Revenue 50000 Op expenses 40000 Net Income 30000 20000 10000 0-10000 2009 2010 2011
INCOME STATEMENT1000009000080000700006000050000 2009 201040000 2011300002000010000 0-10000 Revenue Op expenses Net Income
FINANCIAL STATEMENT In billions of dollars Balance Sheet 2009 2010 2011Total Assets 1856.6 1913.9 1873.9Total Deposits 835.9 845 865.9Equity 152.7 163.5 177.8Book value per 41.50 44.55 49.74share
FINANCIAL RATIOS 2009 2010 2011Tier 1 common ratio 9.60% 10.75% 11.80%Tier 1 capital ratio 11.67% 12.91% 13.55%Total capital ratio 15.25% 16.59% 16.99%Leverage ratio 6.87% 6.60% 7.19%Return on common (9.4%) 6.8% 6.3%average equity
RATIO Tier 1 common ratio1412108 Tier 1 common ratio6 Linear (Tier 1 common4 ratio)20 2009 2010 2011
REVENUE (SEGMENT- WISE) In millions of dollars 2009 2010 2011North America 23615 33625 30161EMEA 15084 11764 12265Latin America 12711 12751 13552Asia 14072 14436 15219
REVENUE (SEGMENT-WISE)3500030000250002000015000 2009 10000 2010 5000 2011 0 North EMEA America Latin Asia America
CAMELS FOR CITI BANK• The financial soundness indicators for the banking sector can be grouped according to six key areas of potential vulnerability known as CAMELS.• Capital ratio, Asset quality, Management soundness, Earnings and profitability, Liquidity and Sensitivity. A. Capital Ratio 2011 2010 Tier 1 Capital 13.55% 12.91% Ratio Total Capital 16.99% 16.59% Ratio• Tier 1 Capital Ratio has improved to 13.55% from 12.91%, which is a positive sign for the bank• Total Capital Ratio has improved marginally from 16.59% to 16.99%.
CAMELS FOR CITI BANK Asset Quality 2011 2010 % Change Net NPA’s to 7.175% 7.418% -3.20% Net Advances Gross NPA 7.777% 7.911% -1.72% to Total Gross Loans• The level of NPAs is recognized as a critical indicator for assessing banks credit risk, asset quality and efficiency in allocation of resources to productive sectors.• Net NPA’s to Net Advances has declined marginally which is a good sign for the bank. Although it still is at a relatively high levels of 7.175%.• Gross NPA’s to Total Gross Loans has reduced marginally from th previous year which is a positive sign for the bank.
CAMELS FOR CITI BANK Management Efficiency $million 2011 2010 % Change Profit per 42402 39685 6.85% employee Business per 5682233 5439292 4.46% employee• The profit per employee has increased by 6.85%, while the business per employee has increased by 4.46%.• The bank has shown marginal growth in the total advances and total deposits section which clearly underlines the management efficiency.• The number of employees have been reduced slightly, thereby indicating the management’s willingness to cut costs during the times
CAMELS FOR CITI BANK Earnings and Profitability $million 2011 2010 % Change Non-interest 0.813 0.847 -4.06% expenses to gross income ROA/ROE 0.095 0.086 10.6%• This ratio indicates the extent to which high non-interest expenses weakens earnings. The ratio of 0.813 is pretty high for the bank, although it has declined from the previous value of 0.847.• ROA/ROE assesses scope for earnings to offset losses relative to capital or loan and asset portfolio. A relatively low ratio of 9.5% indicates the strong earnings capability of the bank and also the efficiency with which it performs, although it has increased from the previous year.
CAMELS FOR CITI BANK Liquidity $million 2011 2010 % Change Liquid assets 0.260 0.244 6.45% to Total assets Liquid assets 1.577 1.463 7.79% to short-term liabilities• These ratios assess the vulnerability of the sector to loss of access to market sources of funding or a run on deposits. It assesses the liquidity available with the bank. The bank has shown a slight increase in these ratios over the previous year, which is a positive indication for the bank.
CAMELS FOR CITI BANK Sensitivity $million 2011 2010 % Change Interest Rate 187433 208911 10.2% Hedges Foreign 53796 56245 -4.3% Exchange Hedges• It indicates the sensitivity of the bank to interest rate and foreign exchange risk.• The bank has hedged its risk, which indicates the willingness of the bank to address sensitivity.
References:•http://www.pwc.lu/en/risk-management/docs/pwc-basel-III-a-risk-management-perspective.pdf•http://www.federalreserve.gov/newsevents/press/bcreg/20060224aa.htm•Booz & Company “Capturing Growth in U.S. Retail Banking”•http://online.wsj.com/article/BT-CO-20120207-714503.html•www.citibank.co.in/•en.wikipedia.org/wiki/Citibank