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1. How does the Citibank budgeting process work?

Citibank applies two management processes to control its


international branches: sovereign risk limits review and operating budget
review. Its budgeting process is a bottom-up. Although it starts from the
headquarters instructions which guide the timing, format and issues
needed to be addressed, budgeting is not obliged to attain specific
targets. The corporations long-term goals are shared. Some international
branches such as Indonesia, however, often establish their own targets
since they traditionally excel the corporations goal. Like the sovereign
risk limits setting process, the country managers seem to have
responsibility to modify their goals based on a better understanding of
their own branches about the economic conditions and political relations.
A revenue budget is the usual starting point for the operating budget
because many costs depend on the banks operations which generate the
revenue. Therefore, the accurate projection about major customer
account is needed for banks. In Citibank, once the operating managers
receive the budget instructions, they prepare forecasts of the major
account relationships and discuss about the forecast until it is able to be
reconciled with their target profits. Then costs are considered.

2. Is this a Participative process?


According to the budgeting process above and Mr. Mistri, Indonesias
country manager, Citibank is implementing participative budgeting
process. Every level of managers is involved in budget review process
and lower management level leads more revision than higher levels do.
This is partly because managers incentive compensation is closely
combined with budget-related performance. This compensation scheme
brings more participation of lower-level managers and the participation
creates more commitment and accountability toward the budget.

3. What challenges does Mistri face, and what options are available to him?
Citibanks manager at corporate raised the Southeast Asia divisions
after-tax profit goal by $4 million, and Indonesias share of this raise
should be between $500,000 and $1,000,000. Since the budget Mr. Mistri

submitted was already very aggressive, he is concerned the increase of


profit goal. Followings are challenges he is facing.
a. First, high employee turnover has been a problem for Citibank.
Citibank invested lots of money to human resources providing high
quality training to its employees. Therefore, the brain drain is a
serious constraint to its growth.
b. Second, Indonesias economy recession is a concern for Citibank.
Indonesia is highly dependent on revenue from oil sales. Due to the
decrease in oil price worldwide, its short-term outlook is not
optimistic.
c. Third, the political relation with Indonesian government is also a big
constraint for Citibank. Citibank has been privileged in Indonesia
because it is the largest foreign bank operating in Indonesia and it
provides loans to the Indonesia government. If Citibank lessens its
participation in loans to governmental agencies, it will cost a lot in
terms of relations with the government.

Based on the understanding above, Mr. Mistri has some available options
to increase profit.
a. First, he can increase its revenue by expanding the operation in
Indonesia. Among its three activities - institutional banking, individual
banking and capital market group, the capital market group seems to
be the most profitable activity because the group can generate
revenue with less costs and risks. Since the capital market group
serves as an intermediary in flows of funds from providers and users,
Citibank does not need to bear risks by lending their money in
Indonesia whose economy is on the downside and to increase costs
by hiring more staff to serve the customers. It can also adopt slightly
higher customer service fees to increase its revenue causing little
resistance from customers.
b. Second, he can achieve the profit goal raise by decreasing its costs.
As mentioned above, Citibank is suffered from the loss from high
turnover and the higher employee retention would save lots of costs
for them. I believe that high quality training will be a valuable asset
for the group in the long term.

4. How did Mistri Feel about the budget he submitted?


Mr Mistri set a slight increase in revenue and a drop in profits, even
though the short-term outlook for the Indonesian economy, which was
highly dependent on oil revenues, was pessimistic. He considered this
budget aggressive, but the other facts from the case would call his
budget soft. Competition could cause higher cost and lower revenues,
but not to an extent to lower profits. Mr. Mistri appears to have set a low
watermark that is easy to achieve, and will maximize his bonus.

5. What precautions did Mistri take concerning sovereign risk?


While the acceptable sovereign risk derived with the budgets, the risk
limits are available prior to the budget process. By fixing acceptable
sovereign risk prior the budgets, the probably income can be setup
dependent on risk, and risk independent of desired income. However, if
the risk review was not complete prior to the budget, the company risked
an adjustment game of tweaking budget and risk levels instead of making
solid analysis.
The other precaution is in prime loans, Citibank could increase the
principal investments of prime loans and increase notional interest
earned. Internal controls support this action because the bank currently
invests less than the acceptable sovereign risk in Indonesia. These
actions would lower target return on assets and return on equity for
Citibank within the country, because prime loans would achieve less than
1.25% and 20% respectively. Political risks also accompany this decision:
an increase of capital inflow would negatively affect the balance of
payments, which Indonesian government had been working hard to
stabilize.

6. How should Gibson allocate the $4 million increase in profit that he has
committed to?
The Indonesian economy is dependent on oil and gas industry sector,
was pessimistic to joining Indonesia into the increasing of Citibank profit
in South East Asia. The other reason is the governments regulation
(Suharto allowed eight foreign banks to set up operations only in Jakarta)
made the Citibank has limited expansion possibilities to make the higher
revenue and profit. If the profit of South East Asia has to increased $4
million, Gibson has to not joining Indonesia in the calculation. He should
divide the $4 million just for Australia, Malaysia, India, and Thailand.

7. How might Citibank discourage Mistri and other country managers


from taking action to meet their short-term goals at the expense of
Citibanks long-term good?