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c The last decade has seen many positive developments in the Indian banking
sector. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of
Finance and related government and financial sector regulatory entities, have made
several notable efforts to improve regulation in the sector. The sector now compares
favourably with banking sectors in the region on metrics like growth, profitability and non
performing assets (NPAs). A few banks have established an outstanding track record of
innovation, growth and value creation. This is reflected in their market valuation.
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The bar for what it means to be a successful player in the sector has been raised. Four
challenges must be addressed before success can be achieved. First, the market is
seeing discontinuous growth driven by new products and services that include
opportunities in credit cards, consumer finance and wealth management on the retail
side, and in fee-based income and investment banking on the wholesale banking side.
These require new skills in sales & marketing, credit and operations. Second, banks will
no longer enjoy windfall treasury gains that the decade-long secular decline in interest
rates provided. This will expose the weaker banks. Third, with increased interest in
India, competition from foreign banks will only intensify. Fourth, given the demographic
shifts resulting from changes in age profile and household income, consumers will
increasingly demand enhanced institutional capabilities and service levels from banks.
The interplay between policy and regulatory interventions and management strategies
will determine the performance of Indian banking over the next few years. Legislative
actions will shape the regulatory stance through six key elements: industry structure and
sector consolidation; freedom to deploy capital; regulatory coverage; corporate
governance; labour reforms and human capital development; and support for creating
industry utilities and service bureaus.
Specifically, at one extreme, the sector could account for over 7.7 per cent of GDP with
over Rs.. 7,500 billion in market cap, while at the other it could account for just 3.3 per
cent of GDP with a market cap of Rs. 2,400 billion. Banking sector intermediation, as
measured by total loans as a percentage of GDP, could grow marginally from its current
levels of ~30 per cent to ~45 per cent or grow significantly to over 100 per cent of GDP.
In all of this, the sector could generate employment to the tune of 1.5 million compared
to 0.9 million today. Availability of capital would be a key factor ² the banking sector
will require as much as Rs. 600 billion (US$ 14 billion) in capital to fund growth in
advances, non-performing loan (NPL) write offs and investments in IT and human
capital upgradation to reach the high-performing scenario.
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: Policy makers adopt a pro-market stance but are cautious in liberalising the
industry. As a result of this, some constraints still exist. Processes to create highly
efficient organisations have been initiated but most banks are still not best-in-class
operators. Thus, while the sector emerges as an important driver of the economy and
wealth in 2010, it has still not come of age in comparison to developed markets.
Significant changes are still required in policy and regulation and in capability-building
measures, especially by public sector and old private sector banks.
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In this scenario, policy makers intervene to set restrictive conditions and
management is unable to execute the changes needed to enhance returns to
shareholders and provide quality products and services to customers. As a result,
growth and productivity levels are low and the banking sector is unable to support a
fast-growing economy. This scenario sees limited consolidation in the sector and most
banks remain sub-scale. New private sector banks continue on their growth trajectory of
25 per cent. There is a slowdown in PSB and old private sector bank growth. The share
of foreign banks remains at 7 per cent of total assets. Banking sector value add,
meanwhile, is only 3.3 per cent of GDP.
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c
, a major international bank, is the consumer banking arm of financial services
giant Citigroup. Citibank was founded in 1812 as the City Bank of New York, later First
National City Bank of New York. As of March 2010, Citigroup is the third largest bank
holding company in the United States by domestic deposits, after Bank of America and
JP Morgan Chase.
Citibank has retail banking operations in more than 100 countries and territories around
the world. More than half of its 1,400 offices are in the United States. In addition to the
standard banking transactions, Citibank offers insurance, credit card and investment
products. Their online services division is among the most successful in the field,
claiming about 15 million users.
As a result of the global financial crisis of 2008±2009 and huge losses in the value of its
subprime mortgage assets, Citibank was rescued by the U.S. government under plans
agreed for Citigroup. On November 23, 2008, in addition to initial aid of $25 billion, a
further $25 billion was invested in the corporation together with guarantees for risky
assets amounting to $306 billion.
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Astablished 108 years ago in Kolkata, Citibank has a long history in India.
Currently it is the largest foreign direct investor in financial services. Citibank has a total
capital commitment of approximately USD 4 Billion in its onshore banking and financial
services business and its principal and alternate investment program in India.
It operates 42 full-service Citibank branches in 30 cities and over 450 ATMs across the
country. Citibank is an employer of choice to over 8,000 people, and indirect employer
to more than 20,000 others. It is also the largest taxpayer in India among international
financial institutions.
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Citi offers consumers and institutions a broad range of financial products and
services, including consumer banking and credit, corporate and investment banking,
securities brokerage, and wealth management. Citi's franchise in India includes
businesses such as equity brokerage, equities distribution, private banking (Citi Private
Bank) and alternate investments and private equity (CVCI).
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x ³Best Consumer Internet Bank´ in India by Globalfinance in year 2009 and 2010.
x "Axcellence in Internet Banking" for the year 2009 in The Asian Banker
Axcellence in Retail Financial Services Awards Programme.
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There were a number of highlights in 2007, including record performance of our
International Consumer, Global Wealth Management and Jransaction Services
business segments.
These positives, however, were offset by disappointing results in our Markets &
Banking business, which was significantly affected by write-downs related to direct
subprime exposures, including CDOs, leveraged lending, and by significantly higher
credit costs in our U.S. Consumer business. In 2007, Citigroup earned $3.6 billion from
continuing operations on revenues of $81.7 billion. Income and APS were both down
83% from 2006 levels.
Customer volume growth was strong, with average loans up 17%, average
deposits up 20% and average interest-earning assets up 29% from year-ago levels.
International Cards purchase sales were up 37%, while U.S. Cards sales were up 8%.
In Global Wealth Management, client assets under fee-based management were up
27%. Branch activity included the opening or acquisition of 712 new branches during
2007 (510 internationally and 202 in the U.S.). We also completed several strategic
acquisitions or investments (including Nikko Cordial, Agg, Quilter, GFU, Grupo
Cuscatlan, ATD, and Akbank), which were designed to strengthen our franchises.
Our equity capital base and trust preferred securities grew to $137.2 billion at December
31, 2007. Stockholders¶ equity decreased by $6.2 billion during 2007 to $113.6 billion,
which included the distribution of $10.7 billion in dividends to common shareholders.
Citigroup maintained its ³well-capitalized´ position with a Tier 1 Capital Ratio of 7.12% at
December 31, 2007. Return on common equity was 2.9% for 2007.
On January 14, 2008, the Board decreased the quarterly dividend on the
Company¶s common stock to $0.32 per share. This new dividend level will allow the
Company to reinvest in growth opportunities and properly position the Company for both
favorable and unfavorable economic conditions.
Credit costs increased $10.6 billion from year-ago levels, driven by an increase in
NCLs of $3.1 billion and a net charge of $7.5 billion to build loan loss reserves.
U.S. Consumer credit costs increased $7.1 billion from year-ago levels, driven by
a change in estimate of loan losses, increased NCLs and net builds to loan loss
reserves. The increases were due to a weakening in credit indicators and sharply higher
delinquencies on first and second mortgages related to the deterioration in the U.S.
housing market. The NCL ratio increased 27 basis points to 1.46%.
Markets & Banking credit costs increased $1.0 billion, driven by higher NCLs
associated with subprime-related direct exposures. Corporate cash-basis loans
increased $1.2 billion from year-ago levels to $1.8 billion.
+
Throughout 2008, in the midst of a global economic downturn and global financial
crisis, they remained focused on Getting Fit. They have made and continue to make
significant progress in strengthening Citi¶s capital and structural liquidity; reducing the
balance sheet, expenses and headcount; and decreasing risk across the organization.
They raised significant capital from private investors as well as through the TARP.
They increased there Tier 1 capital ratio to approximately 11.9 percent at year end,
making Citi¶s Tier 1 among the highest in the industry.
They increased there structural liquidity to 66 percent of total assets in the final quarter
of 2008.
They reduced there assets from a peak of almost $2.4 trillion down to about $1.9
trillion and completed 19 divestitures.
In the fourth quarter of 2008, they reduced there ³business-as-usual´ expenses by 16
percent from the fourth quarter of 2007 to $12.8 billion.
They made difficult but necessary decisions to reduce headcount and ended the year
with
headcount of 323,000, down from 375,000.
They reorganized operations and technology and other functions to create a more
streamlined
organization with greater accountability for performance.
And They added some of the most seasoned and experienced talent in the industry to
Citi¶s
leadership ranks.
They accelerated the second stage of there drive for value creation²Restructuring
Citi²by realigning Citi into two operating units²Citicorp and Citi Holdings. This
structure highlights the value of our core franchise and reflects the rapid and dramatic
changes in funding markets, operating models, and client needs.
The new structure simplifies Citi, and sets out a clear path to profitability and value
creation. With lower risk and a streamlined set of businesses, they expect Citicorp to be
a high-return and highgrowth business. With Citi Holdings, they will be able to tighten
there focus on risk management and credit quality. And, with the right structure and
management in place, we¶ll be able to turn our attention to the third stage of our growth
strategy: Maximizing Citi.
*
3
During 2009, Citigroup sought to respond to market challenges and the
profound changes in the market environment²changes in funding markets, operating
models and client needs²including:
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c cc cAs described above, Citicorp comprises Citi¶s core
franchise, while CiticHoldings consists of non-core businesses and assets that Citi
intends to exit ascquickly as practicable while seeking to optimize value for
shareholders.c
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c cc c c c c cCiti¶s ongoing
operating expenses in the fourth quarter of 2009 totaledc$12.3 billion, down from $15.1
billion (excluding the goodwill impairmentccharge) in the fourth quarter of 2008 and
$15.7 billion in the fourth quartercof 2007. The decline in expenses was primarily driven
by divestitures andcre-engineering efforts. In addition, Citi reduced headcount by over
100,000 tocapproximately 265,000 at December 31, 2009, compared to 375,000 at peakc
levels in 2007.
Citi increased its common capital ratios. Citi significantly increased its Tier
1 Common and Tangible Common Aquity (TCA) ratios during 2009, primarily as a result
of its exchange offers completed in the third quarter of 2009. At December 31, 2009,
Citi¶s Tier 1 Common ratio was 9.6% and its TCA ratio was 10.9%, compared to 2.3%
and 3.1% at December 31, 2008, respectively. In addition, Citi¶s Tier 1 Capital ratio was
11.7% at December 31, 2009. Tier 1 Common and related ratios are measures used
and relied on by U.S. banking regulators; however, Tier 1 Common, TCA and related
ratios are non-GAAP financial measures for SAC purposes. See ³Capital Resources
and Liquidity² Capital Resources´ for additional information on these measures.
Citi continued to de-risk and decrease the amount of its total assets. Citi¶s total
assets were approximately $1.86 trillion as of December 31, 2009, down from
approximately $1.94 trillion at December 31, 2008 and $2.19 trillion at December 31,
2007. Consistent with Citi¶s strategy, Citi Holdings now represents less than 30% of
Citi¶s total assets as of December 31, 2009, compared to 41% at the start of 2008.
While Citi made progress in de-risking and decreasing total assets, particularly in Citi
Holdings, these actions, together with an expansion of the Company¶s loss mitigation
efforts and declining yields in the trading book, resulted in a 9% reduction in net interest
revenue in 2009 versus 2008 and a decrease in Citi¶s net interest margin (NIM) to
2.65% at December 31, 2009 compared to 3.26% at December 31, 2008.
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c cc cc c cDuring 2009, Citi added a net
build of $8.0 billion to its allowance for loanclosses. The allowance for loan losses was
$36 billion at December 31, 2009, orc6.1% of loans, compared to $29.6 billion, or 4.3%
of loans, at year-end 2008.cWith the adoption of SFAS 166 and 167 in the first quarter of
2010, loan losscreserves would have been $49.4 billion, or 6.6% of loans, each as of
Decemberc31, 2009 and based on current estimates. The consumer loan loss reserve
wasc$28.4 billion at December 31, 2009, representing 14.1 months of concurrentc
charge-off coverage, versus 13.1 months at December 31, 2008.c
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cWithin ^egional
Consumer Banking, Citi began making selectedcinvestments in its core businesses in
the latter part of 2009. For example,cin ¬sia, Citi invested in new customer acquisition in
the emerging affluentcsegment and in card usage promotion. Citigroup also continued toc
invest in consumer banking technology. Within Jransaction Services, Citi continued to
invest in technology tocsupport its global network, including its investor services suite of
products,cprepaid and commercial cards offerings and launch of a new front endconline
banking technology that provides a diverse set of functionality beyondctraditional
transaction management and reporting. These and similarcinvestments have increased,
and will likely continue to increase, Citi¶scoperating expenses.
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While showing signs of improvement, the macroeconomic environment going into 2010
remains challenging, with U.S. unemployment still elevated. The U.S. government has
indicated its intention to continue scaling back programs put in place to support the
market during 2008 and 2009. The impact of the U.S. government¶s exit from many of
these programs is a source of uncertainty in 2010, as is the future course of monetary
policy. In addition, the potential impact of new laws and regulations (e.g., The Credit
Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act)), potential
new capital standards, and other legislative and regulatory initiatives is a source of
significant additional uncertainty regarding the business and market environment.
The enormous long-term promise of Citigroup should be clear because we have made
much progress with all the fundamentals, and because our operating businesses in
Citicorp have maintained good revenue momentum. The key issues affecting short-term
earnings are not internal but environmental: the cost of credit and job creation. They will
determine when they can achieve sustained profitability. Meanwhile, they are confident
they can navigate whatever challenges they confront and still keep Citi in a position to
capitalize on a turnaround in the economy. They believe they can do so by
concentrating on these priorities in 2010: