Citi Group Restructuring

Background It all began with the financial crisis of 2007-2008, a crisis which was of a scale that had never been seen before. Many economists called it even worse than the Great Depression. Whether it was or not, that’s something that could be argued. But everyone was of the view that the crisis is really very serious. As a result of it large financial institutions collapsed, banks were being bailed out by the national governments and stock markets tanked to their new lows.
This caused the collapse of housing markets in many countries, consumer spending suffered immensely as a result, industries went bankrupt, businesses closed down and unemployment peaked. There were many reasons that were put forth by various economists. A report presented in the US senate called it as the “failure of regulators, credit agencies and markets”. Citigroup’s Sufferings According to a US government’s report which came into the light in 2011, Citigroup which was the third largest US bank in terms of assets at that time was on the verge of failure.
Regulators were going to pull the plugs on it anytime as depositors were withdrawing their deposits and bank’s counterparties also declined to give credits to the bank. How Citigroup moved to new setup? Citigroup suffered losses for five consecutive quarters. In the fifth quarter, in fact its losses were to the tune of $ 8. 29 billion. Many in the Citigroup agreed to the fact that unless something is done to sharpen its strategy, Citigroup will never regain its glory and perform accordingly.As a result, Citigroup started analyzing its business and strategies. It was found that Citigroup was involved in too many business segments which stopped it from focusing on its core interest area. While analyzing, everything big or small was examined. Citigroup in its annual report called the analysis as “wide ranging and dispassionate”. The outcome of this analysis was that the Citigroup finally decided to realign the group’s various business interests in two broad segments: Citicorp and Citi Holdings.
The thinking behind this new setup was that this structure will help the company focus on its core business areas which in turn would improve the overall performance, while at the same time realizing the value from its non-core assets. The new structure would look like this: In Citicorp, businesses which were core to the group’s strategy and which offered maximum earnings potential to its shareholders with appropriate risk parameters were placed. These businesses are: • Global Transaction Services – Treasury and Trade Solutions Securities and Fund Services • Securities and Banking – Global Banking – Global Markets – Citi Private Bank – Citi Capital Advisors • Regional Consumer Banking – Four Regional Consumer Banks in North America, EMEA (Europe, Middle East, and Africa), Latin America and Asia that each include retail banking, local commercial banking and Citi-branded cards (Source: http://www. citigroup. com/citi/investor/quarterly/2010) Citicorp, according to the new structure will be a relationship driven global bank, to serve both consumers and businesses.
The assets of Citicorp include its core assets located across the globe with strong presence in emerging markets like India, China etc. Citicorp will have the capability to take deposits from customers throughout the world in a manner so that maximum return could be availed. Citicorp will have the capacity to serve local customers globally and global customers in a highly localized way. While in Citi Holdings, assets and businesses which were not central to Citi’s strategy were placed.
But that does not mean that those assets were not good. Some have had very high value in their own right. Some were big iconic brands like Morgan Stanley Smith Barney joint venture. Citi Holdings includes: • Brokerage and Asset Management, which includes the Morgan Stanley Smith Barney joint venture • Local Consumer Lending – North America, which includes residential and commercial real estate loans; auto, student and personal loans; and retail partner cards International, which includes Western Europe consumer banking and other consumer finance franchises around the world • Special Asset Pool, which includes non-core assets, many of which are illiquid in current markets Citi Holdings will consist of non-core businesses which attract long term investments. But since those businesses are not the core one, therefore they do not enhance the performance of the group as a whole and in fact they compete for the limited resources that the company could employ in a highly risky and volatile situation.
It was expected that the management team of Citi Holdings will restructure, divest and manage its business in a way that maximizes the value and will take the group forward in a tough economic situation Vikram Pandit, then CEO of Citigroup in one of his interview talked about “accelerating the implementation of its newly evolved strategy to focus on its core business”. Given the market conditions and business sentiments, Vikram Pandit wanted to streamline the business of Citigroup as soon as possible to further strengthen its position and better serve its clients.
Approximate price: $22
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