CRITICAL EVALUATION OF HOW THE RECENT RECESSION AFFECTED STRATEGIC MARKETING MANAGEMENT PRACTICES OF CITI BANK.
INTRODUCTION
This report intends to study recession and the financial crisis of 2007, its causes and its effect on the US financial industry with specific reference to Citibank. The topics covered in the topics include background to the topic, recession and the financial industry, company profile of Citibank, the impact of recession on Citibank and finally the strategies it implemented after the crisis situation and its results.
BACKGROUND
The worldwide 2007 financial crisis has affected several countries’ economic fortunes, leading to what has largely been referred to as ‘Great Recession’ (Rampell, 2009). What apparently began as isolated sub-prime segment turbulence in housing market of the US lead to a comprehensive recession by 2007 end? Krugman (2009) rebukes fellow economists on their apparent blindness of the likelihood of market economy’s catastrophic failures. Therefore, for most of 2008, global downturn’s severity was underestimated. Consequently, leading forecasters, such as World Bank and the IMF, made numerous revisions for their growth forecasts in 2008 and 2009 as recession kept growing in magnitude (IMF, 2009a). In retrospect, though, the warning signals were there such as huge current deficits in US, UK as well as several advanced economies which were then financed through the surplus savings of the emerging nations as well as oil exporters; loose monetary policies (most conspicuously in the US following the mild 2001 recession); the quest for yield as well as risk misperception; and sloppy financial regulation.
RECESSION AND FINANCIAL INDUSTRY
Following 2008 events, predominantly the Lehman Brothers collapse in September lead to a quick change of perceptions of the risk-loving investors and banks across the globe. Because of the mortgage-backed securities’ complex nature, they were, nevertheless, oblivious of the actual level of liabilities related ultimately to the speedily deteriorating housing sector of US. Subsequently, liquidity quickly emaciated, nearly bringing the financial system of the world to its knees. Few even started questioned whether the American-style capitalism system itself was given a deathly blow. This resulted in growth deceleration in several economies of developing world, with cases of absolute recessions too. Simultaneously, the two of the most effective globalizers in recent past escaped a big downturn, which was crucial for driving recovery during 2009. China, particularly, has managed in keeping its economy growing at 8.7% rate in 2009, supported by a huge stimulus package of US$585 billion by China. With relatively a lesser stimulus, the economy of India also proved resilient because of a robust domestic demand and the country’s growth in 2009 falling only to 6.7%.
Taylor (2009) has stressed that the exceptionally loose monetary policy of US drove this credit boom, whereas others like Elmendorf (2007) concluded that the interest rates had not been excessively low. Besides the above dimensions, recession was also due to the domestic issues of US (US monetary policy and their financial regulation) and international imbalances (excessive savings moving to deficit economies from surplus economies). Overall, an all-inclusive review of the various crisis-related studies (Acharya and Richardson, 2010, Stiglitz, 2010, and Taylor, 2010), four central, but interrelated, causes of recession can be recognized which include interest rates, risk perceptions, global imbalances, and financial system regulation.
Figure : Explaining the key factors behind the global financial crisis
Source: Verick and Islam (2010)
Researchers have tried to establish a link between imbalances leading up to 2007 and worldwide financial crisis. It has been contended that the capital inflows from China as well as other exporting nations added to the US credit boom and housing bubble along with the country’s depressing impact on the bond yields. Hence in the US, mortgage rates according to Baily et al. (2008) remained low in spite of the Federal Reserve tightening the monetary policy since 2004. Moreover, foreign borrowing funded directly the investment in American firms as well as the instruments of mortgage debt which had been at the sub-prime disaster’s core. Largely, in the decade prior to the crisis, Astley et al. (2009) observes that credit indeed has grown most robustly in deficit economies, which was the only possibility for maintaining through the continuously rising capital outflows from the surplus economies.
The US was the crisis epicenter and the economy of US was directly affected due to the sub-prime meltdown in the mortgage market together with the aftermaths of financial crisis as well as subsequent credit crunch. Consequently, in December 2007 the economy of US went into recession and shrunk by approximately 2.7% in 2009 (IMF, 2009b). Nonetheless, this contraction was lesser than most of the G20 nations and lesser than the advanced economies average of -3%.
Figure : Economic growth across the world, real GDP growth (annual % change)
COMPANY PROFILE
Citigroup Inc. established in 1988, is an international financial services holding firm whose diverse businesses provide corporations, institutions, governments and consumers with a wide variety of financial services & products. Citigroup has nearly 200 million accounts of customers and operates in over160 countries. Citigroup operates under two segments. First is the Citicorp, which includes Global Consumer Banking operation of Citigroup and the Institutional Clients Group, while second is Citi Holdings, which includes Brokerage & Asset Management, Special Asset Pool and Local Consumer Lending. Citicorp is the group’s worldwide bank for businesses and consumers and forms the core franchise of the group. Citicorp aims to provide services & products to customers while leveraging Citigroup’s worldwide network. Citicorp had nearly $797 billion in the form of deposits as of 2011 year end (Reuters, 2013). GCB (Global Consumer Banking) includes Citigroup’s 4 geographical RCB (Regional Consumer Banking) businesses which provide customary banking services for the retail consumers. GCB also includes the groups branded cards as well as local commercial banking operations. Global Consumer Banking is an internationally diversified business having almost 4,200 branches across 39 nations across the globe having $313 billion in the form of deposits by 2011 end (Reuters, 2013).
The actuality that Citigroup was affected by the disastrous consequences of the global financial turmoil is apparent if one examines Citigroup’s balance sheet & income statements during the previous decade. Critical examination of previous financial reports suggests that there the firm had been extremely affected in the mid of 2007. Citigroup witnessed a stable growth of net income however incurred high losses since 2007’s 4th quarter.
EFFECT OF RECESSION ON CITIGROUP
Low short term rate of interests from the year 2000 up to 2004 resulted in financial institutions for seeking higher resulting investment (Crouhy, Jarrow and Turnbull, 2008). Additionally, the new innovations on technology (predominantly for risk management), increasing house prices as well as the exceedingly liquid markets lead to an increasing demand of collateral debt obligations (CDO). These characteristics of financial markets drove Citigroup for promoting the subprime mortgage financed securities issuance worth billions of dollars. Substantial exposures to the troubled mortgages as CDO’s in 2007, accentuated by bad risk management pushed Citigroup into the calamitous financial chaos. The company in 2007 recorded $18.3 billion, worth of pre-tax losses, on the firm’s subprime linked direct exposures and in 2008 it suffered a $14.3billions loss (Annual Report, 2008). The excessive mortgage default in the financial crisis caused Citigroup in writing down $60bn worth of assets since 2007 August and was amongst the largest write-downs concerning subprime linked securities. Also, the off balance sheet write-downs of security investment vehicles constituted a large part of the overall losses.
STRATEGIES ADOPTED BY CITIBANK AND THEIR IMPACT
Citi today is a fundamentally changed institution as compared to before the financial crisis: smaller, leaner, sounder, safer and absolutely focused on their core mission. Citi is amongst the only leading US which has purposefully shrunk since the financial crisis. The strategy of Citi has its basis on a premise that the size of a firm depends on only the expectations and needs of their clients. The company’s business lines, liquidity, reserves, asset base, country presence and head count are suitably scaled for meeting the financial sector needs of huge international clients and of the retail, commercial private banking, institutional and public-sector clients in America and across the globe. Citi has been strong advocates of the financial reform focused on 3 core principles which include capital requirements, resolution authority for protecting the soundness & safety of the entire financial system while eradicating “Too Big To Fail” (Citigroup, 2012). The company also supports additional principles, including central clearing relating to 3rd-party derivatives, taking most firm derivatives to the exchanges, and establishing greater transparency. Since the financial crisis, Citi has increased their liquidity and financial strength, and it seems extremely improbable that resolution provided by Citi would be ever required. These stable resources build of City would allow them in continued operation and serving their clients when in highly stress scenarios with no support from the taxpayer. Simultaneously, these augmented resources also increases the options’ range for resolution of the company if it were ever necessitated, offering regulators abundant flexibility to choose a strategy of resolution which diminishes the adverse effects of Citigroup’s failure on the customers as well as financial stability of US. For instance, Citi’s strong liquidity & capital positions provide regulators opportunity of requiring the Citi groups banking entities’ recapitalization without capital support from government, allowing them in serving their customers & clients without any disruption of the system, under the new ownership and management, even during stress scenarios which involve severe loss. There are 4 core constituents to Citigroup’s transformation (Citigroup, 2012):
- Financial: Citibank has aggressively moved for strengthening its capital base. The company has raised over $140bnin capital ever since 2007 financial crisis. Today, the capital ratios of the firm are greater than current regulatory requirements. Tier I Capital ratio at the end of 1Q’12 was about 14.3 percent-up from 7.1 percent from 4Q’07, and also greater than the 6% regulatory requirement. Basel I Tier 1 Common Capital ratio at the end of 1Q’12 was 12.5% up from 5.0 percent in 4Q’07.
Source: Citigroup (2012)
Additionally, overall & structural liquidity of Citi has significantly improved as compared to the levels sustained during the financial crisis. At March 31, 2012, Citi’s aggregate liquidity resources at the end of financial year 2012 of over $420 billion was about 66 percent greater than 2008. Thus, Citi is much less now reliant on the capital market short-term funding as compared to before recession.
Source: Citigroup (2012)
- Strategic: After the crisis, Citigroup went back to its historic roots & the strategy which built this organization over the previous 200 years. They changed from their product-centered tactic to one which places their clients at the heart of everything they do. Their extensive worldwide network facilitated their clients in entering new markets, expanding in current ones, and also in obtaining an increased share in the increasing trade flows in the emerging economies. The Group is also helping its customers pursue prospects in the top 150 global cities. The main focus has given to going back to banking basics, involved in responsible finance activities as well as serving clients, besides facilitating economic recovery (Citigroup, 2012).
- Structural: During crisis period, Citi identified core strategic operations which historic have been the strengths of the company whereas the remainder, roughly $800 billion worth business & assets, had been identified for selling. In 2009 beginning, Citi formally reorganized its management structure as core institutional & consumer businesses and the Citi Holdings. By 1Q’12, approximately 75 percent of non-core assets present in Citi Holdings has been either wound down or sold and has been reduced to 11 percent of the firm’s balance sheet (Citigroup, 2012). Citi has also centralized & streamlined its organizational structure. In Citicorp now comprises of two core business lines which are Institutional Clients Group and Global Consumer Banking organized into 6 regions with each having a CEO. It has also consolidated 9 depository institutions having over $200bn worth of assets to their principal depository establishment subsidiary, i.e. Citibank, N.A., reducing their domestic US bank numbers from twelve to three.
- Cultural: Refocusing on the firm strategy required restoration and renewal of Citigroup’s culture which had made it great-client-driven, focusing on the banking basics, dedication to serve the real economy, providing support to the communities. It was this culture Citigroup was striving to reconstruct. The core of the transformation is called by the company as Responsible Finance. Prior to entering into a transaction, they ask 3 questions which include (i) is the transaction in the interest of the client, (ii) would it help in creation of economic value and (iii) would it be systemically responsible (Citigroup, 2012). The answer for all the above 3 questions must be ‘Yes’.
CONCLUSION
The worldwide 2007 financial crisis has affected several countries’ economic fortunes, leading to what has largely been referred to as ‘Great Recession’. Leading forecasters, such as World Bank and the IMF, made numerous revisions for their growth forecasts in 2008 and 2009 as recession kept growing in magnitude. Because of the mortgage-backed securities’ complex nature, they were, nevertheless, oblivious of the actual level of liabilities related ultimately to the speedily deteriorating housing sector of US. Few even started questioned whether the American-style capitalism system itself was given a deathly blow. This resulted in growth deceleration in several economies of developing world, with cases of absolute recessions too. Overall, an all-inclusive review of the various crisis-related studies, four central, but interrelated, causes of recession can be recognized which include interest rates, risk perceptions, global imbalances, and financial system regulation. The US was the crisis epicenter and the economy of US was directly affected due to the sub-prime meltdown in the mortgage market together with the aftermaths of financial crisis as well as subsequent credit crunch. Citigroup Inc. established in 1988, is an international financial services holding firm whose diverse businesses provide corporations, institutions, governments and consumers with a wide variety of financial services & products. The company owing to recession in 2007 recorded $18.3 billion, worth of pre-tax losses, on the firm’s subprime linked direct exposures and in 2008 it suffered a $14.3billions loss. Citi today is a fundamentally changed institution as compared to before the financial crisis: smaller, leaner, sounder, safer and absolutely focused on their core mission. Citi has been strong advocates of the financial reform focused on 3 core principles which include capital requirements, resolution authority for protecting the soundness & safety of the entire financial system while eradicating “Too Big To Fail”. Citibank has aggressively moved for strengthening its capital base. Additionally, overall & structural liquidity of Citi has significantly improved as compared to the levels sustained during the financial crisis. Thus, Citi is much less now reliant on the capital market short-term funding as compared to before recession. After the crisis they changed from their product-centered tactic to one which places their clients at the heart of everything they do. During crisis period, Citi identified core strategic operations which historic have been the strengths of the company whereas the remainder, roughly $800 billion worth business & assets, had been identified for selling. Refocusing on the firm strategy required restoration and renewal of Citigroup’s culture which had made it great-client-driven, focusing on the banking basics, dedication to serve the real economy, providing support to the communities.
REFERENCES
Acharya, V.V. and M. Richardson (2010) “Causes of the financial crisis”, Critical Review, 21(2-3), pp. 195–210.
Annual Report (2008) “Citigroup Annual Report, 2008”, Citigroup.
Astley, M., Giese, J., Hume, M. and C. Kubelec (2009) “Global imbalances and the financial crisis”, Bank of England Quarterly Bulletin, Q3, pp. 178-190.
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Krugman, P. (2009) “How Did Economists Get It So Wrong”? New York Times, September 6, 2009.
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Web sources
Citigroup (2012) “Resolution Plan for Citigroup Inc. & Citibank, N.A.”, Citigroup, [Online] accessed on 9th May 2013 from http://www.federalreserve.gov/bankinforeg/citigroup-20120703.pdf
Elmendorf, D.W. (2007) “Was the Fed Too Easy for Too Long?” Unpublished paper, The Brookings Institution, [Online] accessed on 9th May 2013 from http://www.brookings.edu/~/media/Files/rc/opinions/2007/11_fed_elmendorf/11_fed_elmendorf.pdf.
Reuters (2013) “Citigroup: Company profile”, [Online] accessed on 9th May 2013 from http://in.reuters.com/finance/stocks/companyProfile?symbol=C.N