Citigroup Inc.Company Profile

September 2014

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Disclaimer

• The following report is based on information that was available in public domain and no confidential information was used to develop this report

• For any concerns please do get in touch with the author at jawahar.sheit@gmail.com

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Executive Summary

Citigroup recently made a settlement with Department of Justice (DoJ) towards the residential mortgage backed securities (RMBS), to a tune of US $7 billion. Despite this, the bank still faces stiff challenges.

Regulations, post the financial meltdown, has required the bank’s continuous concentration on US operations, while exposing it to fraud and money laundering activities at other countries, particularly in the Latin American region.

The bank continues to face threats not just from impending litigations, and regulations but also due to below average industry performance and lack of innovation in its products and services.

The focus of Citigroup would now be of achieving operational efficiency by – improving internal controls and compliance; re-organizing foreign subsidiaries; and divesting assets from Citi Holdings – while cutting costs.

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Citigroup (Ticker: C) was formed in 1998 upon the merger of Citicorp and Travelers Group Inc. The company is a global diversified financial services holding company, with a broad range of financial products and services, including consumer banking, corporate and investment banking, securities brokerage, trade and securities services, and wealth management.

Citigroup currently operates via two primary business segments: Citicorp, consisting of Citi’s Global Consumer Banking businesses and Institutional Clients Group; and Citi Holdings, consisting of businesses and portfolios of assets that Citigroup has determined that are not central to its core Citicorp businesses.

Sources: Citigroup public filings, Hoovers

Headquarters: New York, NY

Company Type: Public

Net Revenue: US $92,543 Million (2013)

No. of Employees: 251,000 (2013)

Fiscal Year End: December

At-a-Glance: Citigroup Inc.

Key Competitors: Wells Fargo, JP Morgan, Bank of America, Barclays, HSBC, Deutsche Bank

SIC Code: 6021 – National Commercial Banks

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Business Segments

Sources: Citigroup public filings

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Key Financials

Sources: Citigroup Annual Report 2013, Yahoo! Finance

Key Financial Ratios2012 2013 Comparison

Operational PerformanceReturn on Assets 0.4% 0.7% Return on Equity 4.1% 6.9% Efficiency Ratio 72.0% 63.0%

Regulatory RequirementsTier 1 Common Ratio 12.7% 12.6% Tier 1 Capital Ratio 14.1% 13.7%

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Competitive Environment

Industry CompetitorsSuppliers Customers

Substitutes

New EntrantsThreat of New Entrants• Regulatory requirements pose barrier to

new entrants• Competitors are re-evaluating their

product mix to enter into newer services (e.g. investment banks entering into retail banking).

• The industry environment and competition for the Banking Industry is highly varied, from thrifts (regional banks) to large global banks. .

• As the products and services gets more commoditized, there are very little or no options for the industry participants (banks) to differentiate or innovate.

• Citigroup continues to perform below average in comparison with the competition and the industry.

Bargaining Power of Customers• While individual customers pose little or

no threat, regulations are mostly customer/buyer oriented

• With little differentiation to provide with products/services, banks try to win customers with differentiation in augmented services

Bargaining Power of Suppliers• Access to capital/debt has become very

limited post 2007 meltdown• Human capital availability for specialized

areas has always been a challenge• Limited availability of specialized

technology, outsourcing and business consulting vendors

Threat of Substitutes• While stringent regulatory requirements

provide barrier to new entrants, substitutes like Fund Houses, NBFCs, Home Mortgage providers, offer competition for selective products/services

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Peer Benchmarking

ParametersWELLS FARGO

BANK OF AMERICA

JP MORGAN CHASE

CITIGROUP

Revenue (ttm) $81.8 Billion $85.3 Billion $92. Billion $68.2 Billion

Profit Margin (ttm)

27.9% 9.3% 17.5% 14.4%

Operating Margin (ttm)

43.8% 29.6% 37.6% 23.1%

Cash (mrq) $328.8 Billion $524.4 Billion $1006 Billion $732.2 Billion

Return on Assets (ttm)

1.5% 0.4% 0.6% 0.5%

Return on Equity (ttm)

13.5% 3.4% 7.4% 4.7%

Tier 1 Common Ratio (Q3 13)

10.6% 11.1% 10.5% 12.7%

Tier 1 Capital Ratio (Q3 13)

12.1% 12.3% 11.7% 13.6%

Sources: Yahoo! Finance, Federal Reserve

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Key Findings (1 of 3)

• Citigroup had a profitable first half of 2014 despite writing off $3.8 billion for settlements, but is yet to achieve operational efficiencyo In the first quarter of 2014, Citigroup's main businesses revenue fell 3.5 percent, while operating

expenses eased only 1.5 percent compared with a year earlier, citing operational inefficiencieso The Federal Reserve in late 2013, rejected Citigroup’s capital plan, citing not meeting

“significantly heightened supervisory expectations for large banking houses”, in-spite of the progress made by the bank in meeting the regulatory capital

o Citigroup for the past 18 months eliminated $2.8 billion in annual expenses by way of layoffs, assorted reorganization and productivity steps

• The recent settlement with Department of Justice (DoJ) provides a breather for Citigroup, but the firm still has other litigations to settle with – possibly raising stakeholders concerno DoJ would also be enquiring suspected fraud committed by Banamex’s employees in

Ocenografia dealo Brazil’s Congressional probe for suspected money laundering by Petrobras, also involves

Citigroup’s Brazil branch.o The bank’s Argentina license is under risk, due to the recent standoff between Argentine

government and hedge funds, to accept the country’s debt structuring terms. The issue is under investigation by US Appeals Court.

o Meanwhile, Citigroup has lost three of its senior legal counsels recently

Sources: Yahoo! Finance

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Key Findings (2 of 3)

• While concentrating on its US/North American operations Citigroup’s foreign investments at various countries pose threats to growth and continuing operationso Citigroup is considering exiting retail business in Japan, citing weak loan growth and interest

rates remaining close to zeroo Citigroup recently reduced its exposure in Russia and Ukraine citing instability in these countries

due to recent conflictso Citigroups’s Latin America operations in Mexico, Brazil and Argentina, are already under trouble

due to the existing litigations on possible money laundering and regulatory issues.o Reserve Bank of India, the country’s central bank, is suggesting foreign banks to convert their

local branches as subsidiaries, potentially offering them to open up new branches and acquire local banks. But this move would also get Citigroup to comply with more regulations, including lending 40% of their loans to undergrowth sectors of economy like agriculture.

• Citigroup’s internal control lapses at subsidiaries and foreign branches raise concerno In April 2014, Banamex, Citigroup’s Mexican subsidiary lost US $400 million, due to bad loans

made to Oceanografia, with the bank’s employees suspected behind the loan transactions.o In October 2013, Banamex’s US $300 million loan to Mexican homebuilders was defaulted,

forcing Citigroup to make reserves for expected losses.o LavaFlow, Citigroup’s subsidiary in trading systems and solutions, was asked to pay US $5

million as penalty and settlement to SEC, for providing broker-dealer services even after deregistering.

o Citigroup’s Brazil branch is also under congressional committee probe for suspected money laundering by Petrobras, along with other banks in Brazil.

Sources: Yahoo! Finance

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Key Findings (3 of 3)

• Despite continuous investments, compliance and regulations still pose a major hurdle for growtho Federal Reserve’s recent rejection of capital plan due to its failure of stress tests. The Fed raised

concerns about deficiencies including Citigroup’s inability to develop scenarios for internal stress testing and project revenue and losses under stressful scenario. Citigroup has since grew its regulatory capital during the first half of 2014 to achiever better comprehensive capital analysis and review (CCAR) by Fed.

o Citigroup has been facing restrictions from SEC from selling hedge funds and private equity funds to clients, due to the “bad actor” rule.

o Citigroup plans to have almost 30,000 employees working on compliance by year end, due to excessive regulatory pressure, further hurting the bank’s plan to go lean and achieve efficiency.

Sources: Yahoo! Finance

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SWOT Analysis

STRENGTHS:

• Growth in revenue and income margin in key business segments and geographies in 2013, compared to 2012

• Increased regulatory capital to meet 2014 CCAR requirements with Fed

• Recent settlement with DoJ

• Presence in growing economies

WEAKNESSES:

• Expected operation efficiency is yet to be achieved and is in short by $1.5 billion of 2015 target

• Litigations and other regulatory issues still pose a threat to growth

• Internal controls and compliance issues with subsidiaries

OPPORTUNITIES:

• Expected access to capital markets, once regulatory pressure eases

• Opening up of growth economies like India and China

THREATS:

• Growing regulatory pressures at both US and foreign locations

• Stiff competition from US banks and underperformance in the sector, might cause stakeholder pressure

• Scarcity in availability of specialized vendors/resources would stimulate higher spending

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Business Opportunities for Consulting Services

BUSINESS CONSULTING

• Achieving efficiency using enterprise transformation – Citigroup has to fully integrate businesses acquired over years in order to achieve planned operational efficiency

• Utilizing business analytics for creating business scenarios – Citigroup’s recent failure in Federal Reserve’s comprehensive capital analysis and review (CCAR) for inability to perform stress tests

• Improving performance for achieving operational results – Citigroup is still $1.5 billion away from achieving its 2015 target for operational savings

FORENSIC INVESTIGATIVE

& DISPUTE SERVICES

• Investigating possible employee frauds – Recent money laundering fraud committed by Banamex’s (Citigroup Mexican subsidiary) client suspects employees of the bank behind it.

• Rise in litigations might require external counsels – Citigroup’s continuing suite of litigations within US and elsewhere and also the recent exits of high profile counsels might require external help.

GOVERNANCE, RISK &

COMPLIANCE

• Internal control lapses at subsidiaries and foreign branches – Citigroup’s lack of concentration on internal controls at foreign subsidiaries has resulted in fraud

• Outsourcing regulation compliance – Citigroup plans to increase its Compliance Staff headcount by 30,000 within 2014, thereby increasing its direct costs

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COMPETITIVE LANDSCAPE

APPENDIX I

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Competitive Landscape

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US BANKING REGULATORY LANDSCAPE

APPENDIX II

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US Financial Regulatory Landscape

BANK REGULATORS

SECURITIES & DERIVATIVES REGULATORS

OTHER FINANCIAL

REGULATORS

COORDINATING FORUM

OFFICE OF THE COMPTROLLER OF THE

CURRENCY (OCC)

SECURITIES & EXCHANGE

COMMISSION (SEC)

FEDERAL HOUSING FINANCE AGENCY

(FHFA)

FINANCIAL STABILITY OVERSIGHT COUNCIL

(FSOC)

FEDERAL DEPOSIT INSURANCE

CORPORATION (FDIC)

COMMODITIES FUTURES TRADING

COMMISSION (CFTC)

CONSUMER FINANCIAL PROTECTION BUREAU

(CFPB)

FEDERAL FINANCIAL INSTITUTIONS EXAM

COUNCIL (FFIEC)

NATIONAL CREDIT UNION

ADMINISTRATION (NCUA)

FEDERAL RESERVE BOARD

(FRB / THE FED)

PRESIDENT’S WORKING GROUP (PWG) ON CAPITAL

MARKETS

Sources: FAS.org

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US Financial Regulatory Requirements

BANKINGREGULATORY ENVIRONMENT

DODD-FRANK ACT

ANTI-MONEY LAUNDERING

COMMUNITY RE-

INVESTMENT ACT (CRA)

BASEL FAIR LENDING

To promote the financial stability of United States by improving accountability and transparency in the financial system.

Legal controls that require financial institutions and other regulated entities to prevent, detect, and report money laundering activities

To encourage depository institutions to help meet the credit needs of the communities in which they operate

HOME MORTGAGE

DISCLOSURE ACT (HMDA)

The HMDA requires many financial institutions to maintain, report, and publicly disclose information about mortgages.

Sources: Federal Reserve, CFPB, OCC, Wikipedia

The Fair Housing Act (FHA) and Equal Credit Opportunity Act (ECOA) protect consumers by prohibiting unfair and discriminatory practices.

International regulatory capital standards developed by Basel Committee of Banking Supervision (BCBS)