Get documents about "Citibank to Purchase 2Nd Mortgages
Description
Citibank to Purchase 2Nd Mortgages document sample
Document Sample
Citibank in Asia Pacific
Introduction
• Citibank’s branch banking business conducted
operations in 15 countries throughout Asia Pacific
and the Middle East in 1989
• Citibank’s branch banking business was projected
as a prestigious, consumer-oriented international
bank and the undisputed leader in the
marketplace
• Financial services were targeted to affluent upper
and middle income market segment
• Citibank’s Asia Pacific branch banking business
was challenged with increasing earnings from
$69.7MM to $100MM by 1990
Citibank’s Challenges
• Increase earnings in Citibank’s Asia Pacific bank
business through the launch of a credit card product
• Obstacles:
– Mixed opinion from the Asia-Pacific country managers
that a successful credit card launch was possible
– Questions abound regarding Citibank’s ability to adopt
mass-market positioning to acquire credit card customer
and maintain its up-market positioning with its current
upscale branch banking customers
– Differing customer attitudes and usage patters across the
Asia Pacific region
– High level of market uncertainty across the region with
regulations, branch limitations, talent, poor
infrastructure, etc.
SWOT Analysis
Strengths Weakness
• Market Leader • Consumer attitudes and usage varies
• Branding across countries
• Credit card considered a status symbol • Australia & Singapore are saturated
• Targeted countries include booming, markets
growing economies (Philippines, India) • Country managers are unconvinced/no
buy-in.
and affluent, Westernized countries
• Credit card offering adds complexity to
(Australia, Singapore), diversifying risk organizational compensation structure
• Strong economies of scale in data • Cannibalization of current services
processing • Brand dilution
• Hong Kong presence provides valuable • Collections process is undefined
data to estimate revenue impact and price • Centralized data processing costs, politics
credit cards accordingly • Learning curve on demand side & cost side
Opportunities Threats
• Penetration leader in new markets • Fraud
• Target growing middle and upper class • Defaults
• Portfolio allows for customization in • Laws and regulations
markets • AMEX and Diner’s Club are early
• Additional revenues from cross-selling and entrants with brand cachet
arbitrage • Competitors offer discounts
Acquisition Costs
Unit Cost Prospects RR Qualify Cards Card Customers Acq Cost/Card
Direct Mail 1.5 300,000 0.02 0.67 0.8 3216 139.93
Direct Sales 225,000 30,000 0.5 0.67 0.8 8040 27.99
Take One 0.25 2,000,000 0.015 0.334 0.8 8016 62.38
Bind In 0.15 3,000,000 0.01 0.334 0.8 8016 56.14
Break Even Analysis
Scenario Target No Fixed Costs VC Total Costs Rev/Cust Break Even #
Acquisition Advertising Support ($25/card)
I 250,000 7,857,000 2,000,000 35,000,000 6,250,000 51,107,000 180 283,928
II 500,000 16,574,000 4,000,000 50,000,000 12,500,000 83,074,000 180 461,522
III 750,000 27,228,000 6,500,000 60,000,000 18,750,000 112,478,000 180 624,878
IV 1,000,000 40,026,000 9,000,000 70,000,000 25,000,000 144,026,000 180 800,144
Break Even - Sensitivity Analysis
Revenue Per Customer
120 150 180 210 240
Scenario I 425,892 340,713 283,928 243,367 212,946
II 692,283 553,827 461,522 395,590 346,142
III 937,317 749,853 624,878 535,610 468,658
IV 1,200,217 960,173 800,144 685,838 600,108
Market Entry – Game Theory
Citibank
AMEX
Source: Demisch, McGarry, Mukhtar, Rajbansi; Feb 2008
Conjoint Analysis
• Build ideal mix of product attributes
• Determine customer segmentation
• Identify cannibalization & competitive response
Joining Fee Annual Fee Brand Services Incremental Revenue
None None Citi (Visa, MC) Card replacement Cash advance
Low Low Amex Loss/misuse liability Pre-payment
High High Visa/MC Spending limit Advance ticket sales
Diner’s Club Cash Advance Product warranty
extension
Local Bank Year-end summary Product/Travel insurance
Cross-Selling
• Success selling auto loans through car dealers
• Greater potential with Citi cardholders
– Opportunity for cross-sell of products such as Auto Loans, Ready Credit,
Deposits, Mortgages
– Enables virtual presence in countries restricting number of foreign bank
branches
• Bundle with bank services for lower combined fees
How calculate cross-sell value?
Take Hong Kong Citibank example where 6% of account holders also
have Citi credit card and assume same opportunity in reverse…
Cross-Sell Value Calculation
Relative Year 1 (phased launch)
Australia Hong Kong Singapore TOTAL
Total # cards 10.5M 2M 630K 13.1M
Proj. # Citi cards Yr 1 1M 150K 25K 1.75M
Proj. Citi card customers 588K 88K 15K 691K
# of Citibank customers 85K 130K 18K 233K
Net Revenue from Fund $59M $67M $16M $142M
NRFF per customer (exact figure) $694.12 $515.38 $888.89 N/A
Card holders w/ 2nd product 35.3K 5.3K 0.9K 41.5K Total Relative Yr 1
Incremental NRFF (cross-sell value for all 9 Asia
value) $24.5M $2.7M $784K $28M markets would be
$29M
Assumes 1.7 cards per customer and 6% of card holders will
purchase 2nd Citi product as result of cross-sell efforts.
Percentage based on 6% of Hong Kong’s Citibank customers also
owning Citi card.
Arbitrage Opportunities
Sample Exchange Rates
US $1 = HK $1.13 Buy HK Buy Aus
$11.3M $13.334M
US $1 = Australian $1.33
with US with HK
HK $1 = Australian $1.18 $10M $11.3M
Buy US
$10.025M
with Aus
$13.334M
Triangular Arbitrage Example = US $25K Profit!
Across Citibank’s Asia-Pacific customer accounts =
$1.5M+ per turn.
Market Segmentation
Total Per Capita Urban Population
100
10
1
Estimated Distribution of Population and Cards by Income Urban Population Without Credit Cards
40
6
35
30 5
25 4
Millions
20 3
15 2
10
1
5
0
0
$6K-$12.5K $12.5K-$25K >$25K $6K-$12.5K $12.5K-$25K
Market Segmentation
Australia India Indonesia Malaysia Phillipines Singapore Taiwan Thailand
Weight Data Rating India Rating Data Rating Data Rating Data Rating Data Rating Data Rating Data Rating
Per Capita 25% 11929 5 279 1 338 1 2018 3 527 2 8817 5 4837 3 930 2
Real GNP 10% $196.80 5 $222.50 5 $63.40 3 $34.10 2 $32.60 2 $23.80 1 $95.80 4 $51.10 3
1988 Growth Rate 10% 4 2 9.7 4 4.8 2 8.1 4 6.8 3 11 5 7.3 3 10.8 5
1988 Inflation 10% 7.6 3 9.8 2 8 3 2 5 8.7 2 1.5 5 1.2 5 3.8 4
Average Annual 15% $60,000 5 $10,000 2 $24,000 4 $14,000 3 $10,000 2 $20,000 4 $25,000 4 $15,000 3
Customer Income
Political/Economic 30% A 5 C 3 C 3 B 4 D 2 B 4 A 5 B 4
Risk Factors
Score 4.5 2.55 2.55 3.5 2.1 4.15 4.05 3.35
PRIORITY 1 3 3 2 4 1 1 2
Customer Lifetime Value (CLV)
Profit per
Assumptions Value of Acquired
Purchase Customer
Item 1 Item 2 Item 3 Item 1 Item 2 Item 3
Years of Customer Life 5
Year 1 150.00 60.00 15.00 37.50 9.00 1.50
Annual Discount Rate 15% Year 2 15.30 1.45
Year 3 171.74 15.61 32.63 1.19
Item 1 Item 2 Item 3 Year 4 69.46 15.92 6.33 0.97
Year 5 196.62 16.24 23.91 0.79
Initial Purchase Price $150.00 $ 60.00 $ 15.00
Annual Product Inflation 7% 5% 2% Net
Margin per Product 25% 15% 10% Present
Value
Retention Rate Year 1 95% 95% 95%
Item 1 Item 2 Item 3
Retention Rate Later Yrs. 80% 80% 80% 65.95 11.45 4.13
Years between Purchase 2 0.6 0.25
Total NPV 81.53
Discount Rate(%)
5 10 15 20
5 $101.60 $90.57 $81.53 $74.03
Customer 7 $117.58 $102.12 $90.00 $80.33
Life Years 10 $127.91 $108.88 $94.51 $83.39
15 $140.63 $116.01 $98.63 $85.83
Source: CLV Calculator- HBR http://hbswk.hbs.edu/archive/1436.html
Long Run Effects of Risk on Marketing Policies
Expected Expected Discount NPV NPV
Cash Flow Cash Flow Rate Calculation
Period 1 Period 2
Low Price $10M $14M 15% (10)/(1+0.15)+ $19.27M
Strategy (14)/(1+0.15)2
High Price $6M $4M 5% (6)/(1+0.05)+ $9.34M
Strategy (4)/(1+0.05)2
Coordinate finance & marketing functions to select appropriate discount rate, marketing policies and
resource allocations after analyzing the risks and returns from different marketing policies.
Reference: Sharan Jagpal (2008) “Fusion for Profit” pp 26
EV of Entering a Test Market in Singapore Using Real Options
Expected incremental profit from test market/(1+ discount rate) $8.5M(1+0.05)
+
Probability of low demand X Cash Flow from Yr 2 on/ discount rate 0.5x ($0/0.05)
X
1/(1+ discount rate) 1/(1+0.05)
+
Probabaility of high demand X Cash Flow from Yr 2 on/ discount rate 0.5 x ($100/0.05)
X
1/(1+ discount rate) 1/(1+0.05)
-
Probability of introducing new product X investment/(1 + discount rate) (0.5X $70M)/(1+0.05)
-
Upfront cost for setting up test markets $20M
=
Total incremental value of expected cash flows from test market
strategy $907M
Conditional NPV with strategic flexibility on immediate Launch
=[Expected Profit in Yr1/(1+ Discount rate)] + (probability of withdrawing
product at end of Yr X conditional NPV of cash flows from Yr 2 on) +
(probability of staying in market at end of Yr 1 X conditional NPV of cash =85/1.1+(0.5x0)+(0.5x90
flows from Yr 2 on) - upfront inves 9)-70
= $462M
P.S: Conditional NPV of profits=Annual CF from Yr2 on/[Discount
Rate(1+Discount Rate)] = 100/(0.10 x [1+0.10])
= $909M
Economic Value of waiting for uncertainity to be resolved =$907M-$462M
$445M
Country Managers
• Risk-averse and reluctant to handle card product
• Tie compensation to product
• Compensate for long term vision
• Local currency (Jagpal, NB chapter 23)
• 4 Component Parts of Compensation
– Base wage
– Share of NPV of after tax operating cash flow
– Share of NPV of tax shield
– Share of real options of product
• Above mix changes per country and per period!
Compensation - Period 1
• Australia vs. India example
NPV NPV Tax Real Compensation
Operations Shield Options Recommendation
Australia High ($59M) High Low 25% Base Salary
37.5% NPV Operations
25% NPV Tax Shield
12.5% Real Options
India Low ($6 M) Low High 50% Base Salary
12.5% NPV Operations
6.25% NPV Tax Shield
31.25% Real Options
Compensation - Period 2
• Australia vs. India example
NPV NPV Tax Real Compensation
Operations Shield Options Recommendation
Australia High (>$59M) High withdraw 50% Base Salary
25% NPV Operations
25% NPV Tax Shield
India Low (>$6 M) Low remain 50% Base Salary
25% NPV Operations
6.25% NPV Tax Shield
18.75% Real Options
Recommendations
• Use a staged roll out plan introducing each of three groups at 6-9 month
intervals (Australia, Singapore, Taiwan first).
• Opt for a test market initially, followed by multi-country entry.
• The presence of cost and demand dynamics must be considered when
formulating pricing strategy, and Citibank may choose to learn from first
movers errors.
• For uncertain marketplaces, use Real Option Valuation model.
• Build centralized data processing center before entering test market.
(Citi absorbs initial $35 MM investment)
– Establish specific credit card business independent from other
business units in each country
– Charge country managers usage fee based on either computational
usage, dollar usage, or user (per merchant/cardholder) & continue to
charge until investment recouped
– Allow country managers to set join fee
Recommendations (cont’d)
• Features of credit card program should match the brand positioning
and corporate image. Include gold features for premium clients and
regular/base features for others.
• In saturated markets grow through acquisition, and use green field
approach in emerging countries.
• Capitalize on cross-selling and foreign currency exchange arbitrage
opportunities.
• Structure flexible country manager compensation to encourage
elements of shared risk and long term focus on available marketing
options.
• Compensate country managers in local currency.
Questions
Related docs
