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How Macroeconomics Has Affected Citibank? Case Study Example

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Case Study

Macroeconomics examines the economy as a whole entity and tries to discover what makes the economy grow over a period of time. It further looks at the causes of short fluctuations in the economy and how these indicators affect the economy and associated performance. It contrasts to microeconomics which is understood as how individuals or firms affect the economy. It is well known that a central bank control’s the economy’s future. The decisions that the Federal Reserve make help to control “output, unemployment and inflation.” (“Ball, 2008). Money is a person’s or an economy’s wealth in the eyes of economists. Money can be defined as what it does for the economy. Commodity money becomes the medium of exchange in a positive and flowing economy. Money is considered flat money with no intrinsic value attached to it. No government has exchanged anything in return for it. The Federal Reserve note is actually a blank or worthless piece of paper. Banks channel money from the savers to the investors. “Funds flow in a two step process in a bank: people deposit money into the bank and the bank lends the money to investors.” (Ball, 2008). Banks charge interest on the money they lend at a higher interest rate than the initial deposit. They take a small or medium cut on the money they transfer to the investors to stay afloat. This helps to reduce “adverse selection and moral hazard.” (Ball, 2008).

Citibank has offered a business prospectus cycle through the “short-run alternation between economic downturns, recessions and economic upturns and expansions.” (“Macroeconomics: The Big Picture”). We must look at the long term growth and factors leading to the growth or decline. Further we must look at legal policies that influenced Citibank’s growth through this near recession period. Long term interest rates have been turned into short term interest rates which is not profitable to the consumer yet Citibank is still accumulating business to stay afloat. We must look to the economics of the Great Depression in order to predict what the current recession will yield for Citibank. We must look at the last three cycles of depression that are being yielded as a result of the downfall of the mortgage banking system across the United States and in other countries that affect our economy.

Financial and Soundness of Citibank

Citibank has managed to “buy a rating on Eaton and raised its target price from $77.00 to $82.00.” (Matt, 2010). Their analyst Timothy Then has stated their significant secular growth is very positive for the upcoming year. They must also establish a “higher profit and ROIC profile for Citibank as compared to the past six years.” (Matt, 2010). Their continued sound FCF which is well in excess of the EPS will keep them very well positioned in the financial economy including “M&A growth and dividend increases.” (Matt, 2010). They expect their profits to report about $3.95 of earnings per share in 2010.

How do Past and Present Regulations Affect the Bank’s Operations?

According to S&P said in 2008 Citibank’s future financial outlook was poor. They removed them from the Credit Watch for their annual rating. They have had plumage in their consumer credits department which is fundamental power to the bank. They have rebuilt capital yet loss their liquidity. They lost big time on mortgage related securities and leveraged loans in 2008. They have teamed up with international franchises which should help them maintain their creditworthiness despite the volatility of their earnings. It is doubtful that they will continue in this negative ramp because they have reached the endpoint. They should start growing which was evident by their share per profit on earnings in 2010. They have taken on new management teams which should help to boost their rating. They will face tough cycles during 2009 and 2010 with weak earnings. Their revenue base should remain strong and issues should be isolated during the upcoming years.

Macroeconomics does not create a climate for doing business with Citibank because their profitability on share values are very low and unstable. I would not recommend buying stock in the bank because they are recovering from losses in 2008 and yet still have not stabilized as of 2010.

Works Cited

Ball, Laurence.Money,Banking and Financial Markets St. Martin’s Press NY: New York, 2008.

Macroeconomics: The Big Picture Retrieved December 1, 2010 from, http://edwardmcphail.com/intromacro/Chapter6.pdf

Matt (2010) [Online] 23 Jan 2008. 01 Dec 2010<http://www.americanbankingnews.com/2010/03/12/citibank-nyse-c-maintains-buy-rating-on-eaton-raises-price-target-to-82-nyse-etn/>

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