Documente Academic
Documente Profesional
Documente Cultură
Presented to:
Graduate School of Business and Governance
Master in Business Administration
Ateneo de Davao University
Submitted by
Barrena, Nikki
Amanon, Jules Ryan
I. VISION & MISSION
Citibank’s Approach:
In the case, Citibank was trying to avoid Zaire’s default on its external debt, which
could have a domino effect on Third World lending. Citibank believed that it could
help Zaire back on its feet. Zaire needs private financing to develop its tremendous
resources… if a country loses access to the international capital markets, it loses
its economic growth.
Existing Vision and Mission: (Not provided/available in the case. However, the
following beliefs were introduced as Citibank’s plans/proposal. We also
researched online of the current vision and mission of Citibank.
Citibank's mission is to serve as a trusted partner to our clients by responsibly
providing financial services that enable growth and economic progress (Source:
http://www.citigroup.com/citi/about/mission-and-value-proposition.html).
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II. INTERNAL AUDIT
A. Management Capabilities
Dr. Irving Friedman (Senior Vice President and Senior Adviser for
International Operations)
Weaknesses:
1. Citibank has significant amount of existing delinquent loan to Zaire. By
1975, 98 banks worldwide held Zairian debts of about $887 million. Private
Banks from the United States (including Citibank), Europe, and Japan each held
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about a third of the total. The country became unable to service its external debt
as financial crisis deepened. Interest payments slackened, many private banks
stopped receiving them altogether.
2. Citibank has a large portfolio in overseas loans to LDCs which are high-
risk in nature. At the end of 1977, Citibank had $30 billion in overseas loans,
of which $11.3 billion were to non-oil-exporting LDCs and $3 billion to oil
exporters. Citibank’s stock price had already dropped from $50 to $25 which
indicates that the public perceives LDC lending as dangerous.
Political
To enhance dominance at home and Zaire’s role in the Third World,
President Mobutu Sese Seko announced several important measures in 1974, a
new official doctrine and constitution, reorganization of the Political Bureau, and
creation of a party school. The official doctrine, Mobutuism (the teachings,
thoughts, and actions of Mobutu), was to be spread by high party officials. The
measures gave Mobutu full, direct control of most of Zaire’s major institutions.
Mobutu also attempted to integrate the military into Mouvement Populaire de la
Revolution (MPR) and tried to keep Zaire in the forefront of efforts to resolve the
Angolan crisis.
Economic
On November 30, 1973, President Mobutu proclaimed a set of measures
directed toward Zaire’s economic independence. Plantations still in European
hands were to be “Zairianized,” as were foreign-owned retail and wholesale
houses, construction firms, small factories, and farms. The November 1973
measures were disruptive to agriculture and commerce. The new owners of small
trade and transport operations often liquidated the businesses out of lack of
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interest or business experience. Major parts of the country’s distribution system
were demolished. The national road (largely maintained by Belgian plantation
owners) suffered accordingly. Agricultural activity declined further. The larger
trading companies, influenced by the turn of events and the overvalued zaire
(Z1=US$2 in 1974), turned most of their operations to importing.
While political reforms were being made in 1974 (Mobutuism), serious
economic pressures due to international price instability and accelerated
government spending were accumulating.
Social
During the Zairianization, the intellectual elite and the general public began
to openly resent the “acquirers.” The situation flagrantly contradicted the national
party’s slogan “Serve others, not yourself.” (After Mobutu came to power in
November 1965, he outlawed all political parties and created a new one, the
Mouvement Populaire de la Revolution or MPR.)
Technological
The United States has strategic interests in Zaire; it bordered nine countries
and was resource-rich. Gulf Oil was developing offshore oil production; output was
expected to reach 1.5 million tons in 1976. Purchase of equipment to enhance
Zaire’s productive capacity is vital to the country’s economic growth.
Legal
Zairianization and nationalization imposed heavy pressures on the banking
system. Transitional difficulties and inexperienced management led Zairianized
companies into liquidity shortage. They pressed for bank credit, and some state-
owned enterprises accumulated excessive debt. Pressured to finance also the
government deficit, the Bank of Zaire abolished credit ceilings, introduced the
rediscount system, and raised reserve requirements. This gave the banks more
autonomy in operations while maintaining mandatory minimums for loans to priority
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sectors and Zairian-owned enterprises. But the Bank of Zaire also let the reserve
ration fall to 23% despite a 40% ratio requirement.
Environmental
Zaire was resource-rich, which is the reason why the U.S. had strategic and
economic interests in the country. About 95% of all U.S. cobalt needs were met
with imports and Zaire supplied more than 75%. Zaire also had significant copper
reserves and hydroelectric potential being developed by the U.S. companies and
commercial banks. At the end of 1976, U.S. investment in Zaire was estimated at
$1 billion.
Opportunities
Threats
1. Potential losses of Citibank due to political instability in Zaire.
2. Economic conditions in Zaire may lead to further default.
3. Conflict among other private banks in obtaining a fair and mutual agreement.
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IV. STRATEGY FORMULATION AND EVALUATION
A. INPUT STAGE
IFE-EFE Matrix:
Given the above average results of both IFE and EFE Matrix, Citibank
should capitalize on its internal strengths to take advantage of the available
opportunities while at the same time countering the threats in the situation.
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B. MATCHING STAGE
SWOT Matrix:
Strengths Weaknesses
S1- Large financial institution W1-Significant amount of
S2- Global network existing delinquent loan to Zaire
S3- Strong financial position W2- Large portfolio in overseas
loans to LDCs which are high-
risk in nature
Opportunities
O1- International expansion
through lending to LDCs
S1, S2, S3, O2- Establish a O2- Benefit from the
scheme to provide short-term improvement in economic
credit to Zaire to revitalize W1, O2- Offer refinancing to management and productivity in
Zaire’s productive capacity Zaire Zaire through Mobutu’s National
and get their house in order. Recovery Plan
Threats
T1 -Potential losses of Citibank
due to political instability in Zaire
T2- Economic conditions in Zaire
may lead to further default
W1, T1, T2, T3 - Offer T3- Conflict among other private
rescheduling to Zaire banks in obtaining a fair and
mutual agreement
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2. 15 year-rescheduling – stretch-out maturities on existing loans.
Pros:
1. Positive method of development assistance
2. Preferred by most private banks
Cons:
1. Setting a precedent of rescheduling debt for a government already in
default could have undesirable ripple effects
2. Zaire might lose access to international capital market which would
affect their economic growth
3. May lead to private banks declaring Zaire in default in the long run
Pros:
1. Zaire could then use its scarce cash resources to continue paying their
loans to private banks and get their house in order.
2. Private Banks could keep the pressure on Zaire and control the use of
funds.
3. Zaire could preserve its creditworthiness, since under Citibank’s plan
Zaire would avoid an admission of bankruptcy, which is critical since they
eventually would have to go to the private market for capital.
4. Proposal stemmed from the general role of private banks in development
financing.
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Cons:
1. Net increase in exposure to Zaire.
2. Valuable time might be lost in helping Zaire with its problems.
3. If some unsophisticated banks among the 98 did not cooperate and
major lenders refuse to make up the difference by increasing their own
exposure to Zaire, Citibank might well come up short of its $250 million.
SPACE Matrix:
Internal Strategic Position External Strategic Position
Financial Position: Stability Position:
Large financial institution +5 Economic condition -4
Global network +5 Political instability -5
Strong financial position +4 Risk exposures -3
14 -12
Competitive Profile: Industry Position:
Significant international portfolio -3 Growth potential +6
Focus on LDCs -2 Resource utilization +5
Capacity utilization -1 Government incentives +3
-6 +14
FP Average: +14 / 3 = +4.67
SP Average: -12 / 3 = -4.00
CP Average: -6 / 3 = -2.00
IP Average: +14 / 3 = +4.67
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Conclusion:
I-E Matrix:
IFE Factor: 2.75
EFE Factor: 2.85
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Given the above average I-E result of Citibank, it may consider to grow and
build through aggressive type of strategies. It may invest on available
opportunities by using its strengths to achieve objectives.
BCG Matrix:
No sufficient data was given to create a BCG Matrix.
C. DECISION STAGE
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Quantitative Strategic Planning Matrix (QSPM):
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V. STRATEGY RECOMMENDATION AND IMPLEMENTATION
Based on the evaluation of strategies using the different tools in the strategy
formulation stage, it is recommended for Citibank to pursue its plan to make its
“best effort” to raise $250 million in medium-term credit, given the following
conditions:
Zaire would pay all its outstanding interest within the year;
Zaire would make provision for the payment of principal in arrears on its
medium-term syndicated bank debt by the first quarter of the following year;
Zaire would begin negotiations with the IMF and become eligible to draw
under the higher IMF tranches by April 1, 1977; and
Zaire would not suffer any “material adverse change” in its international
credit standing.
Under this plan, Citibank would convince Zaire not to admit bankruptcy and the
private banks not to declare Zaire in default. Zaire needs private financing to
develop its tremendous resources.
The following are the recommended action plans to implement the selected
strategy:
1. Draft a Memorandum of Understanding (not legally binding) to
reestablish Zaire’s creditworthiness in international financial markets
to be agreed and signed by the government and 13 agent banks. Citibank
needs to persuade the Zairians to give up the demand for a fifteen-year
rescheduling, and the other 12 agent banks to go along with the plan and
not to call Zaire in default. Once finalized, the parties must sign and conform
to the Memorandum of Understanding.
2. Require Zaire to pay the principal in a special blocked account. This
amount would be released to the private banks when Citibank, as part of
the understanding, would be able to produce written commitment for the
$250 million in new medium-term credit on a “best efforts” basis. The new
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credit would be phased in quarterly over a year to open a dollar Letter of
Credit (LCs) for essential imports. This six-month revolving LCs would be
available for up to five years, conditional on Zaire’s continued compliance
with the Memorandum of Understanding.
3. Ensure cooperation among the 98 creditor banks through
collaboration among the thirteen major banks and banks with the
highest outstanding credit to Zaire since 1974: Japan, U.S., Britain,
France and Canada. Most of these major lenders refuse to make up the
difference by increasing their own exposure to Zaire, hence, Citibank might
come up short of its $250 million goal. Private banks from the United States,
Europe and Japan each held about a third of the total outstanding debt of
Zaire.
4. Ensure that the additional exposure on the $250 million financing to
Zaire would be guaranteed by a third party. If the plan would be realized,
the $250 million represents 1.65% of the total Other Foreign Currency
Loans of Citicorp. Currently, $1.6 billion of the $15.13 billion other foreign
currency loan is guaranteed by a third party.
Other foreign currency loans Other foreign currency loans after
before the $250 million financing to the $250 million financing to Zaire
Zaire
Outstanding $15,130 million Outstanding $15,380 million
Guaranteed 1,600 million Guaranteed 1,626 million
Counter-exposure 10.57% Counter- 10.57%
exposure
5. Ensure that Zaire would negotiate with the IMF to draw higher credit
tranches. As part of the Memorandum of Understanding with the private
banks to get the new $250 million loan, Zaire should comply with the terms
of the agreement. Citibank should monitor the compliance and actions
undertaken by the government of Zaire to increase second tranche and
subsequent thereto.
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The Strategic and Financial Objectives are depicted in the following financial
projections of Citibank in Zaire based on historical data and selected strategy as
discussed previously:
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Below is the timeline (Gantt Chart) of the action plans for Citibank:
ACTION PLANS: 1977 1978 1979 1980 1981
1. Draft a Memorandum of Understanding
(not legally binding) to reestablish Zaire’s
creditworthiness in international financial
markets
2. Require Zaire to pay the principal in a
special blocked account.
3. Ensure cooperation among the 98
creditor banks through collaboration
among the thirteen major banks and
banks with the highest outstanding credit
to Zaire since 1974: Japan, U.S., Britain,
France and Canada.
4. Ensure that the additional exposure on
the $250 million financing to Zaire would
be guaranteed by a third party.
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VI. STRATEGY REVIEW AND EVALUATION
Credit risk is concerned with calculation of the money value that is at stake
in case the debtor fails to make payments in time.
Such an assessment of Credit Worthiness obligor’s risk is immensely
valuable for those companies that are into providing loans payments to the needy
ones. The rate of interest charged is a function of risk associated with the borrower.
This is to say that the company distinguishes among its customers by gauging the
extent to which risk is attached with them.
Stating it another way, credit risk is about making sure that the financial
health of the customer base that is maintained by the company is sound enough
not to create troubles in future when it comes to making payments.
Such documents that show credit history is useful for the customers also as
people can use those as a means to prove their past records regarding credit
status of theirs. It eases out the job of both lender and borrower when the issue
relates to decision of whether a given person should be handed over the financial
help or not.
A scorecard that sums up the factors involved in default probability of
customers in terms of indicators is a useful instrument.
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Such credit score profile of clients plays a significant role in helping the
assessor decide for the 'financial funding' subject.
Example:
Reference: https://www.strategy2act.com/solutions/credit_risk_excel.htm
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