Written with Mahendra Madhavan for a case study in our Global Financial Management course.
Citibank must answer questions regarding its purpose within Indonesia. Bank headquarters has requested higher net incomes, augmenting a currently aggressive budget. Citibank’s quest for higher profits could negatively affect the bank’s long-term leadership in Southeast Asia.
Citibank expanded into Indonesia in 1968. By 1983, the local Citibank official in Indonesia, Mr. Mistri, maintained a profitable division which tracks the growth of the country. Attaining the profit growth correlation with the Indonesian economy was an original reason for expansion into Indonesia. The government of Indonesia had requested international banks to make the foreign direct investment to increase human and financial capital. In 1983, Citibank corporate managers increased the Indonesia’s after-tax profit goal by $500,000 to $1,000,000. In pursuit of these goals, the local Indonesia Bank officials based decisions on diverse risks, regulatory restrictions, local growth and competition, and personal compensation.
Due to corporate business controls, local bank officials are allowed maximum exposure to a country, but may exercise an ability to stay lower than maximum. These controls are set by collaboration between corporate and local bank officials. While the acceptable sovereign risk derived with the budgets, the risk limits are available prior to the budget process. By fixing acceptable sovereign risk prior the budgets, the probably income can be setup dependant on risk, and risk independent of desired income. However, if the risk review was not complete prior to the budget, the company risked an adjustment game of tweaking budget and risk levels instead of making solid analysis.
In 1983, when corporate bank officials pushed down an increase in net income, they did not provide any guidance for increasing risk, nor make adjustments to the...
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