DBRS Downgrades Issuer & Senior Debt Rating of Citigroup Inc. to “A” with Stable Trend

DBRS has today downgraded the long-term ratings for Citigroup Inc. (Citigroup or the Company) and its related entities, including its Issuer & Senior Debt rating to A from AA (low). The rating on Citigroup’s Short-Term Instruments has been confirmed at R-1 (middle). The trend on these ratings is Stable. Citigroup’s Preferred Shares have been downgraded to BBB from A (low) and remain Under Review with Negative Implications. At the same time, DBRS has downgraded the ratings of Citigroup’s subsidiaries, including Citibank, N.A.’s Deposits & Senior Debt rating to A (high) from AA and its Short-Term Instruments rating to R-1 (middle) from R-1 (high). The trend on these ratings is also Stable. The Company’s ratings were first placed Under Review with Developing Implications on November 24, 2008, and were placed Under Review with Negative Implications on January 14, 2009.

Today’s rating actions follow the Company’s announcement of a net loss of $8.3 billion for Q4 2008, Citigroup’s fifth consecutive quarterly loss. The loss was driven by continued large writedowns on legacy positions in Securities & Banking, as well as increased credit costs in international and domestic businesses as credit trends deteriorated across much of Citigroup’s global franchise. The loss occurred even with a gain of $3.9 billion (after tax) on the sale of its German retail banking operations. DBRS views this prolonged weakness in financial performance as indicative of a sustained deterioration in the Company’s fundamentals. The downgrade of Citigroup’s long-term rating reflects both the extent of this deterioration and the sizable challenges that Citigroup still faces as it restructures its businesses. DBRS sees the Company’s earnings as remaining under pressure in 2009 as it faces disrupted markets and rising credit costs. The global economic slowdown is affecting earnings from emerging markets and other international businesses.

At the same time, this ratings action incorporates the enhanced support now being made available by the U.S. government. Citigroup’s SA2 support assessment designation reflects DBRS’s view that the Company is a systemically significant U.S. bank, given its scale and extensive participation in the capital markets, as well as the eligibility criteria established by the U.S. Treasury for its Targeted Investment Program (TIP) and Asset Guarantee Program (AGP), both of which have already been used to provide support to Citigroup. Given that the Treasury’s goals with these programs is to preserve market confidence, promote market stability and encourage the flow of credit to the economy, the Stable trend for Citigroup’s ratings reflects DBRS’s perception that there is a very high likelihood of the Company receiving further support under these programs should it be necessary. This perspective is also reflected in maintaining the short-term rating of Citigroup at R-1 (middle), which is not typical for an bank holding company rated “A” but reflects the more extensive provision of liquidity generally to bank holding companies and some of their non-bank subsidiaries under current programs.

Explicit government support has bolstered Citigroup’s intrinsic position. The Company, like other U.S. banks, has received significant explicit support from the U.S. government. In addition to the system-wide liquidity facilities and debt guarantee programs of the Federal Reserve (the Fed) and the Federal Deposit Insurance Corporation (FDIC), Citigroup has benefited from a capital injection through the Troubled Assets Relief Program (TARP). Moreover, the Company has received a capital injection under the Treasury’s TIP and has entered a loss-sharing agreement under its AGP. While Citigroup retains a substantial first-loss position, it is protected to a significant degree against unusually large losses on an asset pool of approximately $301 billion.

Citigroup’s regulatory capital ratios have been strengthened with its Tier 1 now estimated at 11.8%, a sizable cushion above regulatory minimums. The regulatory capital ratios benefited from the aforementioned capital injections in the quarter and the risk-weighting relief afforded by the asset guarantee. Citigroup’s tangible common equity, however, has fallen precipitously due to the lack of earnings and an increase in the accumulated other comprehensive loss, which increased $11 billion in the quarter to $25 billion at year end. The tangible common equity-to-assets ratio fell to a weak 1.52%. Liquidity and funding remained sound as the Company benefits from various Fed liquidity facilities and strong deposit franchises within its diverse businesses in the United States and internationally.

DBRS views Citigroup’s new strategy positively, although it will reduce the Company’s business diversification. The announced plan splits Citigroup’s operations into two units that will be managed separately. The first unit, Citicorp, will house the Company’s core franchises, including Corporate and Investment Bank, Global Transaction Services, Private Banking, and Retail Banking (which comprises Global Cards and Citigroup’s regional consumer and commercial banking franchises globally). The other unit, Citi Holdings, will include non-core businesses, including retail brokerage, asset management, local consumer finance and the ring-fenced asset pool. While restructuring the Company has near-term costs, Citigroup is expected to benefit even in the near term from refocusing on restoring the full strength of its core businesses, while allowing a separate management group to focus on maximizing the value of its non-core businesses. The retail brokerage joint venture with Morgan Stanley announced on January 13, 2009, is indicative of the opportunity under the new strategy. As the Company develops more details for its plan, DBRS will evaluate the impact of this strategic restructuring on the Company’s intrinsic fundamentals in the context of the challenging environment.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.