DBRS Ratings for Citigroup Inc. Unchanged After 2Q12 Results – Senior at ‘A’

DBRS, Inc. (DBRS) has today commented that its ratings for Citigroup Inc. (Citigroup or the Company), including its Issuer & Senior Debt Rating of “A” and its R-1 (middle) Short-Term Instruments rating, are unchanged following the Company’s 2Q12 earnings. Citigroup reported net income of $2.9 billion for the quarter, up 1% from 1Q12. Excluding the previously announced loss on the Akbank stake sale ($424 million before taxes) as well as pre-tax CVA/DVA gains of $219 million in the quarter, the Company’s net income was $3.1 billion. This compares to adjusted net income of $3.4 billion in 1Q12. First quarter adjustments include $1.3 billion of pre-tax CVA/DVA charges and $477 million of pre-tax gains on minority investments. Citigroup’s ratings continue to reflect its status as a Critically Important Banking organization (CIB) in the United States. CIBs benefit from DBRS’s floor rating of “A” for bank holding companies and A (high) for operating banks with short-term ratings of R-1 (middle).

From DBRS’s perspective, the quarter’s results highlight the diversity of the core businesses and show that underlying momentum, in terms of business drivers as well as credit, remains mostly favorable. In addition, the Company’s success in controlling costs remains evident with each segment showing positive operating leverage in the first half of 2012, despite a more challenging revenue environment in the second quarter. DBRS continues to view Citicorp’s earnings capacity as enabling the Company to cope with credit costs and the burden of legacy assets. Notwithstanding these positives, DBRS’s intrinsic rating for Citigroup remains at A (low). While DBRS views the gap between the Company’s intrinsic assessment rating and final ratings as narrowing, the one notch uplift remains appropriate at this time. Counterbalancing the strengths of the Company are still considerable, though declining, balances and contingent risks related to legacy mortgage lending and other legacy asset exposures. In addition, legal and related costs, while down from 1Q12, remain elevated. DBRS expects the ongoing LIBOR investigation to remain an overhang for Citigroup and the industry.

Total revenues (excluding CVA/DVA) for Citigroup, which includes Citi Holdings as well as the Corporate/Other segment, where the Akbank loss on sale is recorded, were $18.4 billion in 2Q12, down 11% from 1Q12. In the core Citicorp businesses, revenues declined 8% from the strong first quarter to $17.8 billion. The decline was driven by Securities & Banking (S&B) where revenues (ex-CVA/DVA) fell 22% to $5.2 billion. DBRS sees this decline as reflective of the more challenging market conditions rather than any Company-specific weakness. Revenues for the other Citicorp businesses were more resilient. In Global Consumer Banking (GCB), revenues were $9.8 billion, down 2% from 1Q12. Another strong mortgage banking quarter in the U.S. bolstered revenues and helped offset the impact of lower average card balances globally and declining investment sales, especially in Asia. Positively, DBRS notes that across GCB regions, on a constant dollar basis, end of period loan balances were mostly higher as were deposits. Transaction Services (TS) reported record quarterly revenues of $2.8 billion, up 2% from 1Q12.

Overall, the core Citicorp businesses generated pre-tax income of $5.9 billion (ex CVA/DVA) in the second quarter, down $1.5 billion q-o-q. By business, GCB contributed 51% of total pre-tax earnings with S&B and TS contributing 27% and 22%, respectively. Citi Holdings reported a net loss $920 million for 2Q12 on revenues of $903 million and at quarter-end Citi Holdings’ assets were down to $191 billion, or 10% of total Company assets.

As noted, credit continued along its positive trajectory in the second quarter, though the pace of reserve release slowed further. After releasing $1.2 billion in 1Q12, Citigroup released $984 million of reserves in 2Q12, primarily in its North America Cards business. In this portfolio, which includes retail partner cards (Citi-Retail Services), losses and delinquencies declined further and remain low by historical standards. Citigroup did not release any general reserves related to its North American mortgage lending within Local Consumer Lending (in Citi Holdings) and, at quarter end, the Company held $9.5 billion of reserves for this $100 billion portfolio. DBRS sees the lack of general reserve release as reflective mostly of management conservatism given that delinquencies, losses and balances all continue to decline. Current reserves against this portfolio represent 30 months of coincident net credit loss (NCL) coverage. Overall, the Company’s allowance for loan losses was a solid $27.6 billion at quarter end, equivalent to 4.25% of total loans and 253% of nonaccrual loans. Total 2Q12 NCLs were $3.6 billion, down 10% from 1Q12, and the Company-wide provision for loan losses was $2.6 billion in 2Q12, down from $2.8 billion in 1Q12. DBRS notes that, internationally, credit trends were generally stable in the second quarter and the modest reserve build in International Consumer Banking reflected continued growth in the loan portfolio rather than deterioration in asset quality.

Citigroup’s regulatory capital ratios remain solid. At quarter end, the Company’s estimated Basel I Tier 1 Common ratio was 12.7%, up from 12.5% at the end of 1Q12, and its estimated Basel I Tier 1 ratio was 14.4%. The Company’s estimated Basel III Tier 1 Common increased to 7.9%, from 7.2% at March 31, 2012, and DBRS notes that this estimate reflects final market risk rules and the recent NPR. The Company maintained its expectations for a Basel III Tier 1 Common ratio above 8% by the end of 2012, which DBRS sees as achievable based on current trends.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: William Schwartz
Approver: Alan G. Reid
Initial Rating Date: 24 July 2001
Most Recent Rating Update: 23 November 2011

For additional information on this rating, please refer to the linking document under Related Research.