DBRS Ratings Unchanged After 1Q13 Results for Citigroup Inc. – 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 release of the Company’s 1Q13 earnings. On March 13, 2013, DBRS confirmed the Company’s ratings following a detailed review of the Company’s operating results, financial fundamentals and future prospects. 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). DBRS’s intrinsic rating for Citigroup remains at A (low).

Excluding after-tax CVA/DVA losses of $198 million ($319 million pre-tax) in the quarter, the Company’s 1Q13 net income was $4.0 billion. This was up from adjusted ($301 million CVA/DVA and $653 million repositioning charge) net income of $2.2 billion in 4Q12. Inclusive of the CVA/DVA, reported 1Q13 net income was an improved $3.8 billion. Importantly, from DBRS’s perspective, the Company also generated strong positive operating leverage in the quarter, while the core Citicorp franchise reported a fifth consecutive quarter of positive (YoY) operating leverage (excluding CVA/DVA losses).

DBRS sees Citigroup’s improved quarterly performance as consistent with new senior management’s immediate focus on continuing to wind down Citi Holdings and utilizing its DTAs. The quarterly results reflected material reductions in operating expenses and credit costs combined with solid progress in many of its businesses. Moreover, the Company reported solid core loan and deposit growth, and a strengthened balance sheet. Nonetheless, the operating environment remains challenging with constrained loan demand, pressured margins, high regulatory and compliance expenses, and the continued drag of Citi Holdings. DBRS also notes that the Company’s earnings will be less impacted from the mortgage banking slowdown compared to other large banks given its smaller scale.

Citigroup’s DBRS-calculated adjusted income before provisions and taxes (IBPT), (excluding CVA/DVA, legal and related costs, repositioning charges, and gains/losses on securities) grew a strong 32% from 4Q12 to $8.8 billion, but was down 2.8% compared to 1Q12. DBRS continues to view Citicorp’s earnings capacity as enabling the Company to cope with its declining credit costs and the burden of legacy assets. Counterbalancing the strengths of the Company are the still considerable, though declining, balances and contingent risks related to legacy mortgage lending and other legacy asset exposures. DBRS notes that Citi Holdings reported a net loss of $788 million in the quarter, down from $1.0 billion in 4Q12 and the Company had legal and related costs of $710 million in 1Q13, significantly lower than the $1.3 billion in 4Q12, but 30% higher than 1Q12.

In the core Citicorp businesses (excluding CVA/DVA), revenues increased 13.0% from the fourth quarter to $19.9 billion, while adjusted net income rose 51.5% to $4.8 billion. Securities and Banking (S&B) rebounded in the quarter and accounted for much of the improvement with total revenues (excluding CVA/DVA) of $7.3 billion, up 50% QoQ, driven by fixed income market revenues that increased 69% from the fourth quarter to $4.6 billion. Fixed income was down 3% YoY, however, from a strong 1Q12, as stronger sales in securitized products were overcome by lower rates and currency revenues.

North American Consumer Banking (NACB) revenues weakened 4% over the quarter to $5.1 billion primarily from retail banking spread compression, lower mortgage gain-on-sale, and seasonally lower card volumes. NACB benefitted, however, from 6% lower expenses and 16% lower credit costs in the quarter, resulting in a 7% increase in net income. In International Consumer Banking (ICB) constant dollar basis revenues were $4.9 billion, down 1.1% from 4Q12 with margin pressure weighing on revenues. Nonetheless, positive operating leverage was achieved from efficiency savings and sharply lower credit costs in Asia and EMEA. With income taxes normalizing from lower 4Q12 levels, net income declined 12% QoQ. Regionally, Mexico continues to generate positive momentum in Latin America, while Asia, which rebounded modestly in the quarter with higher loan and investment volumes, continued to track lower YoY. Positively, DBRS notes that across GCB regions, on a constant dollar basis, average loan and NACB deposit balances were higher on a YoY and QoQ basis. Meanwhile, Transaction Services (TS) revenues were flat over the quarter in constant dollars, as expenses declined 5%, generating positive operating leverage in the quarter. Similar to ICB, net income declined 10% from substantially higher taxes. Management expects TS to maintain positive operating leverage for FY2013. Assets under custody grew 2% in the segment, while average deposits contracted in the quarter. In terms of earnings, Global Consumer Banking contributed 38% of Citicorp’s total income from continuing operations (ex-Corporate/Other segment) with S&B and Transaction Services contributing 46% and 15%, respectively.

Overall credit trends continued to reflect improvement at a slowing pace, but with some exceptions. After releasing $86 million in 4Q12, Citigroup released $652 million of reserves in 1Q13, of which 54% was from Citi Holdings and 46% from Citicorp. Total Citigroup non-accrual loans declined 8% over the quarter to $10.7 billion, or 1.65% of total loans, from 1.76% at 4Q12. Consumer non-accruals in Citi Holdings primarily accounted for the improvement, as $1 billion of the $2.8 billion in Citi Holding mortgages sold in the quarter were delinquent. Meanwhile, corporate non-accrual loans increased 7% (mostly in North America) over the quarter to 1.01% of loans up 6 basis points over the quarter. Lastly, consumer near term delinquencies were flat to slightly down and remain at historically low levels. Overall, the Company’s allowance for loan losses was a solid $23.7 billion at quarter end, equivalent to 3.70% of total loans and 223% of nonaccrual loans.

With regard to North American mortgage lending within Citi Holdings, DBRS notes that Citigroup released $325 million in reserves in the first quarter most likely primarily associated with the aforementioned asset sale. At quarter end, the Company held $7.5 billion of reserves for this $86 billion portfolio. Current reserves against this portfolio represent 36 months of coincident net NCL coverage. Mortgage repurchase losses in 1Q13 were $138 million, up $8 million QoQ and the repurchase reserve balance was $1.4 billion at quarter end, down $150 million from 4Q12. DBRS notes that repurchase claims totaled $1.8 billion in the quarter, which appears to be a higher rate than 2012 and may result in higher future losses.

Citigroup’s regulatory capital ratios remain solid. At quarter end, the Company’s estimated Basel I Tier 1 Common ratio (incorporating Basel 2.5 market risk capital rules) was 11.8%, down 87 basis points (bps) over the quarter reflecting the increase in RWA from the new guidance. Positively, the Company’s estimated Basel III Tier 1 Common increased to 9.3%, from 8.7% at December 31, 2012, and management expects to achieve 10% by FYE2013. Additionally, Citigroup enhanced it’s aggregate liquidity resources 4.5% to $370 billion and its Basel III LCR, currently at 122%, has been comfortably above proposed requirements for some time.

In March 2013, the Federal Reserve announced its results for the Comprehensive Capital Analysis and Review (CCAR). Under the severely adverse scenario, Citigroup’s Tier 1 common and leverage ratios were 8.22% and 5.38%, respectively at their minimums, and the Fed did not object to its planned capital actions. These planned capital actions include a $1.2 billion common stock buyback program through 1Q14 and maintenance of its $0.01 per share common dividend.

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

[Amended on June 25, 2014 to remove unnecessary disclosures.]