DBRS Downgrades Citigroup’s Senior Debt to A (low); ST to R-1 (low) Following Removal of Support

DBRS, Inc. (DBRS) has today downgraded the Issuer and Senior Debt ratings of Citigroup Inc. (Citigroup or the Company) to A (low) and its Short-Term Instruments Rating to R-1 (low). Additionally, DBRS downgraded the Company’s main bank operating subsidiary, Citibank, N.A.’s Deposits & Senior Debt to “A” and its Short-Term Instruments Rating to R-1 (low). Additional ratings actions are listed in the table below. Separately, the Company’s Preferred Stock rating was upgraded to reflect the updated “DBRS Criteria: Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities” released yesterday. All rating outlooks have been changed to Stable.

The rating actions primarily reflect DBRS’s September 4, 2013 removal of the U.S. rating floor resulting in the equalization of the issuer’s intrinsic and final ratings. DBRS no longer ascribes any non-systemic external support to the Company or its subsidiaries precipitating the downgrades. While many of Citigroup’s financial and credit fundamentals continue to improve, they were only able to partially offset the removal of government support from its ratings. DBRS notes that if the improvements are sustained, the Company’s ratings could be positively impacted in the future. Today’s rating actions conclude the review with negative implications initiated on September 4, 2013.

In the past year, Citigroup’s credit fundamentals and financial performance have continued to improve. With an engaged Board of Directors and clear strategic direction from Senior Management, the Company has achieved marked progress on its primary objectives beyond DBRS’s expectations including the wind-down of legacy assets, efficiency improvement, and utilizing its DTAs. Given those dynamics while also seeing good underlying business momentum, DBRS has returned the rating outlooks to Stable. Nonetheless, the Company’s performance remains pressured from improving, yet still high expenses, higher than peer credit costs relative to core revenue, elevated legacy and regulatory costs, and volatility in its net revenue base.

The Company continues to make incremental and steady progress in putting its legacy issues behind it such as the recent GSE settlements on rep/warranties. Additional litigation exposures on other misbehaviors, however, remain a performance drag and management distraction including such items as the recent EU interest rate fixing settlement, potential FIRREA litigation, and other new probes. DBRS believes that Citigroup will continue to absorb elevated costs primarily related to its legacy businesses over the medium term through earnings.

The operating environment for the Company remains challenging with constrained loan demand, pressured margins, high regulatory, legal, and compliance expenses, and the continued, albeit diminishing, drag of Citi Holdings. Given the tailwind from the appreciating U.S. housing market, DBRS notes that today’s rating actions incorporate the expectation that the Company will continue to successfully wind-down Citi Holdings, without material losses. DBRS sees the key challenges for the Company as improving profitability, reducing earnings volatility, and further reducing its risk profile. DBRS also would expect to see higher returns from Citigroup’s capital market businesses if the Company chooses to maintain a higher risk profile.

While DBRS is cognizant of significant improvements in the Company’s balance sheet, the Company’s core recurrent earnings power and risk-adjusted returns are key drivers for its intrinsic rating level, which have now been equalized with its final ratings. Positively, for fixed income investors, the Company continues to strengthen its balance sheet with strong capital levels, ample liquidity, and an improving credit profile.

Improving operating performance and generating asset growth from its primary businesses while carefully controlling its risk profile could result in positive rating actions. Backtracking in earnings momentum, expense control, and credit costs could result in negative ratings pressure.

Notes:
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, and DBRS Criteria: Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These 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
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 24 July 2001
Most Recent Rating Update: 4 September 2013

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