DBRS: Citigroup Reports Solid 1Q14 Earnings; Headwinds Still Significant

Summary:
• Solid 1Q14 net income of $3.9 billion driven by important contributions across the franchise in a still difficult operating environment
• Headwinds remains significant highlighted by fraud announcement in Mexico and the Fed’s objection to capital plan, as well as the still sizeable legacy assets in Citi Holdings
• DBRS rates Citigroup Inc. Issuer & Senior debt at A (low) with a Stable trend

DBRS, Inc. (DBRS) views Citigroup Inc.’s (Citigroup or the Company) 1Q14 earnings as solid given the still difficult operating environment. Revenue growth is challenging, but the Company has made good progress in lowering expenses in Citicorp and reducing the drag from non-core Citi Holdings. Citigroup continues to face significant headwinds highlighted by the fraud announcement in its Mexico subsidiary, Banamex, and in the recent objection to its capital plan under the Fed’s 2014 Comprehensive Capital Analysis and Review (CCAR), as well as other ongoing issues, including investigations (i.e. foreign exchange, high frequency trading) and litigation issues which have the potential to impact the Company’s transactional and customer businesses.

Demonstrating Citigroup’s global franchise reach, important contributions across business lines generated net revenues of $20.1 billion, up 13% sequentially and down only a marginal 1% year-on year (YoY). In Global Consumer Banking (GCB), net revenues in international businesses (about half of GCB) were solid, driven by volume growth in Latin America and fee growth in Asia. Net revenues in North America remain challenged by lower levels of refinancing, spread compression and lower average loans in the Citi-branded cards business with U.S. consumer deleveraging. Contributing about 50% of Citicorp’s total net revenues, DBRS views GCB’s net revenues of $9.2 billion to $9.7 billion per quarter as an important, stable contributor to the Company’s underlying earnings generation.

Revenues in Institutional Clients Group (ICG) increased 31% (ex-credit value adjustment/debt value adjustment) from a weak 4Q13, but were down 4% YoY, in what is typically a seasonally strong quarter in the capital markets businesses. ICG net revenues were supported by particular strength in Banking and Equity Markets, offset by continued weakness in Fixed Income Markets. Improvement in Equity Markets revenues off a weak performance in 4Q13 is certainly a positive sign, but DBRS will look for this continued trend as an indicator that the Company’s investment in this business is coming to fruition. Lower sector-wide client activity levels are likely to continue to constrain net revenues in Markets with profitability also under pressure from increased capital and compliance requirements. Such pressure is likely to continue while capital markets players continue to adjust to the evolving environment.

Citigroup’s financial profile remains strong with an estimated Basel III Tier 1 (T1) common ratio of 10.4% and an estimated supplementary leverage ratio of 5.6% at the Company-level. Importantly, the 2014 CCAR results showed a projected minimum Basel I T1 Common ratio of 6.5% and projected minimum Transitional T1 Leverage ratio of 5.6% for Citigroup under the Supervisory Severely Adverse scenario with Planned Capital Actions. These ratios remain comfortably above regulatory minimums and are above peer average when comparing to other large capital market players.

DBRS rates Citigroup Inc.’s Issuer & Senior debt at A (low) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]