DBRS: Citigroup 3Q14 Results Reflect Improved Performance; Exiting 11 Consumer Markets

Summary:
• 3Q14 results include strong revenue and core earnings growth. 3Q14 net income of $3.44 billion compares favorably to both 2Q14 and 3Q13.
• Citi will exit from 6 Latam, 2 Asian, and 3 EMEA consumer banking markets (and also Korean consumer finance) going from 35 to 24 markets by YE2015 to focus its business on locales with scale and growth potential; institutional client businesses in exiting geographies are unaffected.
• DBRS ratings remain unchanged; Citigroup Inc. Issuer & Senior debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) views Citigroup Inc.’s (Citigroup or the Company) 3Q14 financial results as reflecting improved performance (especially compared to 2Q14, which included the large DOJ mortgage settlement). The year-on-year (YoY) positive variance in net income primarily reflected stronger revenue and better credit, but expenses also grew and remain elevated. Citicorp revenue (adjusted for CVA/DVA) was up 2.4% quarter-on-quarter (QoQ) and 8% YoY, as both the Global Consumer Bank (GCB) and the Institutional Clients Group (ICG) businesses reported higher revenues and generally better results. Even Citi Holdings revenues were up from the sale of Greece and Spain consumer operations and lower funding costs.

DBRS notes that many performance indicators trended positively in the quarter including better credit metrics (except in Latin America), utilization of some deferred tax assets, maintenance of substantial liquidity, higher net interest margin and an improved capital position. Generating growth remains challenging, as Citicorp QoQ ending loans and deposits declined 1.5% and 2% (as reported in U.S. dollar), respectively, but were both up YoY. Moreover, operating expenses grew over the quarter as legal, repositioning and disposal costs remain elevated. Positively, Citi Holdings generated its second consecutive profitable quarter, while its assets declined to 5% of Citigroup assets. In the quarter, the Company prepared its OneMain Financial (One Main), a consumer subprime lender, for an IPO. OneMain is currently part of Citi Holdings and had approximately $8.3 billion in loans at June 30, 2014.

Citigroup provided proforma financials for its announced exit from 11 consumer banking markets and Korean consumer finance. In DBRS’s opinion, these financials reveal very modest revenue and negligible net income impacts, while improving efficiency, which would be a performance positive for the Company upon divestment.

While the financial information was largely positive in the quarter, DBRS is also mindful that other significant headwinds remain for the Company including the Oceanografía fraud issue in Mexico, restructuring of its Korean business, FX and LIBOR litigation, the Fed’s objection to its capital plan, as well as the declining, but still material level of legacy assets at Citi Holdings. DBRS sees these risk reflected in legal and repositioning expenses, which will likely remain a drag on performance in the near term.

Importantly, Citigroup’s financial profile remains strong with an estimated Basel III Tier 1 (Advanced Approach) common ratio of 10.7% (up 10 basis points) and an estimated supplementary leverage ratio of 6.0% (up 30 basis points) at the Company-level. These ratios remain comfortably above regulatory minimums and are above the average of other large capital market players.

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

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