DBRS: Citigroup 4Q14 Disappoints with Continued One-Off Charges, Pressuring Returns

Summary:
• 4Q14 earnings of $350 million were notably impacted by sizable legal and repositioning charges of approximately $3.5 billion
• Further strategic initiatives announced with the exit of certain non-core institutional businesses where Citigroup views that it does not have the scale to compete
• 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) 4Q14 financial results as disappointing, with earnings trends continuing to be volatile driven by one-off charges. Importantly, the Company continues to report positive net income demonstrating the ability of Citigroup’s franchise to generate the underlying earnings necessary to absorb elevated charges. Net income of $350 million was notably impacted by sizable legal and repositioning charges of approximately $3.5 billion in 4Q14. For the full year, these one-off legal and positioning charges, including the DOJ settlement in 2Q14, totaled a staggering $11 billion. While one-off in nature, these charges pressure overall returns and limit the Company’s ability to generate capital through retained earnings. DBRS expects that elevated legal and repositioning expenses will likely remain a drag on performance in the near term.

Citigroup’s global franchise diversity was evident in revenue trends, with strength in some businesses/geographies offsetting weakness in others. DBRS-adjusted revenues of $17.6 billion declined QoQ on lower interest revenues and a notable decline in principal transactions revenues as Citigroup reported a marked decline in markets revenues. Revenues were supported, however, by generally stable trends in the Company’s consumer businesses outside of EMEA, as well as important contributions from Investment Banking, Trade and Treasury Solutions and the Private Bank. Expense controls remain important, with continued regulatory spend and franchise investment masking the Company’s expense savings initiatives. Excluding one-off charges, DBRS-adjusted expenses have remained relatively flat at around $11 billion over the past 6 quarters. DBRS will therefore be looking to see if the Company’s planned expense saves will attain the efficiency targets it has set for Citicorp.

Citigroup announced further strategic initiatives in the quarter, in addition to the exit from 11 consumer banking markets and Korean consumer finance announced in 3Q14. The Company announced an exit from certain non-core institutional businesses, including hedge fund administration, prepaid cards, certain transfer agency operations and wealth management administration. While DBRS views Citigroup’s willingness to exit underperforming businesses positively, the ongoing multiyear review of its businesses drives higher charges and pressures returns.

DBRS remains mindful that 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 capital plan on a qualitative basis, as well as the declining, but still material level of legacy assets at Citi Holdings. Importantly, Citigroup’s financial profile remains strong with an estimated Basel III Tier 1 (Advanced Approach) common ratio of 10.5% and an estimated supplementary leverage ratio of 6.0% at the Company-level.

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.