DBRS Confirms Citigroup Senior Debt at A (low), Trend Revised to Positive

DBRS, Inc. (DBRS) has today confirmed all ratings of Citigroup Inc. (Citigroup, Citi or the Company), including its Issuer & Senior Debt rating of A (low), the Deposits & Senior Debt rating of Citibank, N.A. (the Bank) of “A” and the Short-Term Instruments rating of R-1 (low) on both entities. At the same time, DBRS has revised the trend on all long-term ratings, as well as the trend on the Bank’s short-term ratings, to Positive from Stable. The Short-Term Instruments rating of Citigroup remains Stable. At the same time, DBRS has discontinued the ratings of certain securities that have been repaid. A full list of rating actions is included below. These rating actions follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

DBRS’s intrinsic assessments (IA) for Citigroup of A (low) and the Bank of “A” have also been confirmed. Citi’s IA is supported by the strength of its extensive global franchise and largely resilient revenue generation, but also considers the Company’s mid-tier returns given expense pressures that constrain performance. The IA also considers Citigroup’s refined and refocused business model, lower risk balance sheet, and improved results. Specifically, asset quality metrics are at multi-year lows, funding and liquidity remain strong, and capital continues to improve through retained earnings. Nonetheless, operational risk remains a challenge, highlighted by the Banamex fraud announcement in 1Q14 and the Fed’s objection last year to Citi’s capital plans on qualitative grounds. DBRS notes, however, that Citi recently passed the 2015 DFAST/CCAR examination from a quantitative as well as qualitative perspective, indicating improvement in capital planning systems and controls. With no regulatory objection, Citi is now permitted to significantly increase its capital distributions in 2015.

The Positive trend recognizes the significant progress that the Company has made since 2009, when its IA was lowered to the current level. Positive franchise momentum has become more evident as Citi continues to make progress with its repositioning, which is focusing on gaining wallet share with high credit quality consumers and multi-national corporates, while shedding non-core assets held in Citi Holdings. Citi Holdings assets now stand at $98 billion, or just 5% of total assets, down from an elevated $619 billion, or 32% of total assets, at year-end 2008.

Citigroup’s continuing success in executing on its strategy, including the run-down of Citi Holdings, reducing associated costs and a diminishing drag on overall earnings from these non-core assets, combined with continued positive franchise momentum, is likely to add positive ratings pressure. Negative ratings pressure, including a reversion back to a Stable trend, could arise from a reversal in progress in business positioning, if accompanied by weakening profitability trends. Substantial issues related to misconduct, litigation or operational controls could also pressure ratings, particularly if DBRS perceives that these issues have impaired Citi’s reputation or are causing damage to the core franchise.

A key underpinning of the rating level is Citigroup’s broad array of strong core businesses through which it meets the wide-ranging needs of retail, business, corporate and institutional customers under a global brand with a physical presence in approximately 100 countries. These businesses include successful retail banking and credit card businesses in many countries around the world, as well as extensive capital markets businesses and its wide-ranging wholesale banking services. Moreover, the Company is well-positioned to benefit from the expanding role of emerging market economies in the global economy. Although emerging markets are more volatile, DBRS sees emerging markets to be a key potential driver of growth for Citi over the long-term. As the most globally diversified U.S. banking organization, DBRS sees Citigroup as one of only a few banking organizations worldwide with the brand and infrastructure to provide such a broad range of banking services globally.

Following a substantial net loss of $28.0 billion in 2008, followed by a net loss of $1.6 billion in 2009, Citi has generated net profits in 2010 through 2014, averaging approximately $10 billion annually. While returns remain at the lower end of the peer group, impacted by an elevated cost base that reflects high legal and repositioning charges, DBRS expects that these elevated charges should begin to tail-off over the medium-term. For the full year 2014, these one-off legal and positioning charges totaled an outsized $11 billion. With that being said, Citi has put a substantial amount of its major litigation issues in the past through various settlements. Furthermore, with much of its business refocusing completed, repositioning costs are expected to decline. Citi is targeting a mid-50% efficiency ratio by 2015, which DBRS views as ambitious, but continued improvement from 67% in 2014 is expected.

DBRS also notes that Citigroup is benefitting from a considerably strengthened financial profile that has been improving since the beginning of 2009. The Company has markedly reduced the stress from its funding needs by shrinking Citi Holdings, growing deposits and improving its funding mix. Liquidity resources have been strengthened with High Quality Liquid Assets (HQLA) of $413 billion, or approximately 22% of total assets, resulting in a Liquidity Coverage Ratio (LCR) of 112%. Capital has also been considerably strengthened in recent years. Specifically, Citi’s tangible common equity-to-tangible assets ratio (DBRS-calculated) was an above-peer 9.5% at year-end, well above the 1.8% level that was reported at YE08. Meanwhile, Citigroup’s fully-phased in Basel III Common Equity Tier 1 (CET1) ratio was a solid 10.6% at year-end.

Citigroup Inc., a global financial services company headquartered in New York had $1.8 trillion in total assets as of December 31, 2014 and ranks as the third largest U.S. based financial institution by assets.

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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents 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: July 24, 2001
Most Recent Rating Update: December 10, 2013

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