DBRS: Citi’s 3Q Results Sound with YTD Positive Operating Leverage at Citicorp

Summary:
• Citi reported 3Q15 net income of $4.3 billion, down 11% sequentially primarily reflecting weaker results in the Institutional Clients Group.
• Adjusting for non-core items, Citicorp has delivered significant positive operating leverage YTD despite revenue headwinds, as costs have been well managed.
• DBRS rates Citigroup Inc. Issuer & Senior debt at A (low) with a Positive trend.

DBRS, Inc. (DBRS) views Citigroup Inc.’s (Citigroup, Citi or the Company) 3Q15 financial results as sound, especially considering the difficult operating environment that curtailed Product revenues. Despite lower overall net income sequentially, improvements at Citicorp, which include loan and deposit growth (on a constant dollar basis), as well as generating YTD positive operating leverage, continue to support the Positive trend. Overall, Citi reported net income of $4.3 billion on revenues of $18.7 billion equating to a return on average common equity of 8.0%. While Citi’s financial performance is improving, this return still needs to improve for Citi to earn its cost of capital.

While reported revenues were down across each business line within the Institutional Clients Group (ICG) segment sequentially, revenues were up modestly 9M15 reflecting strong Advisory revenues, where Citi has seen sustained wallet share gains. Similar to other banks, equity and debt underwriting revenues declined significantly reflecting lower client activity. The Company is seeing good momentum across Treasury and Trade Solutions, Securities Services, and Private Bank. Meanwhile, Global Consumer Banking reported higher net income sequentially driven by lower expenses. Latin American revenues benefited from the sale of Citi’s merchant acquiring business. Credit card open accounts, average loans and purchase sales were all up modestly sequentially. The Company noted that it could take up to two years for credit cards to make a more significant contribution, but will benefit from the Costco relationship once that starts next year. Importantly, active credit card accounts have increased by 6% over the past year.

Evidencing significant progress on managing expenses, Citi’s reported expenses declined by 18% over the past year. Most of the savings have come from lower legal and repositioning charges, but part of the cost savings have come from branch rationalization with the Company having closed or sold over 200 branches since the beginning of 2014. Moreover, Citi has plans to exit approximately 50 more branches by the end of 1Q16, including its Boston branches. The Company is focused on its more productive urban markets and is relying more heavily on digital channels.

Citi Holdings was profitable in the quarter and total assets have declined 20% over the past year to $110 billion. The Company noted that it expects to close an additional $31 billion of asset sales in 4Q accelerating the run off, with the expected sale of OneMain Financial projected to generate a net gain of approximately $1 billion.

The Company benefited once again from a consumer loan reserve release with consumer credit trends remaining favorable. Specifically, North America, Asia and Latin America all experienced lower net credit losses sequentially, while overall delinquencies remained stable. However, further deterioration with ICG’s energy-related exposures resulted in an overall reserve build with approximately $140 million of the reserve build related to energy.

Overall, the balance sheet remains strong with Citi reporting a fully phased-in Common Equity Tier 1 ratio of 11.6% and a supplementary leverage ratio 6.8% at quarter-end. Regulatory capital has benefited from the utilization of approximately $2.1 billion of deferred tax assets, including another $700 million this quarter.

DBRS rates Citigroup Inc.’s Issuer & Senior debt at A (low) and changed the trend to Positive on March 19, 2015.

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