DBRS Upgrades Citigroup Senior Debt to A, Trend Now Stable

DBRS, Inc. (DBRS) has today upgraded the Issuer & Senior Debt rating of Citigroup Inc. (Citigroup, Citi or the Company) to “A” from A (low), the Deposits & Senior Debt rating of Citibank, N.A. (the Bank) to A (high) from “A”, the Bank’s Short-Term Instruments rating to R-1 (middle) from R-1 (low), while confirming Citigroup’s Short-Term Instruments rating of R-1 (low). The trend on all ratings is now Stable. These rating actions follow a detailed review of the Company’s operating results, financial fundamentals and future prospects.

DBRS’s intrinsic assessments (IA) for Citigroup and the Bank were each raised by 1 notch, to “A” and A (high), respectively. In increasing the IA, DBRS recognizes the continued strengthening of the Company’s extensive global franchise since the height of the financial crisis. This has been evidenced by multi-year, consistently improving financial results and strong credit fundamentals, including much improved asset quality, markedly strengthened liquidity, and increasingly robust capitalization. The IA also considers the Company’s continuing progress with its repositioning, focusing on gaining wallet share with high credit quality consumers and multi-national corporates, while shedding non-core assets held in Citi Holdings, which has resulted in lower associated costs and a diminishing drag on overall earnings. Citi Holdings assets now stand at $74 billion, or just 4% of total assets, down from an elevated $619 billion, or 32% of total assets, at year-end 2008.

The Stable trend reflects DBRS’s view that Citi’s fundamentally stronger balance sheet has positioned it well to cope with the current stress in the environment. In particular, the capital markets businesses, energy sector exposure, and the emerging markets businesses may have an impact on overall asset quality, provisioning levels and, therefore, profitability over the near- to medium-term.

Given the recent upgrade and current challenging environment, DBRS views positive rating action over the near- to medium-term as remote. Over the longer-term, Citi’s continued success in enhancing its franchise by executing on its strategy while improving returns across business segments, combined with continued progress in adjusting to evolving regulatory requirements, could add positive pressure to the rating. Conversely, negative ratings pressure 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.

Citigroup’s franchise is underpinned by a 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. In the near-term, however, Citi must continue to manage these businesses in an uncertain operating environment characterized by slower growth and declining commodity prices. 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.

Citigroup’s top line has proven resilient despite the challenging operating environment, averaging approximately $77 billion in annual net revenues over the past few years. Importantly, legal and repositioning charges, which had been constraining to the rating, declined considerably to $2 billion (6% of IBPT) in 2015 from $7 billion in 2014 (33% of IBPT), as the Company has put a substantial amount of its major litigation issues behind it through various settlements while completing much of its refocusing. With further improvement in its efficiency ratio (59% in 2015, down from 67% in 2014) as well as the aforementioned substantial revenue generation, Citi’s profitability metrics have migrated toward the mid- to upper-tier of its global peer group.

DBRS views Citigroup’s funding and liquidity as strong, supported by its $908 billion global deposit base. Due to the Company’s business mix and funding needs, wholesale funding reliance is sizable and is expected to increase somewhat at the holding company as a result of the proposed TLAC rules. Importantly, Citigroup expects TLAC’s impact on issuance plans and earnings to be manageable, with total incremental issuance of TLAC eligible debt to be approximately $10 billion. Meanwhile, reflective of its high level of liquidity, the Company had $379 billion of High Quality Liquid Assets (HQLA) at year-end, which represented 22% of total assets and resulted in a Liquidity Coverage Ratio (LCR) of 112%.

Driven by earnings retention and a reduction in risk-weighted assets, Citi’s capital ratios have reflected continued improvement and remain among the highest in the industry. Specifically, the Company’s fully-phased in Basel III Common Equity Tier 1 (CET1) ratio was a strong 12% at year-end. Additionally, its estimated supplementary leverage ratio improved to 7.1%, which is well above the required minimum. Positively, after receiving the Fed’s objection to its capital plans based on qualitative measures in 2014, Citi passed the 2015 DFAST/CCAR examination from a quantitative as well as qualitative perspective, indicating improvement in capital planning systems and controls.

Citigroup Inc., a global financial services company headquartered in New York had $1.7 trillion in total assets as of December 31, 2015 and ranks as the fourth 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 (December 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (December 2015), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2016). 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: Lisa Kwasnowski
Rating Committee Chair: Alan G. Reid
Initial Rating Date: July 24, 2001
Most Recent Rating Update: March 19, 2015

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