DBRS Confirms Citigroup at ‘A’; Trend Revised to Positive from Stable

DBRS, Inc. (DBRS) confirmed the ratings of Citigroup Inc. (Citi or the Company), including the Company’s Long-Term Issuer Rating of ‘A’. At the same time, DBRS confirmed the ratings of its primary banking subsidiary, Citibank, N.A. (the Bank). The trend on most ratings has been revised to Positive from Stable with the exception of the Bank’s short-term ratings, as they would remain at R-1 (middle) even if the Company’s long-term rating is upgraded. The Intrinsic Assessment (IA) for the Bank is A (high), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

In changing the trend to Positive, DBRS recognizes Citi’s improved financial performance and fundamentally stronger balance sheet that positions it well from a creditor perspective. DBRS sees Citi as being uniquely positioned to benefit from global growth opportunities, given its significant international presence catering to both consumer and institutional clients. Asset quality is strong having improved with the significant reduction of legacy assets, though this improvement is also attributable to the benign credit environment where credit losses are hovering near historical lows across sectors. While DBRS sees Citi as willing to take risk where it sees reward, the Company manages this risk well. Citi has successfully reigned in its exposures and refocused its franchise on core markets and customers.

The ratings are underpinned by Citi’s diverse business mix that includes 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, Citi is well-positioned to benefit from the expanding role of emerging market economies in the global economy. 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. While DBRS views the Company’s core businesses as well-positioned for growth, supported by a scalable business model and mobile/digital capabilities, the ratings also consider the heightened regulatory scrutiny and enhanced capital demands that coincide with being a global systemically important bank (G-SIB).

Importantly for the ratings, earnings continue to demonstrate improvement with resilient revenues and a declining expense base. Citi has been relatively consistent in generating top line revenues, averaging approximately $75 billion in annual net revenues since 2011. The Company continues to make progress with expense initiatives, with an efficiency ratio of 58% in 2017, which is among the best of the U.S. large bank peer group. In 2017, Citi reported net income of $16 billion, adjusted for the one-time adverse impact of U.S. tax reform, on net revenues of $71 billion, largely flat to 2016. Positive operating leverage is contributing to continued earnings momentum, and returns are migrating upward. In 2017, Citi’s adjusted return on tangible common equity (ROTCE) was about 8%, nearing its revised internal target of 10.5% in 2018. Positively, with the benefit of a lower tax rate going forward, the Company now estimates ROTCE targets of about 12% and 13%, respectively, in 2019 and 2020.

Citi’s risk profile benefits from significant diversification. DBRS sees the Company as having executed well on its strategic initiatives post-crisis, most notably running down its sizable level of legacy assets. Generally, Citi tends to have weaker credit quality in stressed market conditions given its sizable credit cards business and exposure to emerging market economies. While these exposures tend to be riskier, they also contribute to higher margins. Credit costs have been gradually trending upward, increasing 7% YoY in 2017, mainly reflecting volume growth and portfolio seasoning, as well as a reserve build related to net credit loss expectations in credit cards. Credit costs are expected to continue to increase, mainly due to normalization of credit in Citi’s institutional business, as consumer reserves were already built up in 2017. DBRS acknowledges the risks associated with the Company’s sizable capital markets businesses, as well as its emerging markets exposures, but sees Citi as having effective risk management capabilities that allow it to make appropriate risk/reward decisions.

Citi’s funding and liquidity profile is strong, underpinned by its substantial deposit base of close to $1 trillion, with just over half of this balance sourced internationally. Due to the Company’s business mix and funding needs, wholesale funding reliance is sizable and well-managed. Citi’s most significant source of wholesale funding is long-term debt, which stood at $237 billion, or 14% of liabilities, at the end of 2017. Given its surplus of TLAC-eligible debt, long-term debt levels are not expected to increase materially. Reflecting its high level of liquidity, high quality liquid assets stood at $446 billion at the end of 2017, resulting in an LCR of 123%.

Capitalization is also strong, with regulatory capital ratios among the highest of the large global banks. Citi reported a fully-loaded Basel III Common Equity Tier 1 (CET1) ratio under the advanced approaches of 12.3%, and a Supplementary Leverage Ratio of 6.7% at the end of 2017.

Citigroup Inc., a global financial services company headquartered in New York had $1.8 trillion in total assets as of December 31, 2017 and ranks as the fourth largest U.S. based financial institution by assets.

The Grid Summary Grades for Citi are as follows: Franchise Strength – Very Strong; Earnings Power – Strong/Good; Risk Profile – Strong/Good; Funding & Liquidity –Strong; Capitalisation – Strong.

RATING DRIVERS
If Citi continues to demonstrate momentum across its franchise while improving returns, DBRS sees the ratings as likely migrating upward. The trend could revert back to Stable if there were a reversal in business positioning or notable deterioration in credit quality, particularly if accompanied by weakening profitability trends. While not expected, any substantial operational risk issues could also pressure ratings, particularly if DBRS perceives that these issues have impaired Citi’s reputation or are causing damage to the core franchise.

Notes:
All figures are in USD unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (May 2017) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on our website under 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, Senior Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director – Global FIG
Initial Rating Date: 24 July 2001
Most Recent Rating Update: 02 August 2017

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

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