DBRS Upgrades Ratings of Citigroup, Inc. to A (high); Stable Trend

DBRS, Inc. (DBRS) upgraded most of the ratings for Citigroup Inc. (Citi or the Company) and its primary banking subsidiary, Citibank, N.A. (the Bank), including the Company’s Long-Term Issuer Rating to A (high) from ‘A’. The trend on all ratings is now Stable. The Intrinsic Assessment (IA) for the Bank was raised one notch, to AA (low) from 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, reflecting the structural subordination of the holding company.

KEY RATING CONSIDERATIONS
The ratings upgrade reflects Citi’s strong franchise, supported by a diverse business, product and geographical mix, consistent and improving financial performance, and fundamentally robust balance sheet. Earnings continue to demonstrate improvement, supported by low credit costs, a lower tax rate and good expense control. Revenues should continue to benefit from targeted investments in its franchise and digital capabilities. With a smaller brick and mortar presence in the U.S. than other large bank peers, DBRS sees Citi as well-positioned to gain consumer wallet share from the rollout of enhanced digital capabilities. DBRS notes that Citi is also susceptible to emerging market weakness, trade disruptions, and political uncertainties given this unique global positioning.

The ratings upgrade and Stable trend also consider the benign credit environment, still healthy, albeit slowing U.S. economy, and supportive administration that are contributing to strong earnings. While DBRS views Citi as taking the appropriate precautions with regard to riskier lending and extensions of credit, the ratings also consider the underlying risks and interconnectedness of the capital markets at a time when the current credit cycle is potentially in its later stages. Furthermore, while DBRS sees that rising interest rates will provide a tailwind to earnings, this could also contribute to asset quality deterioration.

RATING DRIVERS
Over the longer term, if Citi demonstrates success in leveraging its franchise to improve returns across businesses while maintaining a similar risk profile, there could be positive ratings pressure.

The trend could be revised to Negative if there were signs of notable credit deterioration that had a prolonged adverse impact on profitability. While not expected, 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.

RATING RATIONALE
Citigroup has a very strong franchise with an extensive global reach. The most global of U.S. banking organizations, Citi is one of only a few banking organizations worldwide with the brand and infrastructure to provide a full range of banking services to multi-national corporations globally. At the same time, these global operations can provide customers in local markets with access to Citigroup’s broad international capabilities. The Company’s consumer business is present in 19 countries and jurisdictions, while its corporate business is supported by trading floors in approximately 80 countries and a proprietary network in 98 countries and jurisdictions. Citi’s global scope shows in the scale of its international revenues, with just over 50% of its revenues generated outside North America in 2018.

Citigroup’s results are supported by the strength of its diverse, global franchise that generates significant, sustainable revenues. The Company’s top line has proven resilient despite the challenging operating environment, averaging approximately $74 billion in annual net revenues over the past five years. Contributing to these recurring revenues is the substantial fee revenue contribution from the Institutional Clients Group (ICG) and the generally high yields and margins the Company achieves in its lending activities, notably cards. Profitability metrics are showing improvement with higher rates providing an uplift to revenues, while the bottom line is benefitting from expense control, low levels of provisioning and a lower tax rate. In 2018, Citi’s return on average common equity (ROACE) was a solid 9.4%, while return on average assets (ROAA) was approaching 1%. While returns are improving, they remain at the lower end of the range for the large U.S. bank peers.

Citi has extensive exposure to various risks and has effective risk management capabilities. The Company has strong processes for measuring and controlling risk across the organization, limiting potential operational risk issues. Citi benefits from its willingness to take on more risk where opportunities offer commensurately high rewards, while remaining relatively conservative about taking risk in illiquid positions or taking risk where returns are more moderate. Asset quality metrics are strong with low levels of nonperforming loans and net charge-offs. Given the Company’s substantial earnings power, DBRS sees Citi as having the resources to continually invest in technology, systems and process enhancements. While Citi’s size and scale provide many benefits, particularly with its ability to spread costs across a broader platform, managing risk across such a large, complex organization is a critical challenge.

Citigroup has a comprehensive framework for managing funding and liquidity across the franchise. Citi’s sizable deposit base anchors the Company’s sound funding profile. The Company’s organic deposit growth has been solid and is sourced through various channels including its retail bank and Treasury and Trade Solutions business. Citi’s reliance on wholesale funds primarily reflects its capital markets businesses, and is well diversified by geography and investor. Liquidity is strong with a significant level of high-quality liquid assets (HQLA) averaging 21% of total assets in 2018, as calculated by DBRS. Overall, the Company reported an LCR of 121% as of 4Q18.

Citi has strong capitalization that provides a substantial cushion to absorb unexpected losses. At the end of 2018, Citi reported a fully-loaded CET1 ratio of 11.9% and a supplementary leverage ratio of 6.4%. The Company also reported a strong tangible common equity/tangible assets ratio of 8.0% at the end of 4Q18, as calculated by SNL Financial.

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

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (July 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on our website under Methodologies and Criteria.

The primary sources of information used for this rating include company documents, SNL Financial and other sources such as bank regulators. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the “Global Methodology for Rating Banks and Banking Organisations” was utilized to evaluate the Issuer, while the “DBRS Criteria: Guarantees and Other Forms of Support” was used to rate the subsidiaries guaranteed by the Issuer.

The last rating action on this transaction took place on February 14, 2018.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS’s outlooks and ratings are monitored.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Lisa Kwasnowski, Senior Vice President - Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: 24 July 2001

For more information on this credit or on this industry, visit www.dbrs.com.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA