DBRS Morningstar Confirms Long-Term Ratings of Citigroup at A (high), Stable Trend

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Citigroup Inc. (Citi or the Company), including the Company’s Long-Term Issuer Rating of A (high). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Citibank, N.A. (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA (low), 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.

KEY RATING CONSIDERATIONS
The ratings reflect the Company’s strong franchise that is supported by scale and diversity, consistent financial performance and a fundamentally robust balance sheet. 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 Morningstar sees Citi as well positioned to gain consumer wallet share from the rollout of these enhanced digital capabilities.

The ratings and Stable trend also consider the challenges Citi is facing with improving profitability, while making needed platform and systems enhancements in response to the Consent Orders, especially at a time of market uncertainty related to the Coronavirus Disease (COVID-19). We also see Citi as exposed to a wide range of capital markets activities, which support the franchise value, but elevate risk levels. Citi is also susceptible to emerging market weakness, trade disruptions and political uncertainties given its unique global positioning.

RATING DRIVERS
Given the current operating environment, an upgrade is unlikely over the near term. Over the longer term, if Citi demonstrates success in leveraging its franchise to improve risk-adjusted returns across businesses, while demonstrating improved controls and systems through the termination of its Consent Orders, the ratings would be upgraded. Conversely, signs of notable credit deterioration that has a prolonged adverse impact on profitability would result in a downgrade.

RATING RATIONALE
The Company 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 Citi’s broad international capabilities. The Company’s global scope shows in the scale of its international revenues, with just over 50% of its revenues generated outside North America in 2020.

Citi’s earnings remain resilient, despite a substantial building of loan loss reserves associated with the unprecedented operating environment. Exceptional results from capital markets businesses have helped to offset headwinds in other business lines. For 2020, Citi delivered a return on average common equity of 5.9%, which we consider acceptable in the context of the challenging operating environment. However, the Company’s profitability metrics continue to lag behind U.S. universal bank peers, in part due to its higher provisioning levels related to its more credit card-focused business mix. Importantly, Citi’s substantial earnings power provides the resources to continually invest in technology, systems and process enhancements, which we see as a sustainable competitive advantage over smaller peers.

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. In October 2020, the Federal Reserve and OCC issued Consent Orders against the Company that cited "significant ongoing deficiencies", criticizing Citi's systems and controls, and requiring demonstrated progress for remediation. Remediation efforts will result in additional expenses at a time when earnings are already being pressured by the pandemic-related headwinds. Unless these issues are resolved, we expect that Citi will continue to have challenges closing the earnings gap between peers, which is a ratings constraint.

Citi’s sizable deposit base of $1.3 trillion, which is sourced through various channels, including its retail bank and Treasury and Trade Solutions business, anchors the Company’s sound funding profile. Core deposits readily fund the entire loan portfolio and deposit growth was exceptional during 2020, primarily reflecting high levels of liquidity in the system, largely resulting from the impact of stimulus and reduced spending. Citi’s reliance on wholesale funds primarily reflects its capital markets businesses, and is well diversified by geography and investor. Long-term debt is well-laddered by maturity. Secured funding is done shorter-term, presenting potentially an overnight funding risk, though funding for less liquid assets is typically done on a term basis. Liquidity is strong with an average of $545 billion of high-quality liquid assets (HQLA) in 4Q20, or about 24% of total assets. The Company’s CET1 ratio was in line with peers at 11.8% at YE20.

Asset quality remains solid, with net charge-offs remaining at low levels, as the benefit from stimulus measures and payment relief programs continues to delay loss recognition. While we expect credit performance to worsen in the coming quarters, Citi remains well positioned to absorb the fallout, considering its substantial earnings generation capacity and robust balance sheet fundamentals.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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

DBRS Morningstar notes that this Press Release was amended on January 26, 2022, to incorporate the correct rating attributes.

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

The principal methodologies are the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021): https://www.dbrsmorningstar.com/research/372344/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar 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 Morningstar did 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 United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. 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 used to evaluate the Issuer and the “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” was utilized to rate the subsidiaries guaranteed by the Issuer. “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” was used in assessing potential ESG implications for the ratings.

The last rating action on this issuer took place on February 14, 2020, when most ratings were confirmed and some short-term ratings were upgraded.

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

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Michael McTamney, 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.dbrsmorningstar.com.

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