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

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Citigroup Inc. (Citi or the Company), including the Company’s Long-Term Issuer Rating of A (high). At the same time, Morningstar DBRS confirmed the credit ratings of its primary banking subsidiary, Citibank, N.A. (the Bank). The trend for all credit 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 CREDIT RATING CONSIDERATIONS
The credit ratings and Stable trend reflect the scale, quality and diversity of Citi’s franchise. The Company’s strong balance sheet fundamentals also provide key support to the credit ratings. The challenges Citi is facing with improving profitability, while making the necessary investments in response to its regulatory Consent Orders, along with executing its strategy transformation are also factored into the credit ratings. Citi’s susceptibility to various geopolitical political uncertainties, given its unique global positioning is also taken into consideration. Additionally, Citi is exposed to a wide range of capital markets activities, which support the franchise value, but elevate risk levels.

CREDIT RATING DRIVERS
Given Citi’s ongoing transformation, an upgrade of the credit ratings is unlikely over the medium 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 credit ratings would be upgraded. Conversely, signs of notable credit deterioration that has a prolonged adverse impact on profitability would result in a credit ratings downgrade. Any indications of significant weakening in Citi’s franchise due to further missteps in managing operational and/or reputational risks would also result in a credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong
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 more than half of its revenues generated outside North America in 2023.

Earnings Combined Building Block (BB) Assessment: Good
Citi’s top line has proven resilient, averaging $75 billion in annual net revenues over the past five years, including 4% year-on-year revenue growth in 2023, but profitability metrics remain at the bottom of its U.S. peer group. Operating expenses continue to be elevated primarily due to significant investments in infrastructure, technology, risk and control enhancements, as well as front office talent. In 4Q23, the Company reported a net loss of $1.8 billion, which was largely attributable to a few non-recurring items, totaling $4.7 billion. These included a $1.7 billion FDIC special assessment, a $1.3 billion reserve build related to transfer risk stemming from exposures to Argentina and Russia, an almost $900 million negative revenue impact associated with the currency devaluation in Argentina and approximately $800 million in restructuring charges related to actions taken as part of Citi’s organizational simplification. Looking forward, we expect operating expenses to decline in 2024, reflecting the benefits of the Company’s simplification, further reduction of exit markets and wind-downs and productivity savings. Over the medium term, Citi is targeting a return on tangible common equity of 11% to 12%, which we view as achievable.

Risk Combined Building Block (BB) Assessment: Strong/Good
While Citi’s size and scale provide many benefits, 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 profitability metrics already lag peers. Until these issues are resolved, we expect that Citi will continue to have challenges closing the earnings gap between peers, which is a credit ratings constraint. Positively, the Company’s credit performance remains favorable across regions and reserves remain substantial at $18.1 billion, or 2.66% of total loans.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong
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. 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 remains robust, with high-quality liquid assets averaging $561 billion during 4Q23, representing nearly one-quarter of total assets.

Capitalization Combined Building Block (BB) Assessment: Strong/Good
Citi’s capital metrics and internal capital generation provides a sound cushion to absorb unexpected losses. Despite returning $6 billion to shareholders in dividends and repurchases in 2023, the Company’s Standardized CET1 ratio improved 30 basis points (bps) to 13.3% at YE23, approximately 100 bps above its regulatory requirement.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/427882.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (January 23, 2024).

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

Morningstar DBRS applied the following principal methodology: Global Methodology for Rating Banks and Banking Organizations (June 23, 2023): https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations.

The following methodologies have also been applied: DBRS Morningstar Criteria: Guarantees and Other Forms of Support: (March 28, 2023): https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support. In addition Morningstar DBRS uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (January 23, 2024) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

This credit 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 credit ratings:

The last credit rating action on this issuer took place on February 8, 2023.

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

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see: https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Michael McTamney, CFA, Senior Vice President - Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: 12/15/82

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

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