(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has affirmed the ratings of Citigroup Inc.
(Citi), including the company's 'A/F1' Issuer Default Ratings (IDRs) and 'a-'Viability Rating (VR). The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.
Today's rating action on Citi was taken in conjunction with Fitch's Global Trading and Universal Bank (GTUB) periodic review. Fitch's outlook for the industry is stable on balance. The positive rating drivers include improved liquidity, funding, capitalization and more streamlined businesses, all partly driven by regulation. Offsetting these positive drivers are substantial earnings pressure, regulatory uncertainty and heightened legal and operational risk.
RATING ACTION AND RATIONALE Citi's 'a-' VR continues to reflect both Citi's fundamental strengths and remaining challenges. Citi's strengths include its diverse revenue mix, conservative liquidity management and improved capital position. Challenges include a still sizeable level of non-performing loans and non-core assets, as well as modest levels of profitability as measured by core return on assets.
Non-core assets totaled $191 billion at June 30, 2012 or approximately 10% of assets, down considerably from 34% of assets in early 2009. However, the non-core assets housed in Citi Holdings continue to be a drag on overall profitability, as well as asset quality ratios. Citi Holdings loans comprise 20% of total Citigroup loans, but over 60% of nonaccrual assets. That said, reserve coverage of the Citi Holdings loan portfolio remains appropriate at 9.6% at quarter-end. The ratings incorporate an expectation of a slowing runoff to the remaining assets in Citi Holdings, now comprised primarily of loans in North America.
The current VR factors in Fitch core capital levels at or above the current levels, and continued progress in meeting Basel III capital ratios (including the proposed SIFI buffer). Fitch views strong capitalization as necessary given remaining balances of non-core assets and non-performing loans. The current VR also reflects the continued generation of operating profitability and a gradual reduction of remaining non-core assets managed by Citi Holdings.
Regulatory and legal issues appear relatively manageable, but Citi and its peers face financial challenges due to consumer banking regulatory changes in the U.S., new capital markets regulations such as the Volcker Rule and implementation of Basel III capital and liquidity standards. Fitch believes Citi will be able to comfortably meet new regulatory requirements, but recognizes that new regulations could affect revenue generation capacity particularly in capital markets activities and U.S. consumer operations. Citi's diverse international franchise enhances its financial resiliency.
RATING DRIVERS AND SENSITIVITIES - VR, IDRS & SENIOR DEBT The VR could be positively affected if Citigroup significantly improves operating performance as measured by operating return on assets (ROA). This improvement could be achieved if performance of core operations is maintained, while the drag on performance from non-core operating diminishes over time. Reductions in current economic, financial, and regulatory uncertainties would be contributing factors to any upward momentum in the VR. Other positive drivers include sizeable reductions in remaining non-core assets and non-performing loan levels, while maintaining conservative liquidity and capitalization. Fitch views upward momentum in ratings as limited over the near term though given the various headwinds facing Citi and the industry.
Downward pressure on the VR would result from a material loss, reduction in capital ratios or significant deterioration in liquidity levels. Likewise, any unforeseen outsized fines, settlements or other charges could also have adverse rating implications. Fitch considered Morgan Stanley's purchase of an additional 14% of the Morgan Stanley Smith Barney from Citi to be a modest net positive for Citi. The transaction resulted in a moderately higher accounting charge in 3Q'12 results than Fitch expectations, but remained a rating neutral event.
RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR Citi's current 'A' Long-term IDR is above its 'a-' VR, reflecting the fact that Citi's IDR benefits from support. The '1' Support Rating, and 'A' Support Rating Floor for Citi, factors in government support in the event of need for Citi and other U.S. G-SIFIs. At Citi's current VR, the firm's Long-term IDR would be affected by a change in the support rating floor.
Fitch's rating action continues to embody a view of support in Citi's IDRs and other U.S. Global Systemically Important Financial Institutions (G-SIFIs) over the near-to-intermediate term. This viewpoint was broadly discussed in Fitch's special report titled 'U.S. Banks - Sovereign Support: When Does it End' dated Dec. 15, 2011. Fitch could reassess its support ratings for U.S. G-SIFIs if global market conditions normalize and resolution regimes become more harmonized across international jurisdictions.
While Fitch believes the policy goal is to no longer provide full support to systemically important banks, this is progressing at an uneven pace globally.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid securities issued by Citi and by various issuing vehicles are all notched down from Citi's or its bank subsidiaries' VR in accordance with Fitch's assessment of each instrument's respective nonperformance and relative loss severity risk profiles. Their ratings are all primarily sensitive to any changes in the VRs of Citi or its subsidiaries.
HOLDING COMPANY RATING DRIVERS AND SENSIVITIES Citi's IDR and VR are equalized with those of its operating companies and banks reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. It has modest double leverage of 108% at 2Q12.
SUBSIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES The IDRs of Citi's major rated operating subsidiaries are equalized with Citi's IDR reflecting Fitch's view that these entities are core to Citi's business strategy and financial profile.
Citigroup is one of the leading banking institutions in the world with by far the largest international banking franchise among U.S. peers. Early in 2009, a strategic shift was announced which split Citi into two major operating units: Citicorp to manage core operations (regional consumer banking and the institutional clients group), and Citi Holdings to manage and dispose of non-core assets.
Fitch affirms the following ratings:
Citigroup Inc. --Long-term Issuer Default Rating (IDR) at 'A' with a Stable Outlook; --Senior unsecured at 'A'; --Subordinated at 'BBB+'; --Preferred at 'BB'; --Short-term IDR at 'F1'; --Support at '1'; --Support floor at 'A'; --Viability Rating at 'a-'. Citibank, N.A. --Long-term IDR at 'A' with a Stable Outlook; --Long term deposits at 'A+'; --Short-term IDR at 'F1'; --Short-term deposits at 'F1'; --Support at '1'; --Support Floor at 'A'; --Viability Rating at 'a-'; --Long-term FDIC guaranteed debt at 'AAA'. Citibank Banamex USA --Long-term IDR at 'A'; --Subordinated at 'BBB+'; --Long-term deposits at 'A+'; --Short-term IDR at 'F1'; --Short-term deposits at 'F1'; --Viability Rating at 'a-'; --Support at '1'; --Support Floor at 'A'. Citigroup Funding Inc. --Long-term IDR at 'A'; --Senior unsecured at 'A'; --Short-term IDR at 'F1'; --Short-term debt at 'F1'; --Market linked securities at 'A emr'; --Long-term FDIC guaranteed debt at 'AAA'. Citigroup Global Markets Holdings Inc. --Long-term IDR at 'A'; --Senior unsecured at 'A'; --Short-term IDR at 'F1'; --Short-term debt at 'F1'. Citigroup Global Markets, Inc. --Senior Secured at 'A'; --Short-term debt at 'F1'. Citigroup Derivatives Services LLC. --Long-term IDR at 'A'; --Short-term IDR at 'F1'; --Support at '1'. Citibank Canada --Long-term IDR at 'A'; --Long-term deposits at 'A'. Citibank Japan Ltd. --Long-term IDR at 'A'; --Short-term IDR at 'F1'; --Long-term IDR (local currency) at 'A'; --Short-term IDR (local currency) at 'F1'; --Support at '1'. CitiFinancial Europe plc --Long-term IDR at 'A'; --Senior unsecured at 'A'; --Senior shelf at 'A'; --Subordinated at 'BBB+'. Citibank International PLC --Long-term IDR at 'A'; --Short-term IDR at 'F1'; --Support affirmed at '1'. Commercial Credit Company --Senior unsecured at 'A'. Associates Corporation of North America --Senior unsecured at 'A'. Egg Banking plc --Subordinated at 'BBB+'.
Citigroup Capital III, VII, VIII, IX, X, XIII, XIV, XV, XVI, XVII, XVIII,and XX --Trust preferred at 'BB+'.
Adam Capital Trust III, Adam Statutory Trust III, IV, V --Trust preferred at 'BB+'.
Additional information is available at '
'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Aug. 16, 2011); --'Securities Firms Criteria' (Aug. 16, 2011); --'Bank Holding Company Criteria' (Aug. 16, 2011); --'Rating Bank Regulatory Capital and Similar Securities' (Dec. 15, 2012); --'U.S. Banks - Sovereign Support: When Does it End' (Dec. 15, 2011). Applicable Criteria and Related Research: Rating Bank Regulatory Capital and Similar Securities U.S. Banks - Sovereign Support: When Does it End -- Amended Securities Firms Criteria Bank Holding Companies Global Financial Institutions Rating Criteria (New York Ratings Team)