July 16 - Citigroup Inc.'s (Citi) operating results in second-quarter 2012 (2Q'12) demonstrated continued progress in key areas and were generally in line with Fitch's rating expectations. Citi recorded further improvements in loan portfolio quality, non-core asset levels and capitalization, while increasing deposit balances and maintaining comfortable liquidity. The ratings remain underpinned by Citi's systemic importance, diversified business/geographic mix, conservative liquidity and improving capital position but remain constrained by still significant levels of problem loans and non-core assets. As expected, Citi's operating results were affected by weaker capital markets results (excluding DVA/CVA), while other segments reported stable performances. Pre-tax operating profits as calculated by Fitch were $3.5 billion versus $4.8 billion in 1Q'12 and $2.3 billion in 4Q'11. These figures exclude DVA/CVA adjustments and various other gains/charges. Operating profitability, as measured by the pre-tax operating ROA, was 0.7% in the latest quarter. Citi's performance in the securities and banking business declined from a strong 1Q'12 in tandem with more difficult market conditions globally. Despite the decline, Citi's results in this segment remained solidly profitable and demonstrated greater resiliency than in the past thanks to efforts to reduce trading risk, particularly in the fixed income area. Citi's loan portfolio quality continued to gradually improve overall, but large levels of problem loans remain particularly at Citi Holdings. Early stage delinquency and net charge-off trends remained stable to positive throughout the consolidated portfolio. Loss reserves stood at 4.3% of total loans and provided coverage of over 1.9x annualized NCOs. Citi recorded further progress in reducing non-core assets managed under Citi Holdings, although non-core operations continued to generate large losses ($0.9 billion versus $1 billion in 1Q'12). Assets under Citi Holdings were reduced by $18 billion in 1Q'12, thanks to broad-based declines in mortgages, other loans and various securities. Non-core assets stood at $191 billion (10% of total assets) compared with $650 billion (34% of total) as of year-end 2008. Citi's capital ratios continued to strengthen with notable progress on the Basel III front. Citi's Tier I common ratio of 12.7% (under Basel I) will likely continue to compare favorably to the average of the four largest U.S. banks (not all have reported yet). Under Basel III, Citi's estimated Tier I common ratio improved to 7.9% thanks to the sale of Citi's stake in Akbank, combined with internal capital generation and efforts to reduce other risk weighted assets.