September 28, 2017 / 9:20 PM / a year ago

Fitch Affirms Citigroup's Long-Term IDR at 'A'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, September 28 (Fitch) Fitch Ratings has affirmed Citigroup Inc.'s (Citi) Viability Rating (VR) at 'a' and Long-Term Issuer Default Rating (IDR) at 'A'. Fitch has also affirmed Citibank, N.A.'s VR at 'a' and IDR at 'A+'. The Rating Outlooks for the Long-Term IDRs are Stable. A full list of rating actions follows at the end of this press release. Fitch affirmed Citi's ratings in conjunction with its periodic review of the Global Trading and Universal Banks (GTUBs). KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT The affirmation of Citigroup's VR reflects Citi's solid capital and liquidity levels. Fitch views favorably Citi's successful execution of its strategy to become a smaller, simpler and safer bank. Citi's earnings reflect a generally improving trend over the past few years, though is still pressured by various headwinds including a low interest rate environment and relatively lackluster economic growth. Citi's complexity of operations, exposure to more volatile capital markets revenues, and weaker relative asset quality and earnings offset these ratings strengths. Citi's capital ratios continue to remain very good. The company's Common Equity Tier 1 under Basel III on a fully phased-in basis increased again to 13.1% at June 30, 2017. The approximate 60 basis points (bps) improvement from a year ago was due primarily to net income and smaller balances of risk-weighted assets, partially offset by share buybacks and dividends. A large portion of Citi's sizeable DTA is still excluded from regulatory capital. Citi recently disclosed a long-term CET1 target of 11.5%, which is inclusive of its G-SIB surcharge of 3%. Fitch views this buffer as appropriate, particularly in light of potential impacts to unrealized gains under a rising rate environment. Citi has continued to build capital over the past several years but will likely decrease over the intermediate to long term through capital distributions to its shareholders. Citi's liquidity profile is a secondary key rating driver, underpinning its VR. Citi's average LCR was 125% during the second quarter of 2017 (2Q17), as compared to the U.S. average of 121% for the eight G-SIBs that recently reported this new required disclosure. Citi has considerably bolstered its amount of liquid assets and reduced its reliance on short-term borrowings over the last several years. Further, Citi's loan-to-deposit ratio remains low at 67% at June 30, 2017. The company's liquidity profile remains strong, though Fitch does note a relatively high reliance on short-term wholesale funding, albeit at levels lower than its U.S. peers. Fitch also views Citi's successful execution of its strategic plans favorably. Citi has made significant progress toward reducing its noncore assets. Citi no longer separately reports these noncore assets as they have reached a small enough size to no longer warrant separate reporting. More recently, Citi has been able to shift from divestitures and other cost-cutting measures to a focus of growing and strengthening the franchise, with planned investments in cards, Mexico, wealth management, and equities. Offsetting the strong capital and liquidity profiles, consolidated credit risk ratios for Citi remain higher than some peers despite an improving overall trend over the past several years. Fitch attributes some of Citi's weaker relative asset quality profile to its high, albeit improving, balance of troubled debt restructurings (TDRs), as well as its exposure to higher loss content credit card loans and emerging markets. Given Citi's higher loss content credit card book and emerging markets exposure, loan losses tend to be higher than peer averages. Fitch expects loan losses may increase for the industry given the very benign credit environment and unsustainably low levels of credit losses. The complexity of global operations and a reliance on more volatile capital markets revenues, which on average accounted for around 30% revenues over the past five quarters, serve as constraints to upwards movement in ratings. Citi has physical operations in 98 markets, with trading floors in 77 countries and serving clients in more than 200 countries. While Citi's global franchise (particularly its Treasury & Trade Solutions and fixed income businesses) are strong, Fitch views Citi's expansive and complex operations as presenting elevated operational risk. Citi's earnings profile and return on equity (ROE) in particular, continues to lag large bank averages. Citi recently outlined new financial targets to be achieved by 2020 with its return on assets (ROA) target unchanged from what was initially laid out in 2013. During the first half of 2017 (1H17), Citi earned an ROA of 87bps as compared 84bps during the first six months of 2016, and relative to the long-term target of 90bps to 110bps. Fitch expects that Citi's earnings will continue to remain pressured given various global headwinds, including low interest rates, modest economic growth, and geopolitical uncertainties. The VRs remain equalized between Citi and its material operating subsidiaries, including Citibank, N.A. The common VR of Citi and its operating companies reflects the correlated performance, or failure rate between the Citi and these subsidiaries. Fitch takes a group view on the credit profile from a failure perspective, while the IDR reflects each entity's non-performance (default) risk on senior debt. Fitch believes that the likelihood of failure is roughly equivalent, while the default risk at the domestic operating company would be lower given the resolution regime and total loss absorbing capacity (TLAC). All U.S. bank subsidiaries carry a common VR, regardless of size, as U.S. banks are cross-guaranteed under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). On a standalone basis, Citi and Citibank, N.A. share the same VR at 'a'. However, the Long-Term IDRs for the material U.S. operating entities are one notch above Citi's to reflect Fitch's belief that the U.S. single point of entry (SPE) resolution regime, the implementation of TLAC requirements for U.S. G-SIBs, and the presence of substantial holding company debt reduces the default risk of domestic operating subsidiaries' senior liabilities relative to holding company senior debt. In Fitch's view, these buffers would provide substantial protection to senior unsecured obligations in the domestic operating entities in the event of group resolution, as they could be used to absorb losses and recapitalize operating companies. Therefore, substantial holding company debt reduces the likelihood of default on operating company senior obligations. SUPPORT RATING AND SUPPORT RATING FLOOR The support rating (SR) and support rating floor (SRF) reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that Citi becomes non-viable. Fitch believes implementation of the Dodd Frank Orderly Liquidation Authority legislation is now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors participating in losses, if necessary, instead of or ahead of the company receiving sovereign support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Citi and its subsidiaries are all notched down from the common VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Subordinated debt issued by the operating companies is rated at the same level as subordinated debt issued by Citi reflecting the potential for subordinated creditors in the operating companies to be exposed to loss ahead of senior creditors in Citi. Subordinated lower Tier 2 debt is rated one notch below the VR for loss severity, reflecting below average recoveries. Legacy Tier 1 securities are generally rated four notches below the VR, made up of two notches for high loss severity relative to average recoveries, and two further notches for non-performance risk, reflecting the fact that coupon omission is not fully discretionary. High and low trigger contingent capital Tier 1 instruments are rated five notches below the VR. The issues are notched down twice for loss severity, reflecting poor recoveries as the instruments can be converted to equity or written down well ahead of resolution. In addition, they are also notched down three times for very high non-performance risk, reflecting fully discretionary coupon omission. SUBSIDIARY AND AFFILIATED COMPANY Citigroup Global Markets Holdings Inc., Citigroup Global Markets Limited, Citigroup Global Markets Inc., Citibank Canada, Citigroup Global Markets Funding Luxembourg, and Citibank Europe plc are wholly owned subsidiaries of Citi or Citibank, N.A. These subsidiaries' IDRs and debt ratings are aligned with Citi or Citibank, N.A., reflecting Fitch's view that these entities are integral to Citi's business strategy and operations. Their ratings would be sensitive to the same factors that might drive a change in Citi's IDR. Domestic subsidiaries and international subsidiaries that have not been upgraded are, in Fitch's opinion, not sufficiently material to benefit from domestic support from Citi or are international subsidiaries that would not benefit from internal TLAC. This includes Citigroup Global Markets Holdings Inc. Fitch is affirming and withdrawing the ratings of Banamex USA, as this entity no longer holds a banking license. There are no outstanding debt issuances at this entity. DEPOSIT RATINGS U.S. deposit ratings are rated one notch higher than senior debt reflecting the deposits' superior recovery prospects in case of default given depositor preference in the U.S. Citi's international subsidiary, Citibank Canada's deposit ratings are at the same level as senior debt ratings because their preferential status is less clear and disclosure concerning dually payable deposits makes it difficult to determine if they are eligible for U.S. depositor preference. DERIVATIVE COUNTERPARTY RATING Fitch has assigned a Derivative Counterparty Rating (DCR) of 'A+(dcr)' to Citibank, N.A and Citigroup Global Markets Inc. and 'A(dcr)' to Citigroup, Inc. and Citigroup Global Markets Limited. A DCR expresses Fitch's view of a bank's relative vulnerability to default under derivative contracts with third-party, non-government counterparties. DCRs have been assigned to these companies because they have significant derivatives activity. The DCRs are at the same level as the respective companies' Long-Term IDRs because they have no definitive preferential status over other senior obligations in a resolution scenario. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT Fitch sees limited near-term upward VR momentum given a relatively high and absolute rating. The company's complex organizational structure and reliance on more volatile capital markets revenues act as key constraints to further upward movement of the ratings. Citigroup's IDRs and senior debt are sensitive to any changes in the VR, while Citibank's IDR and senior debt are sensitive to changes in our view of the buffer created by the U.S. single point of entry (SPE) resolution regime, the implementation of TLAC requirements for U.S. G-SIBs, and the presence of substantial holding company debt, which serve to reduce the default risk of domestic operating subsidiaries' senior liabilities relative to holding company senior debt. Downward pressure on the VR could result from a material deterioration in capital or liquidity levels. The strength of the liquidity and capital profiles underpins Citi's ratings. Today's affirmations incorporate Fitch's expectation that Citi will manage its capital and liquidity profiles relatively conservatively, and although capital distributions will likely increase over time, they will still be governed by regulatory stress testing and as such, remain reasonable. While there is no outsized reliance on a single market outside of the U.S., if there are issues related to economic slowdowns or political unrest in a particular emerging market, it is possible there may be effects for Citi. The secondary effects of a slowdown in a particular country, and those cascading impacts on the global economy are much harder to quantify and assess for any implications to Citi or its peers. Any unforeseen outsized fines, settlements or other legal-related charges could have adverse rating implications for Citi. A fine that was to deplete capital in a material way could lead to a negative rating action. Citi's ratings could be vulnerable to a large operational loss or if an operational event calls into question Fitch's assessment of Citi's risk management function and its ability to accurately identify, monitor, and mitigate risks throughout the organization. SUPPORT RATING AND SUPPORT RATING FLOOR The SR and SRF reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that Citi becomes non-viable. In Fitch's view, implementation of the Dodd Frank Orderly Liquidation Authority legislation is now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors participating in losses, if necessary, instead of or ahead of the company receiving sovereign support. Any upward revision to the SR and SRF would be contingent on a positive change in the U.S.'s propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES These ratings are primarily sensitive to any change in the VR. The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example. SUBSIDIARY AND AFFILIATED COMPANIES The IDRs of Citigroup Global Markets Holdings Inc., Citigroup Global Markets Limited, Citigroup Global Markets Inc., Citibank Canada, Citibank Europe plc, Citigroup Global Markets Funding Luxembourg, and Citigroup Global Markets Holding Inc. are sensitive to a change in Citi's VR. Their IDRs are also sensitive to changes in our view of the Citi's ability or propensity to provide support to these entities. DEPOSIT RATINGS Deposit ratings are sensitive to changes in senior debt ratings. DERIVATIVE COUNTERPARTY RATING DCRs are primarily sensitive to changes in the respective issuers' long-term IDRs. In addition, they could be upgraded to one notch above the IDR if a change in legislation (for example as recently proposed in the EU) creates legal preference for derivatives over certain other senior obligations and, in Fitch's view, the volume of all legally subordinated obligations provides a substantial enough buffer to protect derivative counterparties from default in a resolution scenario. Fitch has affirmed the following ratings: Citigroup Inc. --Long-Term IDR at 'A'; Outlook Stable; --Senior unsecured at 'A'; --Short-Term IDR at 'F1'; --Subordinated at 'A-'; --Preferred at 'BB+'; --Market-linked notes at 'A(emr)'; --Viability Rating at 'a'; --Support at '5'; --Support floor at 'NF'; --Derivative Counterparty Rating at 'A(dcr)'. Citibank, N.A. --Long-Term IDR at 'A+'; Outlook Stable; --Senior unsecured debt at 'A+'; --Long-Term deposits at 'AA-'; --Short-Term deposits at 'F1+'; --Viability rating at 'a'; --Short-Term IDR at 'F1'. --Support at '5'; --Support floor at 'NF'; --Derivative Counterparty Rating at 'A+(dcr)'. Citigroup Funding Inc. --Senior unsecured at 'A'; --Short-Term debt at 'F1'. Citigroup Global Markets Holdings Inc. --Long-Term IDR at 'A'; Outlook Stable; --Senior unsecured at 'A'; --Short-Term IDR at 'F1'; --Short-Term debt at 'F1'. Citigroup Global Markets, Inc. --Long-Term IDR at 'A+'; Outlook Stable; --Senior Secured at 'A+'; --Short-Term IDR at 'F1'; --Short-Term debt at 'F1'; --Derivative Counterparty Rating at 'A+(dcr)'. Citigroup Global Markets Limited --Long-Term IDR at 'A'; Outlook Stable; --Short-Term IDR at 'F1'; --Senior unsecured long-term notes at 'A'; --Short-Term debt at 'F1'; --Derivative Counterparty Rating at 'A(dcr)'. Citibank Canada --Long-Term IDR at 'A'; Outlook Stable. Citibank Europe plc --Long-Term IDR at 'A'; Outlook Stable; --Short-Term IDR at 'F1'; --Support affirmed at '1'. Commercial Credit Company Associates Corporation of North America --Senior unsecured at 'A'. Citigroup Global Markets Funding Luxembourg --Long-Term IDR at 'A'; Outlook Stable; --Short-term IDR at 'F1'; --Market-linked senior notes at 'A(emr)'. Citigroup Capital III, XIII, XVIII --Trust preferred at 'BBB-'. Fitch has withdrawn the following ratings: Banamex USA --Long-Term IDR at 'A+'; Outlook Stable; --Long-Term deposits at 'AA-'; --Short-Term deposits at 'F1+'; --Short-Term IDR at 'F1'; --Subordinated debt at 'A-'; --Viability Rating at 'a'; --Support at '5'; --Support floor at 'NF'. 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