July 16, 2012 / 7:09 PM / in 5 years

TEXT-S&P says Citigroup ratings unaffected by Q2 results

July 16 - Standard & Poor’s Ratings Services today said its ratings on Citigroup Inc. (Citi; A-/Negative/A-2) are not immediately affected by the company’s good second-quarter results, given the current operating conditions. Excluding one-time items, including a $270 million gain on the fair-value adjustment of Citi’s debt, the company generated Standard & Poor‘s-adjusted pretax earnings of $3.9 billion in the second quarter, compared with $4.1 billion the previous year. The second-quarter results benefited from $1.0 billion in reserve releases, versus $1.1 billion the previous quarter and $2.0 billion the previous year. Standard & Poor’s adjusted revenue for Citicorp (Citi’s core business) declined 7.8% year over year, partially as a result of currency translation but also because of weaker investment banking revenue reflecting weak macroeconomic trends and a fall in investor confidence. Higher mortgage revenues in North America resulted in a 4% revenue gain in Citi’s retail banking business in North America. That said, we don’t expect this trend to continue much longer because the pool of qualified borrowers to refinance is declining. Although revenue as reported was down 4% in Citi’s international consumer business, excluding currency translation, revenue was actually up 4%, largely because of strong results in Latin America. Still, given concerns regarding a consumer pullback in Asia and Europe, international revenue gains may not continue into the second half of the year. All and all, excluding currency translation, we expect Citi’s revenue to decline in the second half of the year. Citi’s total expenses declined 6.2% year over year, with cost cutting initiatives contributing to the decline. Management believes that core expenses, which exclude currency translation and legal and repositioning costs, should total $11.5 billion per quarter for the remainder of the year--flat compared with the second quarter. Losses in Citi Holdings Inc., the unit that houses nonstrategic assets, continue to dampen returns. Standard & Poor’s adjusted pretax losses totaled $1.5 billion in the second quarter, down from $1.7 billion in the previous quarter but up from a $1.0 billion loss the previous year, which included a gain on the sale of held-to-maturity securities. Citi Holdings’ assets declined 9% from the previous quarter to $191 billion and now represent roughly 10% of company assets, down from 14% a year ago. We expect Citi Holdings’ assets to decrease by an additional $22 billion to $47 billion by the end of 2013. Citi’s North American mortgage portfolio within Citi Holdings, which totaled $100 billion at the end of the second quarter, would need to further decline in order for Citi’s risk profile to improve, in our opinion. Net credit losses were down 9.6% in the second quarter to $3.6 billion. Delinquencies declined, except in Citi’s Latin America consumer portfolio. Reserve coverage to nonperforming loans was an adequate 253%--above the previous quarter’s coverage of 248%. Citi’s Basel I tier 1 common capital ratio was 12.7% as of the second quarter, up 30 basis points from the previous quarter. Management’s estimate of its tier 1 Basel III common capital ratio as of the second quarter was 7.9%. Citi believes that the ratio will increase above 8% by year-end 2012. Given that regulators rejected Citi’s plan for capital return in 2012, we expect the company to build its capital ratios at a quicker pace than most peers. We believe that Citi will begin returning capital to shareholders in 2013. Citi’s net exposure to Greece, Ireland, Italy, Portugal, and Spain totaled $9.1 billion at the end of the second quarter, slightly higher than the previous quarter but still manageable, in our view. We believe a contagion of the European crisis could still have a negative ratings impact. Our outlook on Citi is negative. We will continue to evaluate the potential effect regulatory reform could have on the company and the evolution of the company’s stand-alone credit profile. We will also continue to monitor Citi’s ability to shed additional assets from Citi Holdings, including a further reduction in North American mortgages over the next two years, which, if achieved, would help reduce Citi’s risk exposure. However, current macroeconomic conditions could make it difficult for Citi to further lower the risk on its balance sheet. In addition, although Citi has not been implicated with setting incorrect LIBOR rates, it is our understanding that U.S. regulators are investigating the matter. The issue could potentially lead to significant lawsuits should any wrongdoing be discovered.

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below