DBRS Changes Citigroup’s Ratings to UR Negative from UR Developing

DBRS has today changed the ratings of Citigroup Inc. (Citigroup or the Company) and its subsidiaries to Under Review with Negative Implications from Under Review with Developing Implications, where they were placed following the November 24, 2008, ratings downgrade. Citigroup’s current Issuer & Senior Debt rating is AA (low) and its Short-Term Instruments are rated R-1 (middle).

Today’s action follows the Company’s announcement that it is establishing a wealth management joint venture (JV)with Morgan Stanley that will be called Morgan Stanley Smith Barney. Under the terms of the JV, Citigroup will receive an upfront cash payment of $2.7 billion and a 49% stake in the JV in exchange for its Smith Barney, Smith Barney Australia and Quilter units. After year three, both Morgan Stanley and Citigroup will have various options for increasing or decreasing their respective stakes in the JV, though Citigroup will continue to own a significant share through at least year five. Importantly, the sale of any future tranches will be conducted at fair market value.

While DBRS views positively the upfront cash received as well as the $6.5 billion of tangible common equity that this transaction generates for Citigroup, the timing of the transaction underscores the fact that the Company remains under significant pressure as it deals with disrupted capital markets, writedowns on legacy holdings and rising credit costs globally. Global Wealth Management has been one of Citigroup’s more stable revenue streams despite the difficult operating environment. While Citigroup retains earnings from Smith Barney via the JV structure, over time some of the benefits of this revenue diversification, which underscores Citigroup’s ratings, will be reduced. DBRS’s review will focus on understanding the impact on Citigroup’s fundamentals of the current environment and the actions being taken by the Company to bolster its franchise in the context of enhanced government support.

In conjunction with the November 24, 2008, rating action, DBRS revised the support assessment for Citigroup and Citibank, N.A. to SA2 from SA3, which reflects its position as a systemically important bank and DBRS’s expectation that these entities would continue to receive systemic external support from the U.S. government in the current environment.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.