DBRS Ratings Unchanged After Q2 2009 Earnings of Citigroup Inc. – Senior at A

DBRS is today commenting that its ratings for Citigroup Inc. (Citigroup or the Company), including its Issuer & Senior Debt Rating of “A” and its R-1 (middle) short-term rating, remain unchanged following the Company’s release of Q2 2009 earnings. Citigroup reported net income of $4.3 billion. This included an $11.1 billion pre-tax ($6.7 billion after-tax) gain from the Morgan Stanley Smith Barney joint venture transaction (closed on June 1, 2009), without which Citigroup would have reported a loss of $2.4 billion. Under its realigned businesses, the Company provided greater clarity in reporting detailed results for its two principal segments, Citicorp and Citigroup Holding, as well as its Corporate/Other segment. Citigroup’s ratings reflect its status as a Critically Important Banking organization (CIB) in the United States. CIBs benefit from DBRS’s floor rating of “A” for bank holding companies and A (high) for banks with short-term ratings of R-1 (middle). Given the nature of the floor, these ratings have Stable trends.

For a second quarter, Citigroup succeeded in sustaining its underlying operating income before provisions and taxes (IBPT) ex the JV gain at levels it last achieved in the middle of 2007, but elevated credit costs continued to take their toll. Given the still weak economy, DBRS views the Company’s success in sustaining this improved level of IBPT of about $6.9 billion as an important indication of the strength of its franchise and a critical achievement for Citigroup to keep absorbing the sizeable burden of its remaining legacy assets and its elevated credit costs. An important contributor to the Company’s improved IBPT is its success in reducing expenses, which are down $3.2 billion from Q2 2008 and on a pace to add over $13 billion to IBPT versus 2008, provided the intensity of expense control is maintained. While revenues ex the JV gain were down $5.6 billion from the prior quarter to $18.9 billion, underlying trends in the businesses suggest that the Company’s franchise is generating sustainable revenues. Although the Company reported some signs that the deterioration in its U.S. consumer credit is slowing, the cost of credit remains elevated with a provision of $12.7 billion, up $2.4 billion from Q1. Rising net credit losses and more reserve building drove the increase.

The resiliency of the Company’s franchise was evident in the Citicorp results, which generated net income of $3.0 billion in Q2 2009. While down substantially from the prior quarter due to swings in various factors, this pace appears relatively sustainable given trends in its businesses, even with elevated credit costs. Strength in the Institutional Clients Group (ICG) businesses was important in sustaining revenues and earnings. Indicative of the resiliency in the Securities & Banking (S&B) franchise, investment banking revenues were up sequentially due to underwriting revenues, while M&A was constrained by weak global activity. Revenues in Equity Markets and Fixed Income Markets were reduced by credit valuation adjustments (CVA), but combined were still above Q2 2008. Although underlying fixed income revenues were down from the very strong Q1, these revenues remained solid indicating that the global client businesses retain their capabilities. While Lending with losses on CDS hedges and Other S&B businesses were still negative, the Private Bank was stable. Leveraging Citicorp’s global reach and broad business base, Transaction Services delivered another solid quarter with deposit growth, increased revenue, minimal credit costs and earnings contributing about $1.0 billion.

Under much greater stress from the deterioration in credit, earnings in Citicorp’s Regional Consumer Banking (RCB) businesses were down 78% from Q2 2008. While still positive, earnings of $217 million were at a reduced pace from the prior quarter due in large part to a reduced flow of revenues from credit card securitizations and elevated credit costs. On a managed basis, revenues were more stable, though still down 11% from Q2 2008, in part due to exchange rate movements. Citicorp’s global diversity was evident, as earnings were up in Asia to $272 million, but only marginally positive in Latin America and still negative in the U.S. and EMEA.

Much of the elevated cost of credit and the burden of the legacy assets were recognized in Citi Holdings, which comprises the businesses and portfolios that Citigroup is seeking to exit or work down. Without the JV gain in the Brokerage and Asset Management businesses this segment would have had a substantial loss. Its provision of $9.9 billion was driven largely by the Local Consumer Lending businesses and reflected both net credit losses of $5.2 billion and a sizeable reserve build. Loss rates in the Local Consumer Lending were up noticeably in the quarter, especially in the North American mortgage portfolios, where declining home values continue to impact loss severities. The Company did report indications of a slowdown in credit deterioration in the U.S. beyond the normal seasonal improvement, but noted the risks in the continued weakness in U.S. employment. Legacy asset portfolios actually posted gains in some areas and exposures are down significantly from Q2 2008 levels. Nevertheless, Citi Holdings retains exposures that still have the potential to produce meaningful negative revenue marks in future quarters.

The closing of the JV in Q2 2009 bolstered Citigroup’s capitalization, contributing the majority of the $9.1 billion increase of tangible common equity (TCE) to $40 billion. Coupled with a decline in risk weighted assets, the Company reported an estimated Tier 1 ratio of 12.7%, up about 80 basis points from the prior quarter. Citigroup’s TCE to risk weighted assets ratio improved in the quarter as well, but remained low. With loss carry forwards, the Company’s earnings benefited from a low tax rate; improving trends also support the Company’s deferred tax asset. The Company’s proposed preferred share exchange and other previously announced actions remain on track to significantly increase Citigroup’s TCE ratios in subsequent quarters as it continues to improve its capital mix.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.