DBRS Ratings Unchanged After Q3 2009 Earnings of Citigroup Inc. – Senior at A

DBRS has today commented 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 Q3 2009 earnings. Citigroup reported net income of $101 million down from $4.3 billion in Q2 2009, which benefited from a $6.7 billion after-tax gain from the Morgan Stanley Smith Barney joint venture transaction. 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.

In DBRS’s view, the key issue has been Citigroup’s ability to sustain operating revenues and income before provisions and taxes (IBPT) that enable the Company to deal with still elevated credit costs. Excluding various one-time items and net revenue marks, Citigroup’s managed revenues were $21.7 billion for the third quarter compared to $21.8 billion in Q2 2009. IBPT was $7.1 billion in Q3 2009, up from $6.7 the prior quarter as expense control remained an important contributor to the Company’s improved IBPT. Operating expenses declined 1.5% from Q2 2009 to $11.8 billion and through the first nine months of 2009 have declined $9 billion compared to the first three quarters of 2008. Given the still weak economy, DBRS views the Company’s success in sustaining this level of IBPT as an important indication of the strength of its franchise.

Important for the Company as it goes forward with its new business alignment (Citicorp and Citi Holdings) is generating sustainable revenues in the core Citicorp businesses. When combined with continued expense control, sustained revenues will enable Citigroup to continue absorbing elevated credit costs and potential costs related to the sizeable burden of its remaining legacy assets. In the third quarter, Citicorp generated net income of $2.3 billion compared to $3.1 billion in the prior quarter.

Underlying trends, however, appear more favorable as a $660 million linked-quarter increase in negative net revenue marks in Securities & Banking (S&B), primarily related to credit valuation adjustments (CVA) on derivatives, was the largest component in the overall decline in net income. Adjusted for S&B revenue marks, Citicorp’s managed net revenues were $13 billion, down 6% from Q2 2009. Within S&B, a weaker trading performance, in part due to a more normalized trading environment and typical quarterly seasonality, weighed on results, though net revenues (ex-marks) of $6.6 billion, down from $7.7 billion in Q2 2009, were still decent, in DBRS’s view. Transaction Services (TS), the other sub-segment of the Institutional Clients Group, delivered another solid quarter, leveraging Citicorp’s global reach and broad business base. Average deposits and assets under custody both showed solid growth in the quarter as TS generated net income of $934 million.

Third quarter earnings of $613 million in Citicorp’s Regional Consumer Banking (RCB) businesses improved by nearly $400 million from Q2 2009 and were up 39% from Q3 2008. The growth of net credit losses slowed and the size of the reserve build declined. Managed revenues of $7.5 billion were up about 4% from the prior quarter. The North American business returned to profitability as provisions declined by $126 million in the third quarter. Citicorp’s global diversity, a key strength, was evident as well. International consumer banking, which accounted for over 50% of RCB’s managed revenues, saw increased client activity in the third quarter. Average loans grew 4%, deposits grew 3% and card purchase sales were up 9%. Earnings in Asia were up sharply (+25% from Q3 2008) to $446 million. Latin America turned a small profit, while EMEA reported a fourth consecutive quarterly loss. Total provisions in RCB were $1.8 billion in the quarter, compared to $2.0 billion for Q2 2009. Losses on Citi-branded cards increased across regions (on a managed basis for North America), while retail banking losses declined in all regions except EMEA. One positive sign was that 90+ day delinquencies were down across all regions.

Much of the elevated cost of credit continues to be recognized in Citi Holdings, which comprises the businesses and portfolios that Citigroup is seeking to sell or run off. This segment’s provision of $6.9 billion (76% of the Citigroup-wide provision) was driven largely by the Local Consumer Lending businesses. It reflected net credit losses of $6.3 billion (78% of the Company’s Q3 2009 total) as well as a $338 million reserve build. Citi Holdings’ third quarter net credit losses were 8% lower than Q2 2009 and the reserve build declined by about $2.4 billion, indicating a slowing in the pace of deterioration. Loss rates in the North American residential real estate and retail partner card portfolios, the drivers of credit losses at Citi Holdings, declined somewhat from the prior quarter. Due to still elevated provisioning, Citi Holdings reported a substantial loss of $1.9 billion in Q3 2009.

Legacy assets held at Citi Holdings contributed positively for a consecutive quarter, thanks to positive revenue marks on subprime related assets. Still, Citi Holdings retains exposures that have the potential to produce meaningful negative revenue marks in future quarters. Positively, these exposures continue to decline and at $182 billion, are down significantly from Q3 2008 levels. Overall, Citi Holdings’ assets declined to $617 billion in the quarter and are down $281 billion from peak levels. The October 1 closing on the sale of Nikko Cordial and Nikko Asset Management has reduced Citi Holdings’ assets by another $25 billion.

The completion of the exchange offer in Q3 2009 dramatically altered the composition of Citigroup’s capitalization. Tangible common equity (TCE) increased more than $60 billion from Q2 2009. As a result, Citigroup’s estimated Tier 1 Common Capital to risk weighted assets ratio improved to a strong 9.1% from 2.7% last quarter. The Company reported an estimated Tier 1 ratio of 12.7%, unchanged from Q2 2009.

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.