DBRS Ratings Unchanged After Q4 2009 Results for 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 Q4 2009 earnings. Citigroup reported a net loss of $7.6 billion for the fourth quarter. The large loss was driven by the repayment of TARP in the quarter and the cost to exit the Company’s loss sharing agreement with the Government, which combined for an after-tax loss of $6.2 billion. Excluding these items, Citigroup reported a Q4 loss of $1.4 billion, compared to net income of $101 million in Q3 2009. 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, Citigroup continues to make progress towards being able to sustain operating revenues and income before provisions and taxes (IBPT) at levels that enable the Company to deal with still elevated, albeit declining, credit costs. Excluding the noted one-time items, Citigroup’s revenues were $15.5 billion for the fourth quarter compared to $20.4 billion in Q3 2009. IBPT was $3.2 billion in Q4 2009, down from $7.1 billion in the prior quarter. The decline in both figures in the fourth quarter was driven by a weaker quarter for Securities & Banking (S&B). In addition to a generally weaker trading performance, S&B’s reported Q4 results were impacted by a negative credit valuation adjustment (CVA) of $1.8 billion (pre-tax), $840 million of which reflected the correction of an error in calculating CVA on the Company’s own debt in prior periods. Excluding CVA, S&B revenues were $5.4 billion compared to $6.6 billion in Q3 2009. Operating expenses also ticked up in the fourth quarter, growing 4% from Q3 2009 to $12.3 billion. The increase was due to foreign exchange movement and repositioning costs, but also reflected continued investments in core Citicorp businesses. DBRS sees expense control as a key factor in sustaining IBPT at acceptable levels. For 2009, Citigroup’s operating expenses were $47.8 billion, down 31% from 2008.

Importantly from DBRS’s perspective, Citigroup’s Q4 results reflected moderately improved credit trends as well as indications that the strengths of the core Citicorp franchise remain intact. Overall, Citicorp reported net income of $1.7 billion for the fourth quarter compared to $2.3 billion in the prior quarter. Citicorp’s managed Q4 2009 net revenues were $13.4 billion, down 9% from Q3 2009. Key for Citigroup is the ability to generate sustainable revenues in the core Citicorp businesses. When combined with continued expense control, sustained revenues will enable the Company to continue absorbing elevated credit costs and potential costs related to the burden of its remaining legacy assets.

Indications of franchise strength were evident in the results for Citicorp’s businesses. In S&B, the market environment, with lower volatility and lower volumes contributed to the noted sequential decline in revenues. Earnings of $300 million were down $437 million from Q3 2009. Signaling continued strength, investment banking fees increased 25% from Q3 2009 due to a strong equity underwriting quarter and improved advisory revenues. Transaction Services (TS) delivered another solid quarter, leveraging Citicorp’s global reach and broad business base. Average deposits grew 7% to $335 billion and TS generated net income from continuing operations of $919 million for Q4 2009, down only $20 million from Q3 2009. In Regional Consumer Banking (RCB) managed revenues of $7.5 billion declined modestly from the prior quarter. Citicorp’s global diversity, a key strength, was again evident in RCB results. International consumer banking accounted for 55% of RCB’s managed revenues and in Q4 2009 deposits, loans, card balances and card purchase volumes all increased in international RCB.

Indicative of continued stabilization in credit, Company-wide provisions were $8.2 billion in the quarter, down 10% from the third quarter. Due in part to increased loan modifications, net credit losses (NCLs) declined 10% to $7.1 billion. Nonaccrual loans declined $500 million to $32.2 billion, but with total loans down 5% in Q4, nonaccrual loans as a percentage of total loans increased 19 basis points from Q3 to 5.44%. Corporate credit improved with NCLs declining 30% sequentially to $1.1 billion in the fourth quarter. Corporate nonaccruals declined 8% from September 30, 2009 to $13.5 billion. Consumer nonaccruals were up 6.5% in North America, but declined internationally. At year end, Citigroup’s loan loss reserves of $36 billion rose to 6.09% of gross loans and 112% of nonaccrual loans.

Much of the elevated cost of credit continues to be recognized in Citi Holdings. Accounting for 80% of Citigroup’s provision, this unit’s provision of $6.6 billion, while down $0.3 billion, was driven largely by the Local Consumer Lending businesses. DBRS anticipates the continued improvement in retail credit costs in Local Consumer Lending will depend on the recovery in the U.S. This recovery is still in its early stages. It is not yet generating enough growth or creating sufficient jobs to meaningfully reduce credit problems for U.S. households.

Due to still elevated provisioning and lower positive marks on legacy assets, Citi Holdings reported a substantial loss of $2.5 billion in Q4 2009. Citi Holdings still has sizeable exposures that have the potential to produce meaningful negative revenue marks in future quarters. Positively, these exposures continue to decline and at $154.4 billion, are down significantly from prior periods. Overall, Citi Holdings’ assets declined $70 billion to $547 billion in the quarter due to divestitures and organic runoff. Citi Holdings’ assets are down $351 billion from peak levels.

Reflecting the sizable common equity raise in the quarter, Citigroup’s capital ratios remained solid at year-end, despite the fourth quarter loss and the termination of the loss sharing agreement with the U.S. Government. At year end, Citigroup’s estimated Tier 1 Common Capital to Risk weighted assets ratio improved to 9.6% from 9.1% last quarter. The Company reported an estimated Tier 1 ratio of 11.7% down from 12.8% at the end of Q3 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.