DBRS, Inc. (DBRS Morningstar) confirmed the long-term ratings of Citigroup Inc. (Citi or the Company), including the Company’s Long-Term Issuer Rating of A (high). At the same time, DBRS Morningstar upgraded Citi’s short-term ratings to R-1 (middle) from R-1 (low). DBRS Morningstar also confirmed the ratings of Citi’s primary banking subsidiary, Citibank, N.A. (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA (low), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.
KEY RATING CONSIDERATIONS
The upgrade of the short-term ratings at certain Citi entities reflects DBRS Morningstar’s view that regulated banking organizations, including their holding companies, are being held to high liquidity standards commensurate with the notch higher rating on our Short-Term scale.
Citi’s IA of AA (low) reflects the Company’s strong franchise that is supported by scale and diversity, consistent financial performance and a fundamentally robust balance sheet. The ratings consider expected revenue growth from targeted investments in its franchise and digital capabilities, which should continue to offset higher-than-peer credit costs. With a smaller brick-and-mortar presence in the U.S. than other large bank peers, we view Citi as well-positioned to gain consumer wallet share from the rollout of enhanced digital capabilities. DBRS Morningstar notes that Citi is also susceptible to emerging market weakness, trade disruptions and political uncertainties given its unique global positioning.
Over the longer term, if Citi demonstrates success in leveraging its franchise to improve returns across businesses while maintaining a similar risk profile, there could be positive ratings pressure.
The trend could be revised to Negative if there were signs of notable credit deterioration that had a prolonged adverse impact on profitability.
The Company has a very strong franchise with an extensive global reach. The most global of U.S. banking organizations, Citi is one of only a few banking organizations worldwide with the brand and infrastructure to provide a full range of banking services to multi-national corporations globally. At the same time, these global operations can provide customers in local markets with access to Citi’s broad international capabilities. The Company’s global scope shows in the scale of its international revenues, with just over 50% of its revenues generated outside North America in 2019.
Citi’s top line has proven resilient, averaging $73 billion in annual net revenues over the past five years. The Company continues to make progress with expense initiatives, with an efficiency ratio of 56.5% in 2019, down 90 basis points (bps) year-over-year (YoY). Positive operating leverage is contributing to the bottom line with the Company’s 2019 return on average common equity reaching 10.3% (+ 90 bps YoY) and return on average assets 0.98% (+ 4 bps YoY).
While returns are improving, they remain at the lower end of the range for the large U.S. bank peers. This is partly due to higher provisioning levels than peers, driven by the Company’s cards business. In 2019, Citi’s provision for credit losses of $8.2 billion grew 12% YoY, reaching 26% of income before provisions and taxes (IBPT), the highest of the U.S. large bank peer group. DBRS Morningstar will continue to monitor the trends in, and drivers of, Citi’s provisioning levels.
While Citi has extensive exposure to various risks, DBRS Morningstar views the Company as having effective risk management capabilities. Citi benefits from its willingness to take on more risk where opportunities offer commensurately high rewards, while remaining relatively conservative about taking risk in illiquid positions or taking risk where returns are more moderate. Asset quality metrics are solid with low levels of nonaccrual loans and good, albeit rising, net charge-offs. Given the Company’s good earnings power, DBRS Morningstar sees Citi as having the resources to continually invest in technology, systems and process enhancements. While Citi’s size and scale provide many benefits, particularly with its ability to spread costs across a broader platform, managing risk across such a large, complex organization is a critical challenge.
Concerns around international trade and the potential slowdown of large emerging market economies could adversely impact Citi given its global scale and sizable cross-border exposures. While still in its early stages, the coronavirus could have a material impact on China’s economy, neighboring countries or beyond. At September 30, 2019, DBRS Morningstar notes Citi’s direct exposure to China and Hong Kong totaled $71 billion. While this exposure is modest at 4% of total Company exposure, adding in neighboring countries such as Singapore ($41 billion), Korea ($31 billion), Japan ($18 billion), and Taiwan ($17 billion), aggregate exposure would grow to about 10% of Citi’s total exposure.
Citi’s balance sheet trends remain favorable. The Company’s sizable deposit base of $1.1 trillion anchors the Company’s sound funding profile. The Company’s organic deposit growth has been solid and is sourced through various channels, including its retail bank and Treasury and Trade Solutions business. Citi’s reliance on wholesale funds primarily reflects its capital markets businesses, and is well diversified by geography and investor. Long-term debt is well-laddered by maturity. Secured funding is done shorter-term, presenting an overnight funding risk, though funding for less liquid assets is typically done on a term basis. Liquidity is strong with an average of $438 billion of high-quality liquid assets (HQLA) in 4Q19, or about 22% of total assets. The Company reported a consolidated liquidity coverage ratio (LCR) of 115%.
Citi has strong capitalization that provides a substantial cushion to absorb unexpected losses. At the end of 2019, Citi reported a fully-loaded CET1 ratio of 11.7% and a supplementary leverage ratio (SLR) of 6.2%. This compares to a CET1 minimum requirement of 10% and an SLR minimum requirement of 5%. The Company also reported a strong tangible common equity/tangible assets ratio of 7.7% at the end of 2019. Supporting the Company’s strong capitalization is its ability to consistently generate capital through earnings, while continuing to return significant levels of capital to shareholders. In the Fed’s most recent stress test results, which were released in June 2019, Citi received “a non-objection to capital plan”, allowing for Citi to increase its dividend to $0.51 per share, and repurchase up to $17.1 billion of shares over the coming year.
The Grid Summary Grades for Citigroup Inc. are as follows: Franchise Strength – Very Strong; Earnings Power – Strong/Good; Risk Profile – Strong; Funding & Liquidity –Strong; Capitalisation – Strong.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2019) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 2020), which can be found on our website under Methodologies & Criteria.
The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision, Specifically, the “Global Methodology for Rating Banks and Banking Organisations” was utilized to evaluate the Issuer, while the “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” was used to rate the subsidiaries guaranteed by the Issuer.
The last rating action on this issuer took place on 15 February 2019, when most of the ratings were upgraded.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Lead Analyst: Lisa Kwasnowski, Senior Vice President – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer – Global FIG and Sovereign Ratings
Initial Rating Date: 24 July 2001
For more information on this credit or on this industry, visit www.dbrs.com.
140 Broadway, 43rd Floor
New York, NY 10005 USA