Fitch: Citi's 3Q15 Results Lower on Global Headwinds
OREANDA-NEWS. Citigroup (Citi) reported a 0.91% return on assets (ROA) in the third quarter of 2015 (3Q15). While this still falls within the company's target of 90 basis points (bps) to 110 basis points, it represents a stepdown from the prior quarter's ROA of 1.01%. Similar to the past few years, the second half of the year has started off a bit weaker than the first half. However, Fitch still expects that Citi will meet its full-year targets, especially given the pending sale of OneMain Financial, with an associated estimated $1 billion pre-tax gain. The company expects the transaction will close next quarter.
Reported revenues declined across the board reflecting a challenging operating environment that included slowing worldwide growth, the disruption of the Chinese markets, and continued uncertainty regarding interest rates. The strengthening U.S. dollar also had a relatively larger impact on earnings than prior quarters.
Bright spots during the quarter included continued increases in capital ratios, further stability in the margin, and still benign credit losses. The quarter's results also benefitted from another profitable quarter in Citi Holdings, albeit at lower levels than the prior quarter and a year ago.
CVA/DVA gains were $196 million pre-tax in 3Q15, as compared to $312 million in pre-tax gains last quarter. Excluding these gains, third quarter revenues declined 3.5% on a sequential basis.
As previously mentioned, the impact of foreign exchange translation into U.S. dollars can impact financial reporting, and had a larger relative impact this quarter than prior quarters. For example, revenues in 3Q15 declined 3.5% on a sequential basis. However, excluding the impact of foreign exchange translations, revenues actually declined 1.6% from the prior quarter for Citigroup. Reported expenses also declined 2.4%, though fell just 0.5% on a constant dollar linked-quarter basis.
Citi hedges its CET1 exposure to fluctuations in currencies; however, foreign exchange translations still impacted the CET1 ratio by 9bps as compared to a year ago.
Reported revenues were 2% lower in International Consumer Banking, while North America Consumer banking revenues were flat. Third-quarter results included $180 million in gains related to the sale of Citi's merchant acquiring business in Mexico. Excluding this item, revenues in International Consumer Banking declined an estimated 7% primarily reflecting regulatory impacts in Asia. Expenses declined in the consumer segment on a linked-quarter basis, despite ongoing higher regulatory and compliance costs, and continual technology investments. This quarter's results benefitted from much lower legal and repositioning charges.
In terms of the Institutional segment, fixed income markets revenues declined 16% sequentially and 16% from a year ago, while investment banking was also notably lower from both last quarter and a year ago. The underwriting environment for both equity and fixed issuance was particularly challenging in September, and combined with the general market tone, contributed to the quarter's lower results.
Citi reversed some valuation adjustments taken last quarter related to prime brokerage financing transactions. Excluding this reversal this quarter and the charge last quarter, Equity Markets revenues increased roughly 3% on a linked-quarter basis, and 12% from a year ago.
Further, Citi disclosed that the impact of foreign exchange volatility also masked otherwise solid performance in Treasury & Trade Solutions and Securities Services.
In terms of credit quality, Citi reported a substantial 35% increase in corporate non-accrual loans, primarily reflecting downgrades in the North America energy portfolio. Citi's energy-funded exposure totaled approximately $21 billion or roughly 3% of total loans at quarter-end, with two-thirds of that exposure rated investment grade. As a result of the energy deterioration, Citi increased loan loss reserves in ICG, as compared to releases in prior quarters. However, net charge-offs remain low at just $34 million during the quarter for the ICG segment.
Conversely, asset quality in GCB demonstrated improvement, with nonaccrual balances 8% lower and NCOs of 2.01% during 3Q15, as compared to 2.24% last quarter. All three regions reported lower linked-quarter loan losses, with relatively stable late-stage delinquency trends across the board. Given Citi's higher loss content credit card book and emerging markets exposure, loan losses tend to be higher than peer averages. Citi disclosed it built its loan loss reserves in Brazil, though does not expect loan losses to have a material impact to total NCOs going forward.
Citi continues to wind down its Citi Holding assets, and ended the quarter with $110 billion in total assets or roughly 6% of consolidated assets. Citi has over $31 billion of that total under contract for sale expected to close sometime in the 4Q15, including OneMain and Citi's retail banking businesses in Japan. Citi expects to sell another $6 billion in assets next year.
Citi's capital ratios continue to remain very good and generally above global peers. The company's estimated Common Equity Tier 1 under Basel III on a fully phased-in basis increased to 11.6% at quarter-end. The approximate 30bps improvement from last quarter was due primarily to retained earnings, utilization of the DTA, and continual shrinkage in risk-weighted assets. The G-SIB surcharge for Citi is estimated at 3.5%, based on year-end 2014 data, translating into a fully phased-in requirement of 10.5% (absent the capital conservation buffer). Citi continues to operate well above that limit.
Citi also reported that it would already be in compliance with the supplementary leverage ratio at the holding company with a 6.8% ratio, up 10bps from the prior quarter-end. Citi indicated that the relative strength of its SLR has allowed the company to pursue growth in prime brokerage, which is seen as an avenue into greater penetration into key client segments.
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