Fitch Affirms Citigroup's Long-Term IDR at 'A'; Outlooks Stable
Citi's Long-Term IDR is driven by its Viability Rating (VR), which has been affirmed at 'a'. Citi's operating subsidiaries' IDRs are affirmed one notch above their VRs reflecting the expected implementation of total loss absorbing capacity (TLAC) requirements for U.S. Global Systemically Important Banks (G-SIBs) and the presence of a substantial debt buffer in the holding company.
The rating actions have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUB), which comprises 12 large and globally active banking groups. Fitch's outlook for the GTUBs is stable as we expect the stable outlook for the groups' commercial banking and wealth and asset management businesses in 2016 to mitigate pressure on earnings from capital markets activities, particularly in fixed income trading.
As globally active universal banks, the 12 GTUBs are among the most affected by evolving regulation, which is bringing capital and resource constraints to some businesses. This means that business models are being adjusted. Specific changes and their timing vary by bank. In the medium term, we believe that the GTUBs with the strongest franchises in their core businesses, sound business models and clear strategies are best placed in this environment, and these company profiles are an important rating factor for many of the GTUBs.
KEY RATING DRIVERS - IDRs, VR AND SENIOR DEBT
The affirmation of Citigroup's VR reflects Citi's solid capital and liquidity levels. Fitch also notes that Citi's earnings reflect an improving overall trend. Citi's complexity of operations, and asset quality somewhat offset these ratings strengths.
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 11.7% at Sept. 30, 2015. The approximate 100 bps improvement from a year ago was due primarily to retained earnings, utilization of the DTA, partially offset by share repurchases and to a lesser extent, the impact of movement in foreign currencies.
Citi's liquidity profile is a secondary key rating driver, underpinning its VR. Citi has considerably bolstered its amount of liquid assets and reduced its reliance on short-term borrowings over the last several years. The company's liquidity profile remains strong, providing support to Citi's ratings. At Sept. 30, 2015, Citi reported $399 billion in cash and unencumbered liquid securities, or 22% of total assets.
Citi is already in compliance with the final U.S. LCR rules, as well as the Basel III Supplementary Leverage ratio at both the holding company and bank levels. Its estimated LCR was 112% (under U.S. rules), while the SLR was 6.85% at September 30, 2015.
Citi's earnings performance through the first nine months of 2015 reflects a strong improvement from the same period a year ago. Citi is tracking within its 2015 financial targets, with an ROA of 99bps (excluding CVA/DVA), which is within its target of between 90bps and 110bps. Earnings have improved from a year ago mainly attributed to much lower legal and repositioning costs, controlled noninterest expenses, still benign credit costs, a stable margin, and a profitable Citi Holdings segment.
Fitch expects that Citi will meet its full-year financial targets, especially given the pending sale of OneMain Financial, with an associated estimated $billion pre-tax gain. The company expects the transaction will close in 4Q15.
Consolidated credit risk ratios for Citi remain higher than some peers despite an improving overall trend over the past several years. Fitch attributes some of Citi's weaker relative asset quality profile to its high balance of troubled debt restructurings (TDRs), as well as its exposure to higher loss content credit card loans and Mexico. Citi, along with many of its peers, remains exposed to falling oil prices, though loan losses to date have been modest for Citi.
Citi's energy-related exposure is slightly higher than its large bank peers, with direct outstandings and unfunded lending commitments totaling $60.5 billion at Sept. 30, 2015. Funded loans comprise 3.4% of loans, with 79% rated investment grade, down slightly from last quarter due to downgrades.
All three consumer geographic regions reported lower linked-quarter loan losses in 3Q15, 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 net charge-offs (NCOs) going forward. Fitch expects that loan losses may increase for the industry given the very benign credit environment, and unsustainably low levels of credit losses.
Citigroup is one of the largest banking institutions in the world, with by far the biggest international banking franchise among U.S. peers. With a vast international franchise, Citi's revenue diversity in terms of geography is greater than its peers, with sizable business operations in many faster growing emerging markets, including China, India, and Mexico. However, this increased revenue diversity also present potential issues with regard to exposure to any political unrest in foreign countries, as well as direct exposure to economic deterioration or slowed growth in any of these markets. This geographic reach also necessitates the need for a sophisticated risk management infrastructure to manage risk around the globe.
While there is no outsized reliance on a single market outside of the U.S. (Mexico being the largest at around 10% of revenues), if there are issues related to economic slowdowns or political unrest in a particular emerging market, it is possible there may be effects for Citi. The secondary effects of a slowdown in a particular country, for example, China, and those cascading impacts to the global economy are much harder to quantify and assess for any implications to Citi or its peers. However, relative to other large U.S. banks, Citi is more exposed to slowdown in the emerging markets.
The complexity of global operations and a reliance on more volatile capital markets revenues, which on average account for around 25% revenues, serve as constraints to upwards movement in ratings.
The VRs remain equalized between Citi and its material operating subsidiaries, including Citibank, N.A. The common VR of Citi and its operating companies reflects the correlated performance, or failure rate between the Citi and these subsidiaries. Fitch takes a group view on the credit profile from a failure perspective, while the IDR reflects each entity's non-performance (default) risk on senior debt. Fitch believes that the likelihood of failure is roughly equivalent, while the default risk given at the operating company would be lower given total loss absorbing capacity (TLAC). All U.S. bank subsidiaries carry a common VR, regardless of size, as U.S. banks are cross-guaranteed under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).
The Long-Term IDRs for the material U.S. operating entities are one notch above Citi's to reflect Fitch's belief that the U.S. single point of entry (SPE) resolution regime, the likely implementation of TLAC requirements for U.S. G-SIBs, and the presence of substantial holding company debt reduces the default risk of domestic operating subsidiaries' senior liabilities relative to holding company senior debt. In our view these buffers would provide substantial protection to senior unsecured obligations in the domestic operating entities in the event of group resolution, as they could be used to absorb losses and recapitalize operating companies. Therefore, substantial holding company debt reduces the likelihood of default on operating company senior obligations.
KEY RATING DRIVERS- SUPPORT RATING AND SUPPORT RATING FLOOR
The support rating (SR) and support rating floor (SRF) reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that Citi becomes non-viable. In Fitch's view, implementation of the Dodd Frank Orderly Liquidation Authority legislation is now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors participating in losses, if necessary, instead of or ahead of the company receiving sovereign support.
KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by Citi and its subsidiaries are all notched down from the common VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably.
Subordinated debt issued by the operating companies is rated at the same level as subordinated debt issued by Citi reflecting the potential for subordinated creditors in the operating companies to be exposed to loss ahead of senior creditors in Citi. Subordinated lower Tier 2 debt is rated one notch below the VR for loss severity, reflecting below average recoveries.
Legacy Tier 1 securities are generally rated four notches below the VR, made up of two notches for high loss severity relative to average recoveries, and two further notches for non-performance risk, reflecting the fact that coupon omission is not fully discretionary.
High and low trigger contingent capital Tier 1 instruments are rated five notches below the VR. The issues are notched down twice for loss severity, reflecting poor recoveries as the instruments can be converted to equity or written down well ahead of resolution. In addition, they are also notched down three times for very high non-performance risk, reflecting fully discretionary coupon omission.
KEY RATING DRIVERS - DEPOSIT RATINGS
Deposit ratings are one notch higher than senior debt reflecting the deposits' superior recovery prospects in case of default given depositor preference in the U.S.
Citi's international subsidiary, Citibank Canada's deposit ratings are at the same level as senior debt ratings because their preferential status is less clear and disclosure concerning dually payable deposits makes it difficult to determine if they are eligible for U.S. depositor preference.
KEY RATING DRIVERS - SUBSIDIARIES
Citigroup Global Markets Holdings Inc., Citigroup Global Markets Limited, Citigroup Global Markets Inc., Citigroup Derivatives Services LCC, Citibank Canada, Citibank Japan Ltd, CitiFinancial Europe plc, and Citibank International Limited (formerly known as Citibank International PLC), are wholly owned subsidiaries of Citi or Citibank, N.A.
Their IDRs and debt ratings are aligned with Citi or Citibank, N.A. reflecting Fitch's view that these entities are integral to Citi's business strategy and operations. Their IDRs and ratings would be sensitive to the same factors that might drive a change in Citi's IDR.
The Rating Outlook for Citi's material international operating companies' IDRs is Positive, including Citigroup Global Markets Limited, Citibank Canada, Citibank Japan Ltd, and Citibank International Limited.
Fitch's Positive Rating Outlook for Citi's material international operating reflects the likelihood of internal TLAC as required by the Financial Stability Board (FSB). The Positive Outlook reflects the agency's belief that the internal TLAC of material international operating companies will likely be large enough to meet and exceed Pillar 1 capital requirements and will then be sufficient to recapitalize them. A one notch upgrade is likely once Fitch has sufficient clarity on additional disclosure on the pre-positioning of internal TLAC and its sufficiency in size to cover a default of senior operating company liabilities. Sufficient clarity may, however, take longer to come through than the typical Outlook horizon of one to two years.
Domestic subsidiaries and international subsidiaries that have not been upgraded or placed on Rating Outlook Positive are in Fitch's opinion not sufficiently material to benefit from domestic support from Citi or are international subsidiaries that would not benefit from internal TLAC. This includes Citigroup Global Markets Holdings Inc., Citigroup Derivatives Securities LLC, and CitiFinancial Europe PLC.
RATING SENSITIVITIES - IDRs, VR AND SENIOR DEBT
Fitch sees limited near-term upward VR momentum given a relatively high and absolute rating. The company's complex organizational structure and reliance on more volatile capital markets revenues act as key constraints to further upward movement to ratings. Citigroup's IDRs and senior debt are sensitive to any changes in the VR, while Citibank's IDR and senior debt are sensitive to changes in our view of the buffer created by the U.S. single point of entry (SPE) resolution regime, the implementation of TLAC requirements for U.S. G-SIBs, and the presence of substantial holding company debt, which serve to reduce the default risk of domestic operating subsidiaries' senior liabilities relative to holding company senior debt.
Downward pressure on the VR could result from a material deterioration in capital or liquidity levels. It is the strength of the liquidity and capital profiles that underpin Citi's ratings. Fitch's ratings action incorporates an expectation that Citi will manage its capital and liquidity profiles relatively conservatively, and although capital distributions will likely increase over time, they will still be governed by regulatory stress testing and as such, remain reasonable. In addition, a CCAR objection due to qualitative reasons may result in a downgrade of the VR as it represents a material shortcoming in the company's risk management infrastructure.
While there is no outsized reliance on a single market outside of the U.S. (Mexico being the largest at roughly 10% of Citicorp revenues), if there are issues related to economic slowdowns or political unrest in a particular emerging market, it is possible there may be effects for Citi. The secondary effects of a slowdown in a particular country, and those cascading impacts to the global economy are much harder to quantify and assess for any implications to Citi or its peers.
Any unforeseen outsized fines, settlements or other legal-related charges could have adverse rating implications for Citi. Fitch notes there is very little visibility into ultimate legal-related risk for Citi or the industry, though Fitch expects litigation costs will remain manageable relative to capital for Citi. A fine that was to deplete capital in a material way may lead to negative rating action.
Citi's ratings could be vulnerable to a large operational loss or if an operational event calls into question Fitch's assessment of Citi's risk management function and its ability to accurately identify, monitor, and mitigate risks throughout the organization.
SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that Citi becomes non-viable. In Fitch's view, implementation of the Dodd Frank Orderly Liquidation Authority legislation is now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors participating in losses, if necessary, instead of or ahead of the company receiving sovereign support.
Any upward revision to the SR and SRF would be contingent on a positive change in the U.S.'s propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view.
SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
These ratings are primarily sensitive to any change in the VR. The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example.
SENSITIVITIES - DEPOSIT RATINGS
Deposit ratings are sensitive to changes in senior debt ratings.
SENSITIVITIES - SUBSIDIARIES
The IDRs of Citigroup Global Markets Holdings Inc., Citigroup Global Markets Limited, Citigroup Global Markets Inc., Citigroup Derivatives Services LCC, Citibank Canada, Citibank Japan Ltd, CitiFinancial Europe plc, and Citibank International Limited (formerly known as Citibank International PLC) are sensitive to the same factors that might drive a change in Citi's IDR.
Specific factors that Fitch seeks additional clarity on before resolving the rating outlook and potentially upgrading the subsidiary ratings of Citigroup Global Markets Limited, Citibank Canada, Citibank Japan Ltd, and Citibank International Limited will include host country clarification on internal TLAC, the quantum of internal TLAC and whether it will be pre-positioned. The quantum is relevant because per Fitch's criteria the agency will look to the sufficiency of the amount of capital available to that subsidiary to recapitalize it. If the amount of TLAC is sufficient for recapitalization in Fitch's opinion and is pre-positioned, Fitch will likely upgrade the subsidiary ratings; further, if home and host country regulators reach agreements where pre-positioning is not required, the rating will not be upgraded and the Outlook revised to stable.
If clarity on host country internal TLAC proposals are further delayed beyond the next six months, Fitch will likely revise the subsidiary Outlooks to Stable until such clarity on these proposals is articulated.
Citigroup Global Markets Holdings Inc., Citigroup Derivatives Securities LLC, and CitiFinancial Europe PLC are sensitive to changes in Citi's IDRs.
Fitch has affirmed the following ratings:
Citigroup Inc.
--Long-Term IDR at 'A'; Outlook Stable;
--Senior unsecured at 'A';
--Short-Term IDR at 'F1';
--Subordinated at 'A-';
--Preferred at 'BB+';
--Market-linked notes at 'A emr'
--Viability Rating at 'a';
--Support at '5';
--Support floor at 'NF'.
Citibank, N.A.
--Long-Term IDR at 'A+'; Outlook Stable;
--Long-Term deposits at 'AA-';
--Short-Term deposits at 'F1+';
--Viability rating at 'a';
--Short-Term IDR at 'F1'.
--Support at '5';
--Support floor at 'NF'.
Citibank Banamex USA
--Long-Term IDR at 'A+'; Outlook Stable;
--Long-Term deposits at 'AA-';
--Short-Term deposits at 'F1+';
--Short-Term IDR at 'F1';
--Subordinated debt at 'A-';
--Viability Rating at 'a';
--Support at '5';
--Support floor at 'NF'.
Citigroup Funding Inc.
--Senior unsecured at 'A';
--Short-Term debt at 'F1';
--Market linked securities at 'A emr';
Citigroup Global Markets Holdings Inc.
--Long-Term IDR at 'A'; Outlook Stable;
--Senior unsecured at 'A';
--Short-Term IDR at 'F1';
--Short-Term debt at 'F1'.
Citigroup Global Markets, Inc.
--Long-Term IDR at 'A+'; Outlook Stable;
--Senior Secured at 'A+';
--Short-Term IDR at 'F1';
--Short-Term debt at 'F1'.
Citigroup Global Markets Limited
--Long-Term IDR 'A'; Rating Outlook Positive;
--Short-Term IDR 'F1';
--Senior unsecured long-term notes 'A';
--Short-Term debt at 'F1'.
Citigroup Derivatives Services LLC.
--Long-Term IDR at 'A'; Outlook Stable;
--Short-Term IDR at 'F1';
--Support at '1'.
Citibank Canada
--Long-Term IDR at 'A'; Rating Outlook Positive;
--Long-Term deposits at 'A'.
Citibank Japan Ltd.
--Long-Term IDR (foreign currency) at 'A'; Rating Outlook Positive;
--Short-Term IDR (foreign currency) at 'F1';
--Long-Term IDR (local currency) at 'A'; Rating Outlook Positive;
--Short-Term IDR (local currency) at 'F1';
--Support at '1'.
CitiFinancial Europe plc
--Long-Term IDR at 'A'; Outlook Stable;
--Senior unsecured at 'A';
--Senior shelf at 'A';
--Subordinated at 'A-'.
Canada Square Operations Limited (formerly Egg Banking plc)
--Subordinated at 'A-'.
Citibank International Limited (formerly known as Citibank International PLC):
--Long-Term IDR at 'A'; Rating Outlook Positive;
--Short-Term IDR at 'F1';
--Support affirmed at '1'.
Commercial Credit Company
--Senior unsecured at 'A'.
Associates Corporation of North America
--Senior unsecured at 'A'.
Citigroup Capital III, XIII, XVIII
--Trust preferred at 'BBB-'.
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