Fitch Upgrades Citigroup's Individual Rating; Places IDRs on Negative Watch

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the Individual, Preferred and Trust Preferred ratings of Citigroup Inc. (Citi) as follows:

--Individual to 'C' from 'C/D';

--Trust Preferred issued by various capital trust subsidiaries to 'BBB-' from 'BB-';

--Preferred Stock to 'BBB-' from 'C'.

Concurrently, Fitch has placed the following ratings of Citi on Rating Watch Negative. (Please see Fitch's press release: 'Fitch: U.S. FI Ratings Potentially Impacted by Proposed FDIC Rules ' dated today for further details. )

--Long-term Issuer Default Rating (IDR) 'A+';

--Senior unsecured 'A+';

--Subordinated 'A';

--Short-term IDR 'F1+';

--Support '1';

--Support Floor 'A+'.

The upgrades of the Individual (or stand-alone assessment) and preferred instrument ratings reflect improved financial performance in 2010, including the emergence of sustainable operating profits and favorable asset quality trends. Other positive factors include success in reducing non-core assets and strengthened capital and liquidity positions. The upgrades are tempered by a still relatively higher level of asset quality problems combined with a large remaining portion of non-core assets under the Citi Holdings' umbrella. The Individual rating currently translates to unsupported IDRs of 'BBB+/F2' but further upgrades of the Individual rating and the unsupported IDRs over the near term are a possibility if earnings stabilize and/or increase, and broad asset quality trends indicate steady improvement. Moreover, Fitch also incorporated the significant improvements in Citi's capital strength as measured by current and anticipated regulatory requirements as well as Fitch's own measures of capital strength, which adjusts for items such as mortgage servicing rights, deferred taxes and fair value of own debt.

In 2010, Citi returned to operating profitability although returns remain significantly below pre-crisis levels. In the first nine months of 2010, return on assets (ROA) improved to positive 0.65% compared with negative 0.08% for full-year 2009. Fitch anticipates that Citi's operating results could improve further, as loan loss provisions are likely to decrease, while the international consumer banking and institutional client businesses are expected to provide steady results. Moreover, earnings are likely to be less affected from the non-core portfolios due to conservative carrying values. Thanks to its broad international franchise, Citi's revenues and core earnings are likely to be less affected than other major U.S. banks by recent U.S. legislation, primarily affecting fee income; however, given Citi's sizable U.S. card business, it will have to contend with industry-wide changes. Moreover, the company's international operations, including a presence in many faster growing markets, give Citi considerable earnings power once asset quality problems in the U.S. are resolved.

Fitch also considered the improvements to the risk management culture as manifested by more disciplined risk-taking and steady progress in addressing problem assets. Through the first nine months of 2010, consumer non-performing loans (NPLs) declined both in the U.S. and in each of the international regions. In addition, early stage delinquencies trended down during the course of 2010 in the consumer portfolio. On the corporate side, NPLs continued to diminish for the fourth consecutive quarter.

Consumer NPLs primarily reside in North America at 80% of total consumer NPLs as of the of third quarter 2010 (end-3Q'10). Within consumer NPLs, domestic mortgages and home equity loans at Citi Holdings remain the largest portions. In domestic mortgages, the dollar amount of NPLs decreased due to the slowdown in new NPLs combined with successful mortgage modifications. However, continued performance of these modified mortgages bears close monitoring. That said, Citi's loan loss reserves (6.7% of total loans at end-3Q'10) factor in potential losses in the event of redefault.

Fitch believes Citi's exposure to rep and warranty losses associated with residential mortgages is relatively low among major U.S. banks, albeit material. Potential rep and warranty losses along with the recently publicized foreclosure documentation issues are believed by Fitch to be manageable relative to Citi's operating income, capital, and reserves at this time.

Since the core/non-core plan was announced in early 2009, non-core assets managed under Citi Holdings have been reduced considerably yet still remain sizeable. Non-core assets declined to $421 billion (21% of total assets) at end-3Q'10 from $650 billion (34% of total assets) as of year-end 2008. The recently announced sale of the student loan business, along with other asset sales and write-downs will reduce this balance significantly in 4Q'10, although fully resolving non-core assets likely will remain a medium-term process.

Citi's capital ratios are now relatively strong. At end-3Q'10 the Tier I common ratio stood at a solid 10.3% compared with just 2.7% at mid-year 2009. In 2010, capital ratios benefited from internal capital generation and a continued reduction in risk assets. In the latter part of 2009, a share issue in December and the completion of an exchange offer in September boosted Tier I common and tangible common equity. At mid-year 2010, Fitch core capital stood at 9.5% of risk-weighted assets, which compared well to the average of 7.6% for the four largest U.S. banks. The U.S. government's ownership of Citi has been reduced from a peak of 34% to 12% by the end of 3Q'10 and this is anticipated to decline further.

Going into 4Q'10, capital ratios are expected to improve owing to the likelihood of positive internal capital generation and a further reduction of risk assets. Fitch believes Citi will continue to manage capital ratios conservatively in view of the prospect for tougher U.S. regulatory requirements (particularly for systemically important banks) as well as the probable implementation of Basel 3, which will likely increase risk-weighted assets over the implementation phases.

Citi's improved financial profile has further bolstered its capacity to pay coupons on trust preferred instruments. Furthermore, Citi has announced that it will begin paying dividends on Series AA, E, F, and T preferred, which had been suspended. Preferred servicing costs are now approximately $0.4 billion per quarter compared with a peak level of $1.9 billion per quarter (including both trust preferred and other preferred issues).

Currently, liquidity is comfortable at both the holding company and bank levels with large levels of unencumbered cash and securities. At the bank level, deposits have increased significantly as a percentage of the funding mix. At Citibank, N.A., total deposits increased to 75% of total liabilities at mid-year 2010 compared with 66% at year-end 2008.

Individual ratings for U.S. banking units remain equalized due to the existence under FIRREA of cross-default guarantees for domestic affiliate banks. Certain debt ratings and trust preferred ratings are being withdrawn as specific issues are no longer outstanding as detailed below.

Citi is one of the leading banking institutions in the world with by far the largest international banking franchise among U.S. peers. Early in 2009, a strategic shift was announced which split Citi into two major units: Citicorp to manage core operations (regional consumer banking and the institutional clients group) and Citi Holdings to manage and dispose of non-core assets.

Fitch has taken the following rating actions:

Citigroup Inc.

--Long-term Issuer Default Rating (IDR) 'A+' placed on Rating Watch Negative

--Senior unsecured 'A+' placed on Rating Watch Negative;

--Subordinated 'A' placed on Rating Watch Negative;

--Preferred upgraded to 'BBB-' from 'C';

--Short-term IDR 'F1+' placed on Rating Watch Negative;

--Individual upgraded to 'C' from 'C/D';

--Support '1' placed on Rating Watch Negative;

--Support Floor 'A+' placed on Rating Watch Negative;

--Long-term FDIC guaranteed debt affirmed at 'AAA';

--Short-term FDIC guaranteed debt affirmed at 'F1+'.

Citigroup Funding Inc.

--Long-term IDR 'A+' placed on Rating Watch Negative;

--Senior unsecured 'A+' placed on Rating Watch Negative;

--Short-term IDR 'F1+' placed on Rating Watch Negative;

--Short-term debt 'F1+' placed on Rating Watch Negative;

--Long-term FDIC guaranteed debt affirmed at 'AAA';

--Short-term FDIC guaranteed debt affirmed at 'F1+'.

Citigroup Global Markets Holdings Inc.

--Long-term IDR 'A+' placed on Rating Watch Negative;

--Senior unsecured 'A+' placed on Rating Watch Negative;

--Subordinated 'A' placed on Rating Watch Negative;

--Short-term IDR 'F1+' placed on Rating Watch Negative;

--Short-term debt 'F1+' placed on Rating Watch Negative.

Citibank, N.A.

--Long-term IDR 'A+' placed on Rating Watch Negative;

--Long term deposits 'AA-' placed on Rating Watch Negative;

--Short-term IDR 'F1+' placed on Rating Watch Negative;

--Short-term deposits 'F1+' placed on Rating Watch Negative;

--Individual upgraded to 'C' from 'C/D';

--Support '1' placed on Rating Watch Negative;

--Support Floor 'A+' placed on Rating Watch Negative;

--Long-term FDIC guaranteed debt affirmed at 'AAA';

--Short-term FDIC guaranteed debt affirmed at 'F1+'.

Citibank (South Dakota), N.A.

--Long-term IDR 'A+' placed on Rating Watch Negative;

--Long-term deposits 'AA-' placed on Rating Watch Negative;

--Short-term IDR 'F1+' placed on Rating Watch Negative;

--Short-term deposits 'F1+' placed on Rating Watch Negative;

--Individual upgraded to 'C' from 'C/D';

--Support '1' placed on Rating Watch Negative;

--Support floor 'A+' placed on Rating Watch Negative.

Citibank Banamex USA

--Long-term IDR 'A+' placed on Rating Watch Negative;

--Subordinated 'A' placed on Rating Watch Negative;

--Long-term deposits 'AA-' placed on Rating Watch Negative;

--Short-term IDR 'F1+' placed on Rating Watch Negative;

--Short-term deposits 'F1+' placed on Rating Watch Negative;

--Individual upgraded to 'C' from 'C/D';

--Support '1' placed on Rating Watch Negative;

--Support Floor 'A+' placed on Rating Watch Negative.

Citigroup Derivatives Services LLC.

--Long-term IDR 'A+' placed on Rating Watch Negative;

--Short-term IDR 'F1+' placed on Rating Watch Negative;

--Support affirmed at '1'.

Citibank Canada

--Long-term IDR 'A+' placed on Rating Watch Negative;

--Long-term deposits 'A+' placed on Rating Watch Negative.

Citibank Japan Ltd.

--Long-term IDR 'A+' placed on Rating Watch Negative;

--Short-term IDR 'F1+' placed on Rating Watch Negative;

--Long-term IDR (local currency) 'A+' placed on Rating Watch Negative;

--Short-term IDR (local currency) 'F1+' placed on Rating Watch Negative;

--Support affirmed at '1'.

CitiFinancial Europe plc

--Long-term IDR 'A+' placed on Rating Watch Negative;

--Senior unsecured 'A+' placed on Rating Watch Negative;

--Senior shelf 'A+' placed on Rating Watch Negative;

--Subordinated 'A' placed on Rating Watch Negative.

Citibank International PLC

--Long-term IDR 'A+' placed on Rating Watch Negative;

--Short-term IDR 'F1+' placed on Rating Watch Negative;

--Support affirmed at '1'.

Commercial Credit Company

--Senior unsecured 'A+' placed on Rating Watch Negative.

Associates Corporation of North America

--Senior unsecured 'A+' placed on Rating Watch Negative;

--Subordinated 'A' placed on Rating Watch Negative.

Egg Banking plc

--Senior unsecured 'A+' withdrawn;

--Subordinated 'A' placed on Rating Watch Negative.

Citigroup Capital III, VII, VIII, IX, X, XIV, XV, XVI, XVII, XVIII, XIX, XX, XXI, XXXI, and XXXII

--Trust Preferred upgraded to 'BBB-' from 'BB-'

Citigroup Capital XXIX, XXX

--Trust Preferred upgraded to 'BBB-' from 'BB-' and withdrawn

Adam Capital Trust III, Adam Statutory Trust III-V

--Trust Preferred upgraded to 'BBB-' from 'BB-'

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Aug. 16, 2010);

--'Bank Holding Companies' (Dec. 30, 2009).

Applicable Criteria and Related Research:

Bank Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493324

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685

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