LONDON--(BUSINESS WIRE)--Fitch Ratings has affirmed Citigroup Inc.'s (Citi) Viability Rating (VR) and Long-Term Issuer Default Rating (IDR) at 'a/A', respectively. At the same time, Fitch has upgraded Citibank, N.A.'s Long-Term IDR and Long-Term Deposit ratings to 'A+/ AA-', respectively. The Outlooks for the Long-Term IDRs are Stable. A full list of rating actions follows at the end of this rating action commentary.
Citi's Long-Term IDR is driven by its Viability Rating (VR), which has been affirmed at 'a'. The upgrade of Citi's operating subsidiaries' IDRs to one notch above their VRs reflects the expected implementation of total loss absorbing capital (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 are in conjunction with Fitch's review of sovereign support for banks globally, which the agency announced in March 2014. In line with its expectations announced in March last year and communicated regularly since then, Fitch believes legislative, regulatory and policy initiatives have substantially reduced the likelihood of sovereign support for U.S., Swiss and European Union commercial banks. At the same time, Fitch has taken into account progress with the U.S. single point of entry (SPE) resolution regime and TLAC implementation for U.S. G-SIBs.
Fitch believes that, in line with our Support Rating (SR) definition of '5', extraordinary external support while possible can no longer be relied upon for Citi or its certain subsidiaries. We have, therefore, downgraded their Support Ratings (SR) to '5' from '1' and revised their Support Rating Floors (SRF) to 'No Floor' from 'A'. Fitch has maintained institutional support ratings for core Citi subsidiaries.
The ratings actions are part of a periodic portfolio review of the Global Trading and Universal Banks (GTUBs), which comprise 12 large and globally active banking groups. A strong rebound in earnings from securities businesses in 1Q15 is a reminder of the upside potential banks with leading market shares can enjoy. However, regulatory headwinds remain strong, with ever higher capital requirements, costs of continuous infrastructure upgrades and a focus on conduct risks.
As capital and leverage requirements evolve, GTUBs are reviewing the balance of their securities operations with other businesses and adapting their business models to provide the most capital platforms for the future. We expect the GTUBs' other core businesses, including retail and corporate banking, wealth and asset management, to perform well as economic growth, which we expect to be strongest in the U.S. and UK, will underpin revenue. However, pressure on revenue generation in a low-interest environment is likely to persist, particularly in Europe, but low loan impairment charges in domestic markets should help operating profitability.
KEY RATING DRIVERS - IDRS, VR AND SENIOR DEBT
The affirmation of Citigroup's VR reflects its solid capital and liquidity profiles. Citi has grown capital both through retained earnings, and balance sheet deleveraging that has particularly aided risk-based measures. At March 31, 2015, Citi's fully phased-in Basel III Common Equity was an estimated 11%, higher than most U.S.-based GTUBs. After a disappointing objection to last year's capital plan for qualitative reasons, Citi performed well under this year's stress tests, receiving no objection to increase the quarterly dividend to $0.05 a share, and repurchase up to $7.8 billion of common shares. Citi's estimated minimum tier 1 common ratio was the highest of the five U.S.-based GTUBs that participated in the annual stress tests.
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 March 31, 2015, Citi reported $401 billion in cash and unencumbered liquid securities, or 22% of total assets. Citi also has access to $38 billion in borrowing capacity from various Federal Home Loan banks, as well as access to borrowing capacity at the discount window or international central banks at March 31, 2015. 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 111% (under U.S. rules), while the SLR was 6.4% at March 31, 2015.
Citi's earnings profile, complexity of operations, and asset quality somewhat offset these ratings strengths. The company's earnings performance has lagged peer averages, though the VR already incorporates a forward looking view and Fitch expects that Citi will reach its targets over the near term. Citi is the most global of the U.S. GTUBs, and while this creates a great deal of diversity, it can entail risk with regard to geopolitical issues, as well as the need to have a best in class risk management infrastructure. Lastly, Citi's asset quality metrics have lagged peer averages as well, though somewhat to be expected given its concentration to higher loss content credit cards. These three drivers act as rating constraints to further upward movement to the VR.
Citi's earnings in 2014 were expected to be a year of recovery, which did not materialize; however, earnings got off to a strong start with a first quarter 2015 ROA of 1.05%, well within the company's target of 90bps to 110bps. Fitch notes that over the past couple years, Citi's earnings during the first half of the year have started out favorably, only to be marred by material litigation costs or lower capital markets revenues later on. Citi's ability to meet its full-year earnings targets in 2015 may hinge on future legal-related charges, which are very difficult to predict given limited visibility. Further, although not currently assumed nor incorporated in Citi's ratings, Fitch is sensitive to increased risk taking on the company's part to meet its 2015 financial targets. As such, any perceived changes to the company's risk appetite would be assessed for rating implications.
Citigroup is one of the largest banking institutions in the world, with by far the biggest international banking franchise among U.S. peers. Citi also has material capital markets operations, comprising on average around 25% of revenues. 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 the need for a sophisticated risk management infrastructure to manage risk around the globe.
Fitch still views Citi's risk management infrastructure as enhanced since the financial crisis, notwithstanding the risk management missteps last year. Fitch views Citi's completed or pending strategic changes favorably as they reduce future operational, compliance, and legal-related risk related to such an expansive global franchise. Despite these enhancements, the complexity of global operations and a reliance on more volatile capital markets revenues serve as constraints to further upgrades to the VR.
Lastly, Citi loan losses are typically higher than peer averages. Fitch attributes some of Citi's weaker relative asset quality profile to its high balance of TDRs, which contributes to elevated NPAs. Given the company's exposure to higher loss content credit card loans and Mexico, loan losses are also higher than industry averages. Fitch expects that loan losses may increase for the industry given the very benign credit environment, and unsustainably low levels of credit losses.
The VRs remain equalized between Citi and its material operating subsidiaries. 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 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 total loss absorbing capital (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. As at end-2014, Citi had hybrid and senior debt as a percent of risk-weighted assets (RWA) of approximately 11%, exceeding the Pillar 1 capital requirement.
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. IDRs and senior debt are now sensitive to any changes in the VR.
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. Fitch's rating action assumes that any potential criminal charges as they relate to foreign exchange manipulations will not materially impact ongoing business operations. Absent that, ratings may be adversely impacted, though Fitch has limited visibility into this outcome.
While there is no outsized reliance on a single market outside of the U.S. (Mexico being the largest at 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, for example, Russia, and those cascading impacts to the global economy are much harder to quantify and assess for any implications to Citi or its peers.
Fitch still views Citi's risk management infrastructure as enhanced since the financial crisis. 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.
Downward pressure on the VR may also 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.
KEY RATING DRIVERS AND 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.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by Citi and by 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. This is also supported by the FSB's proposal to have internal TLAC rank senior to regulatory capital at the operating company. Their ratings are primarily sensitive to any change in the common VR. They have, therefore, been affirmed due to the affirmation of the common VR.
KEY RATING DRIVERS AND SENSITIVITIES - DEPOSIT RATINGS
The upgrade of Citibank, N.A.'s and Citibank Banamex USA's deposit ratings is based on the upgrade of their IDRs. 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.
SUBSIDIARY KEY RATING DRIVERS AND SENSITIVITIES
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 core and 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.
Fitch has revised the Rating Outlook for Citi's material international operating companies' IDRs to Positive, including Citigroup Global Markets Limited, Citibank Canada, Citibank Japan Ltd, and Citibank International Limited. The revision of the Outlook is in light of the internal pre-positioning required under the Financial Stability Board's (FSB) TLAC proposal. The Positive Outlook reflects the agency's belief that the internal TLAC of material international operating companies will likely be large enough to meet 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.
Fitch has upgraded the following ratings:
Citibank, N.A.
--Long-Term IDR to 'A+' from 'A'; Outlook Stable;
--Long-Term deposits to 'AA-' from 'A+';
--Short-Term deposits to 'F1+' from 'F1'.
Citibank Banamex USA
--Long-Term IDR to 'A+' from 'A'; Outlook Stable;
--Long-Term deposits to 'AA-' from 'A+';
--Short-Term deposits to 'F1+' from 'F1'.
Citigroup Global Markets, Inc.
--Long-Term IDR to 'A+' from 'A'; Outlook Stable;
--Senior Secured to 'A+' from 'A'.
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'.
Citibank, N.A.
--Viability rating 'a';
--Short-Term IDR at 'F1'.
Citibank Banamex USA
--Short-Term IDR at 'F1';
--Subordinated debt at 'A-';
--Viability Rating at 'a'.
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.
--Short-Term IDR at 'F1';
--Short-Term debt at 'F1'.
Citigroup Global Markets Limited
--Long-Term IDR 'A'; Rating Outlook revised to Positive from Stable;
--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 revised to Positive from Stable;
--Long-Term deposits at 'A'.
Citibank Japan Ltd.
--Long-Term IDR at 'A'; Rating Outlook revised to Positive from Stable;
--Short-Term IDR at 'F1';
--Long-Term IDR (local currency) at 'A'; Rating Outlook revised to Positive from Stable;
--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 revised to Positive from Stable;
--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-'.
Fitch has downgraded the following ratings:
Citigroup Inc.
--Support to '5' from '1'.
Citibank, N.A.
--Support to '5' from '1'.
Citibank Banamex USA
--Support to '5' from '1'.
Fitch has revised the following ratings:
Citigroup Inc.
--Support floor to 'NF' from 'A'.
Citibank, N.A.
--Support floor to 'NF' from 'A'.
Citibank Banamex USA
--Support floor to 'NF' from 'A'.
Additional information is available on 'www.fitchratings.com.'
Applicable Criteria and Related Research:
--'Global Bank Rating Criteria' (March 20, 2015).
Applicable Criteria and Related Research:
Global Bank Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984981
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