Fitch: Citi's 1Q'16 Weaker Results Reflect Market Sentiment and Energy

CHICAGO--()--Citigroup Inc. (Citi) reported a 0.79% return on assets (ROA) in the first quarter of 2016 (1Q'16) for a return of average equity of 6.4%, well below Fitch Ratings' assumed cost of capital. Fitch views Citi's earnings performance in 1Q16 as disappointing, and reflective of a difficult operating environment with various revenue headwinds, energy-related costs, and a still low rate environment. However, Citi's ratings remain supported by its solid capital and liquidity profile, which continued to build during the first quarter.

Citi continues to execute on its strategic plans, originally laid out in 2013, as the company focuses on being a smaller, simpler, and safer bank. Fitch attributes the successful execution of this strategy in part on that fact that Citi is the only Globally Systemic Important Bank (G-SIB) to receive a pass on its resolution plan by both the FDID and Fed, notwithstanding some shortcomings that still need to be addressed. In addition, Fitch acknowledges the proactive approach Citi has taken to adopting various regulatory rules, and has routinely met various thresholds and ratios well ahead of their requirements.

In terms of Citi's exposure to energy, Citi's energy funded exposure in the ICG segment was $22.3 billion, up 9% from the prior quarter, primarily attributed to new customer relationships. While the risk ratings deteriorated from last quarter, 63% of funded loans and 73% of total exposure remain investment grade, higher than other large banks reporting to date.

Given recently issued OCC guidance on E&P lending, Citi now expects that credit costs in ICG will be around $1.4 billion during the year, based on a scenario in which oil prices remain around $30 a barrel for a sustained period of time. This estimate is approximately $400 million higher than Citi's prior estimate, two-thirds of which was attributed to OCC regulatory guidance on E&P lending issued in March 2016 with the remainder reflecting Citi's revised view of the portfolio. In terms of the ongoing spring redetermination process, Citi disclosed no material drawdowns were made against these facilities to date.

Citi also disclosed its exposure in the GCB segment at $1.4 billion in funded loans and $2.1 billion in exposure, with most of the exposure in North America. Given the relatively weaker credit profile of this segment, with roughly 79% sub-investment grade, Citi carries higher loan loss reserves in this segment at 8.8% of funded loans.

In terms of Global Consumer Banking, Citi's focus is on its priority markets in the U.S., Mexico, and Asia. Over the past three years, Citi has exited or in the process of exiting 19 markets, including the most recent announcement regarding Brazil, Argentina, and Colombia. Citi will remain in South America only on the ICG side in the future. Citi has reduced its branch footprint by 82, as the company focuses on key markets and adapts to changing customer behavior. Citi incurred $491 million in repositioning charges in 1Q16, partially attributed to shifting staff to service centers, and further reduces headcount, which fell 3% during the quarter.

In terms of the Institutional segment, fixed income revenues declined 11% from a year ago, somewhat better than the company previously disclosed, though still incorporated the impact of a very challenging January and February this year. Of note, rates and currencies improved 5% year-over-year, but this was offset by lower activity levels.

Investment Banking was down 27% from a year ago due to both an industry-wide slowdown and strong performance in 1Q15. Results in the ICG segment also include a $180 million write-down of all Citi's investment in Venezuela reflecting changes in the exchange rate.

Fitch notes that the contribution from other ICG segments, including corporate lending, securities services, the private bank, and treasury & trade services, continues to increase now comprising 45% of ICG results. These more non-market sensitive segments also tend to be more efficient, higher return businesses. According to Citi, the company has benefitted from greater market share, as peers retrench from their global strategies.

Citi Holdings remained profitable once again in 1Q16, and accounts for 4% of assets. Citi disclosed that beginning next year, Citi Holdings will no longer be separately reported reflecting the company's view that the remaining assets are not material enough to warrant separate reporting.

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 again to an estimated 12.3%. The approximate 27 bps improvement from last quarter was due primarily to net income, OCI movements, and utilization of the DTA, partially offset by share buybacks and dividends.

Citi's full-year 2016 expectations started with a more challenging environment than anticipated. The company expects that the full-year operating efficiency ratio will be higher than originally anticipated at around 58%. Citi no longer includes an ROA target in its executive compensation guidelines, transitioning to relative total shareholder returns over a three-year performance period.

In terms of expected expenses, regulatory and compliance costs have started to plateau, and that repositioning costs taken in the first quarter should lead to $400 million in savings. Citi also anticipates that legal and repositioning costs should average around 225bps of Citicorp's revenues this year. Lastly, Citi expects that the pending Costco acquisition, expected in June, will be essentially neutral to earnings in 2016.

With regard to a potential British exit from the EU, Citi's perspective was that the EU should stay together. However, Citi operates in 28 EU countries, affording flexibility and options in terms of where to headquarter a European trading business. Also of note, in 1Q16, Citi adopted FASB's new accounting standard on reporting of DVA, and as such, these items will no longer be recognized in earnings, but now in OCI.

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

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Contacts

Fitch Ratings
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Senior Director
+1-312-368-5472
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Meghan Neenan
Senior Director
+1-212-908-9121
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Julie Solar
Senior Director
+1-312-368-5472
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Meghan Neenan
Senior Director
+1-212-908-9121
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com