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Fitch Affirms Citigroup's Long-Term IDR at 'A'; Outlook Stable
December 13, 2016 / 9:54 PM / 9 months ago

Fitch Affirms Citigroup's Long-Term IDR at 'A'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, December 13 (Fitch) Fitch Ratings has affirmed Citigroup Inc.'s (Citi) Viability Rating (VR) at 'a' and Long-Term Issuer Default Rating (IDR) at 'A'. Fitch has also affirmed Citibank, N.A.'s VR at 'a' and IDR at 'A+'. The Rating Outlooks for the Long-Term IDRs are Stable. A full list of rating actions follows at the end of this press release. Citi's Long-Term IDR is driven by its VR, which Fitch has affirmed at 'a'. Fitch's affirmation of Citi's domestic operating subsidiaries' IDRs at one notch above their VRs reflects 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. In addition Fitch has assigned Derivative Counterparty Ratings (DCRs) to Citigroup and to Citibank, N.A., Citigroup Global Markets Limited, and Citigroup Global Markets, Inc. as part of its roll out of DCRs to significant derivative counterparties in Western Europe and the U.S. DCRs are issuer ratings and express Fitch's view of banks' relative vulnerability to default under derivative contracts with third-party, non-government counterparties. Fitch affirmed Citi's ratings in conjunction with its periodic review of the Global Trading and Universal Banks (GTUBs). KEY RATING DRIVERS - IDRs, VR AND SENIOR DEBT The affirmation of Citigroup's VR reflects Citi's solid capital and liquidity levels. Fitch views favorably Citi's successful execution of its strategy to become a smaller, simpler and safer bank. Citi's earnings reflect an overall improving trend over the past few years, though is still pressured by various headwinds including a low interest rate environment and relatively lackluster economic growth. Citi's complexity of operations, exposure to more volatile capital markets revenues, and weaker relative asset quality and earnings offset these ratings strengths. Citi's capital ratios continue to remain very good. The company's Common Equity Tier 1 under Basel III on a fully phased-in basis increased again to 12.6% at Sept. 30, 2016. The 96 bps improvement from a year ago was due primarily to net income, a smaller balance sheet, and utilization of the DTA, partially offset by share buybacks and dividends. A large portion of Citi's sizeable DTA is excluded from regulatory capital. Fitch expects Citi will likely maintain a buffer of between 50bps and 100bps above the fully phased-in CET1 requirement of 10%, which is inclusive of its G-SIB surcharge of 3%. Fitch views this buffer as appropriate, particularly in light of potential impacts to unrealized gains under a rising rate environment. Citi has continued to build capital over the past several years but will likely decrease over the intermediate to long term. 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. Citi reported $404 billion in average cash and unencumbered liquid securities at Sept. 30, 2016, or 22% of total assets. Fitch also views Citi's successful execution of its strategic plans favorably. The company continues to make progress on the strategy that was originally laid out in 2013 as the company focuses on being a smaller, simpler, and safer bank. In particular, the bank recently announced the sales of it consumer businesses in Argentina and Brazil. In early October, Citi also renewed its commitment to Mexico by pledging $1 billion in additional investments over the next four years, and rebranding the bank Citibanamex. Despite the unexpected outcome of the presidential election, Citi recently reaffirmed its views regarding the favorable long-term prospects for its operations in Mexico. Citi has successfully navigated various currency fluctuations throughout the year, including modest impacts to the P&L, and Fitch expects financial results will not be materially impacted by the dramatic declines of the peso following the outcome of the election given Citi's competency in hedging CET1 from currency risk. Offsetting the strong capital and liquidity profiles, 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 emerging markets. Given Citi's higher loss content credit card book and emerging markets exposure, loan losses tend to be higher than peer averages. Fitch expects loan losses may increase for the industry given the very benign credit environment and unsustainably low levels of credit losses. 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. Citi has physical operations in 97 countries and jurisdictions, and serves clients in more than 160 clients. While Citi's global franchise (particularly its Treasury & Trade Solutions and fixed income businesses) are strong, Fitch views Citi's expansive and complex operations as presenting elevated operational risk. Citi's earnings profile and ROE in particular, continues to lag large bank averages. For the nine months ending Sept. 30, 2016, Citi reported a ROE of 7.1%, as compared to an average of greater than 9% for U.S. banks with greater than $250bn in assets. Fitch expects that Citi's earnings will continue to remain pressured given various global headwinds, including low interest rates, modest economic growth, and political uncertainties. 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 at the operating company would be lower given the resolution regime and 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 Fitch's 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. Fitch believes 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 are rated 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, Citigroup Global Markets Funding Luxembourg, and Citibank Europe plc are wholly owned subsidiaries of Citi or Citibank, N.A. These subsidiaries' 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 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 has been revised to Stable from Positive since further clarify on host country internal TLAC proposals has continued to be delayed. This includes Citigroup Global Markets Limited, Citibank Canada, Citibank Japan Ltd, Citibank Europe plc, and Citigroup Global Markets Funding Luxembourg. Domestic subsidiaries and international subsidiaries that have not been upgraded 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 affirmed and withdrawn the ratings of Citigroup Derivatives Securities LCC and CitiFinancial Europe PLC as these entities no longer exist. KEY RATING DRIVERS - DERIVATIVE COUNTERPARTY RATING Fitch has assigned a Derivative Counterparty Rating (DCR) of 'A+(dcr)' to Citibank, N.A and Citigroup Global Markets Inc. and 'A (dcr)' to Citigroup, Inc. and Citigroup Global Markets Limited. A DCR expresses Fitch's view of a bank's relative vulnerability to default under derivative contracts with third-party, non-government counterparties. DCRs have been assigned to these companies because they have significant derivatives activity. The DCRs are at the same level as the respective companies' Long-Term IDRs because they have no definitive preferential status over other senior obligations in a resolution scenario. 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 of the 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. The strength of the liquidity and capital profiles underpins Citi's ratings. Today's affirmations incorporate Fitch's 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. While there is no outsized reliance on a single market outside of the U.S., 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 on 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. 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 could lead to a 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., Citibank Canada, Citibank Japan Ltd, Citibank Europe plc, Citigroup Global Markets Funding Luxembourg, and Citigroup Global Markets Holding Inc. are sensitive to a change in Citi's VR. Their IDRs are also sensitive to changes in our view of the Citi's ability or propensity to provide support to these entities. SENSITIVITIES - DERIVATIVE COUNTERPARTY RATING DCRs are primarily sensitive to changes in the respective issuers' long-term IDRs. In addition, they could be upgraded to one notch above the IDR if a change in legislation (for example as recently proposed in the EU) creates legal preference for derivatives over certain other senior obligations and, in Fitch's view, the volume of all legally subordinated obligations provides a substantial enough buffer to protect derivative counterparties from default in a resolution scenario. 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'. 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'. 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'; Outlook revised to Stable from Positive; --Short-Term IDR 'F1'; --Senior unsecured long-term notes 'A'; --Short-Term debt at 'F1'. Citibank Canada --Long-Term IDR at 'A'; Outlook revised to Stable from Positive; --Long-Term deposits at 'A'. Citibank Japan Ltd. --Long-Term IDR (foreign currency) at 'A'; Outlook revised to Stable from Positive; --Short-Term IDR (foreign currency) at 'F1'; --Long-Term IDR (local currency) at 'A'; Outlook revised to Stable from Positive; --Short-Term IDR (local currency) at 'F1'; --Support at '1'. Canada Square Operations Limited (formerly Egg Banking plc) --Subordinated at 'A-'. Citibank Europe plc --Long-Term IDR at 'A'; Outlook revised to Stable from Positive; --Short-Term IDR at 'F1'; --Support affirmed at '1'. Commercial Credit Company Associates Corporation of North America --Senior unsecured at 'A'. Citigroup Global Markets Funding Luxembourg --Long-Term IDR at 'A'; Outlook revised to Stable from Positive; --Short-term IDR at 'F1'; --Market-linked senior notes at 'A(emr)'. Citigroup Capital III, XIII, XVIII --Trust preferred at 'BBB-'. Fitch has assigned the following ratings: Citigroup, Inc. Citigroup Global Markets Limited --Derivative Counterparty Rating 'A(dcr)'. Citibank, N.A. Citigroup Global Markets, Inc. --Derivative Counterparty Rating of 'A+(dcr)'. Fitch has affirmed and withdrawn the following ratings: Citigroup Derivatives Services LLC. --Long-Term IDR at 'A'; Outlook Stable; --Short-Term IDR 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-'. Contact: Primary Analyst Julie Solar Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 W. 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