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Fitch: Citi's 4Q'16 Results Aided by Markets
January 18, 2017 / 10:14 PM / 8 months ago

Fitch: Citi's 4Q'16 Results Aided by Markets

(The following statement was released by the rating agency) NEW YORK, January 18 (Fitch) Citigroup reported full-year earnings in 2016 of $14.9 billion, representing a 13% decline (excluding CVA/DVA) from the prior year, according to Fitch Ratings, primarily attributed to lower earnings out of Citi Holdings, the absence of cards-related reserve releases, and some one-time gains included in last year's results. This was offset by positive operating leverage in Citicorp for the full year. In 4Q16, Citigroup reported $3.6 billion of net income for a return on assets (ROA) of 78bps. Highlights during the quarter include: strong performance in ICG aided by a favorable market environment following the election, still benign credit quality despite an 11% increase in loan losses on a linked-quarter basis, and a good capital profile even with large movements in OCI during the quarter. Citi also reported lower expenses on a linked-quarter and year-ago basis. The company's efficiency ratio of 59% for the full year compares generally well to other large U.S. banks. Offsetting this, Citi reported revenue headwinds in 4Q16 due in part to the absence of one-time gains realized in Citi Holdings in prior periods, and a larger than expected decline in the net interest margin. Citi's net interest margin (NIM) declined 7bps, which was more than that of peers reporting to date. Citi does not expect this decline to be part of a larger trend, and anticipates the full-year margin to stabilize at around the mid 2.80% range in 2017, in line with the full-year NIM in `2016. Higher long-term debt costs contributed to the linked-quarter movement in the margin. Citi expects net interest income to grow in 2017 supported by the December 2016 rate hike, the benefit of card investments maturing in the second half of the year, offset by TLAC-related debt issuances. Citi Holdings will not be reported separately starting next quarter, which at year-end comprised only 3% of assets, marking the end of Citi's restructuring following the financial crisis. Citi has been very successful in winding down these non-core assets, which at their peak totaled over $800 billion. Citi hopes that it will no longer have to break out legal and repositioning charges in 2018 as they wind down as well. Citi expects an improvement of the efficiency ratio to roughly 58% in 2017 and to mid-50% during 2018, and improving the return on tangible common equity (excluding the DTA) to at least 10% in 2018. Citi's outlook for ROA in 2017 continues to be between 90bps and 110bps, though this ratio remains impacted by TLAC-related issuances and LCR liquidity levels. North America Consumer Banking net income increased 4% on a linked-quarter basis, though down 15% from a year ago. The June 17th Costco acquisition aided Branded Cards results compared to 4Q15, while lower mortgage revenues and certain consumer incentive programs negatively impacted Retail Banking. Higher expenses reflected the investment program started last year which includes increased card-related marketing expenses, enhanced digital capabilities, and infrastructure improvements in the branch network. Citi has reduced its U.S. branch count by 7% for the year, while still growing loan and deposit balances. Citi expects that some of these related investments have yet to translate into higher earnings, but that this will occur in the second half of this year. In International Global Consumer Banking, net income declined 8% on a linked-quarter basis, but improved 36% from the prior year, in constant dollars. International GCB includes consumer businesses in Asia, catering to a more affluent client segment, and Citi's consumer franchise in Mexico, which caters to both mass market and affluent markets. The quarter's results included revenue growth, and controlled expenses over the prior year's quarter. Citi has contracts in place to sell its consumer businesses in Argentina and Brazil in 2017. Citi's Institutional segment reported a 36% increase in FICC relative to 4Q15, better than the 12% and 31% increases for BAC and JPM, respectively. Equity markets also performed better than a year ago, up 15% during the quarter relative to 7% and 8% for JPM, respectively. Citi has been investing in people and technology, particularly prime brokerage, in the Equity Markets business line with a goal of reaching 5th or 6th in the league tables over time. Full-year net income in the Institutional Clients Group improved 6%, which also includes the results of Treasury & Trade Solutions (TTS), Investment Banking, Private Bank, and Corporate Lending. Both TTS and Private Bank continue to report solid performance. Asset quality continues to generally improve. Non-accrual loan balances declined 7% on a linked-quarter basis primarily attributed to improvements in North America and Latin America consumer. NCOs increased in North America Consumer Banking, though is more reflective of the absence of loan losses during the first 180 days of the Costco relationship. Citi reiterated its guidance of 280bps in full-year loan losses for Branded Cards and 435bps for Retail Services in 2017. Citi's capital ratios continue to remain a rating strength, and generally above other large U.S. banks. The company's estimated Common Equity Tier 1 under Basel III on a fully phased-in basis decreased roughly 10bps from last quarter to an estimated 12.5%. The decline was due primarily due to capital distributions, and unrealized AFS losses. Counter to prior quarters, the DTA was a drag on capital ratios during 4Q16 as the size of the DTA grew as result of OCI movements. However, for the full-year, usage of the DTA contributed 14bps to the CET1. Any future corporate tax reforms may impact Citi's earnings with valuation allowances recorded against the DTA and, potentially, a capital charge; however, this would be offset by higher earnings over time. These movements in capital ratios were partially offset by net income and lower risk-weighted assets in 4Q16. Fitch also notes that Citi's foreign exchange hedging program was effective again with changes in currencies impacting the CET1 ratio by only 1bp for the full year. Contact: Julie Solar Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Meghan Neenan Senior Director +1-212-908-9121 . 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