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Fitch: Citigroup's 2Q17 Earnings Impacted by Higher Credit Costs
July 14, 2017 / 9:30 PM / 5 months ago

Fitch: Citigroup's 2Q17 Earnings Impacted by Higher Credit Costs

(The following statement was released by the rating agency) CHICAGO, July 14 (Fitch) Citigroup Inc. (Citi) reported second quarter 2017 (2Q17) earnings of $3.9 billion, representing a 3% decline relative to the year-ago quarter, according to Fitch Ratings. Strength in investment banking and international consumer banking were offset by lower results in the trading business and North America Consumer Banking (NACB). These results combined for a 6.8% annualized return on average common equity (ROAE) in 2Q17 down slightly from 7% in the prior year quarter. On a return on average tangible common equity (ROTCE) basis excluding Citi's deferred tax asset (DTA), the firm's 2Q17 result was 9.3%, down 20 basis points from the 9.5% result in the prior year's quarter. ROTCE remains slightly below management's 10% target, though with the firm's expected capital return over the next 12 months, Citi should get closer to, if not reach, this target absent unexpected performance volatility. Results in Citi's NACB segment were challenging this quarter with segment net income down 18% from the year-ago quarter. Net revenue in Branded Cards was up 10% year-over-year reflecting the acquisition of the Costco card portfolio in June 2016. Retail services net revenue was up 4% year-over-year due to continued loan growth. Mortgage banking net revenue was a small contributor to the lower results, declining approximately $90 million (or 33%) from the prior year quarter amid lower originations, higher cost of funds, as well as the impact of the previously announced sale of a portion of Citi's mortgage servicing rights. Credit costs were more significant in the segment, up 27% to $1.3 billion relative to the prior year period due to a combination of the Costco acquisition, continued volume growth, seasoning of the portfolio and the impact of changes in collections activity in Retail Services. Citi indicated that it has not observed more loan delinquencies in its Retail Services portfolio, but it has changed its collections approach given regulation, which drove the $103 million allowance build this quarter. Citi's International Consumer Banking segment had comparatively better results than the NACB segment with net income for the segment only down 2% from the prior year quarter. Geographically, Latin America showed particularly strong growth in this segment with net revenue up 8% year-over-year. Revenue growth in Asia was more muted but still good at 3% higher relative to the prior year period. Credit costs in this segment were also higher at $470 million, up 18% compared to the prior year's quarter. This included net credit losses of $434 million and a loan loss reserve build of $21 million. Nevertheless, the overall net credit loss rate in this segment remained low at 1.58%, up slightly from 1.52% in the prior year quarter. Despite subdued trading conditions during the quarter, performance in Citi's Institutional Clients Group (ICG) segment was good, with net income up 6% relative to the prior year period. Investment Banking net revenue was up 22% relative to last year's second quarter due to strength in equity capital markets (ECM) and advisory. The trading businesses were more challenged, with Fixed Income Markets net revenue down 6% relative to the prior year quarter due in large part to low volatility and a strong year-ago quarter which included solid results in currencies due to the BREXIT vote. Equity markets net revenue was down 11% amid low volatility, but securities services was up 10% due to growth in client volumes. Citi's 2Q17 net interest revenue of $11.17 billion held relatively steady relative to the prior year period amid continued deposit growth and balance sheet growth, but the net interest margin declined to 2.72% in 2Q17 from 2.86% in the prior year quarter. This was due in large part to holding higher cash balances for resolution planning purposes and wind down of legacy assets. Fitch continues to view Citi's liquidity position as sound. Total deposits grew 2% relative to the prior year period to $958 billion. Similarly the bank's loan-to-deposit ratio remained solid at 66% this quarter. 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 was 13%, up 50 basis points from the year-ago quarter. The increase was due primarily to net income and incrementally lower risk-weighted assets offset by common share dividends and share repurchases. Additionally, Citi's Supplementary Leverage Ratio at the parent company remained strong at 7.2% as of 2Q17, well above regulatory minimums. Over the last 12 months Citi returned $12.2 billion of capital to shareholders via a mix of dividends and share repurchases, which equates to a payout ratio over the last 12 months of approximately 79%. Any future corporate tax reforms may impact Citi's earnings with valuation allowances recorded against the DTA and, potentially, a capital charge, but this would be offset by higher earnings over time. On June 22, 2017, the Federal Reserve released the results of the Dodd-Frank Act Stress Tests (DFAST) results which Citi passed. Fitch estimates that, relative to other DFAST institutions, Citi was more adversely affected by the global market shock and counterparty default scenarios. On June 28, 2017, Citi received a non-objection to its annual capital plan under the Federal Reserve's Comprehensive Capital Analysis and Review, which authorizes the firm to increase its dividend to $0.32 per share repurchase up to $15.6 billion of common equity between July 1, 2017 and June 30, 2018 for a total capital return over the next four quarters of $18.9 billion. Contact: Julie Solar Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Doriana Gamboa Senior Director +1-212-908-0865 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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