TEXT - Fitch on Citigroup

Oct 16 - Third-quarter results generally supported improvement in Citigroup Inc.'s (Citi) credit profile, despite recent disappointments related to the performance of the Morgan Stanley-Smith Barney (MSSB) joint venture. Taking into account the improvement in quarterly results, Fitch views today's announced senior management changes as broadly neutral for the bank's credit profile. Citi's reported $468 million 3Q12 earnings obscured solid core earnings for the quarter. Reported revenues reflect drags from DVA/CVA ($776 million) and the charge related to the incremental sale of the MSSB joint venture ($4.7 billion pretax). Adjusting for these and other significant items, Citi had core revenues of $19.4 billion, which was a modest improvement on both a linked-quarter and a year-over-year basis. Backing out noncore items, Fitch estimates that Citi's third-quarter adjusted pretax return on assets (ROA) of 0.9% showed improvement over the 0.7% figure reported in the second quarter and 0.6% a year earlier. As expected, Securities and Banking (S&B) turned in a solid quarter, adjusting for DVA/CVA. This primarily reflects strong results in Fixed Income, which was aided by weak comparisons with the prior quarter and year. We expect that S&B will remain volatile given the still unsettled capital markets environment. Citi continues to make progress in bringing down noncore assets. Following the sale of the additional stake in MSSB, Citi now has $171 billion of noncore assets, predominantly residential mortgages, at Citi Holdings, down from $191 billion in the previous quarter. As Fitch acknowledged in its recent affirmation, the pace of reduction in noncore assets will likely slow going forward. Still, we expect the negative earnings impact of Citi Holdings to remain a drag on overall results in future periods. As with other large banks regulated by the Office of the Comptroller of the Currency (OCC), Citi was affected by new guidance related to the treatment of mortgage loans in cases where the borrower has gone through Chapter 7 bankruptcy proceedings. This had the effect of accelerating chargeoffs on these loans, despite the fact that they were current. To a large extent, banks had already reserved for these loans. We view the resignation of Citi CEO Vikram Pandit as an unexpected but credit-neutral event that will likely have no material impact on the bank's credit profile or ratings in the near term. We regard designated successor Michael Corbat's track record, including his leadership of Citi Holdings, as generally positive, and his background in international banking fits well with Citi's core strategic strengths.