Fitch: Citi Reports Disappointing Fourth Quarter

Thu Jan 16, 2014 3:37pm EST

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(The following statement was released by the rating agency) CHICAGO, January 16 (Fitch) Citigroup's (Citi) fourth quarter 2013 (4Q'13) reported results declined 17% sequentially, driven mainly by weaker trading results, elevated legal and related charges, and higher provision expenses. This was partially offset by margin and spread income expansion, well-controlled core expenses, and decent loan growth. Further, other credit risk fundamentals remain strong with continuing improvements in liquidity and capital levels. Excluding the CVA/DVA loss of $164 million and a $189 million gain on the credit card divestiture, Citi's estimated core return on average assets (ROAA) declined to just 57 basis points (bps) during the quarter. This performance is viewed as relatively weak, both in absolute terms and when compared to its large bank peers. Nonetheless, performance is much improved from the 4Q'12, and full-year comparisons also reflect an overall improving financial profile. Citi's full-year reported ROA was approximately 74bps (adjusted 73bps), as compared to 40bps (adjusted 62bps) in 2012 which includes a couple of large one-time charges, primarily the significant repositioning charges in 4Q'12, and impairments related to the divestiture of the Morgan Stanley Smith Barney joint venture and Akbank. By business line, Citi's Securities & Banking net income was most hard hit in 4Q'13, falling 11% on a sequential basis (excluding CVA/DVA). Most of Citi's Securities & Banking revenue comes from its fixed income markets business, which fell 16% from the prior quarter. This compares poorly to improved FICC income for BAC and GS, and a more modest decline for JPM. Positively, Citi reported strong growth in investment banking revenues on a linked-quarter basis reflecting growth in equity underwriting and M&A. Supported by stronger investment banking and equity markets, as well as lower expenses in 2013, full-year net income in securities & banking was up 9% from 2012. Global Consumer Banking net income was flat on a sequential basis, supported by growth in Latin America and the Best Buy card portfolio acquisition, offset by continuing declines in mortgage refinancing activities. Transaction Services net income was down slightly on a sequential basis. Assets under custody are up 10% from a year ago. Citi continues to wind down its assets housed in Citi Holdings, which fell to $117 billion or 6% of consolidated assets. Despite the continual wind-down, Citi Holdings continues to drag down consolidated earnings, with a loss of $422 million in 4Q'13 related to the aforementioned legal charges. Positively, mortgage repurchase provision expenses have abated, and Citi has now finalized settlements with both Fannie Mae and Freddie Mac. Future repurchase-related risk would stem from sponsored private-label securitizations (PLS), though Fitch views Citi as relatively less exposed to future PLS legal risk than both BAC and JPM. Legal and related charges remain elevated at approximately $800 million during the quarter, totaling over $3 billion for the year. Fitch expects legal charges will likely remain elevated over the near- to intermediate-term for Citi and its large bank peers. To date, litigation losses have been materially less than at both BAC and JPM. However, Citi remains exposed to LIBOR, currency trading, and credit-default swap investigations, to name a few, though Fitch notes that visibility into future legal-related costs is very limited. Unlike its large bank peers, Citi reported both a sequential increase in net charge-offs (NCOs) and provision expenses, up 5% and 16%, respectively, driven by higher credit costs in Latin America and Citi Holdings. However, Citi continues to release reserves, albeit at a measured pace, especially when compared to some of its large bank peers. As such, its level of reserves-to-loans remains the highest of the large banks at roughly 3% at year-end. This is viewed as prudent, given still elevated levels of non-performing assets (NPAs) (inclusive of accruing troubled debt restructurings). Citi's capital ratios continued to remain very strong. Retained earnings growth during 4Q'13 was offset by an increase in operational risk-weighted assets, reflecting model changes during the quarter that incorporated recent external operational losses. Under Basel III, Citi's estimated Tier I common ratio was 10.5%, and above its current long-term target of 10%. Citi also disclosed that its estimated Basel III supplemental leverage ratio was an estimated 5.4% at Dec. 31, 2013, while Fitch expects the bank-level ratio remained above the 6% bank-level requirement. Contact: Julie Solar Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 West Madison Chicago, IL 60602 Meghan Neenan Senior Director +1-212-908-9121 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. 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