April 15, 2014 / 4:21 PM / in 3 years

Fitch: Citi's 1Q'14 Earnings Solid in Face of Industry Challenges

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(The following statement was released by the rating agency) CHICAGO, April 15 (Fitch) Citigroup's (Citi) first quarter 2014 (1Q'14) reported results reflect broad industry challenges in fixed income and mortgage banking, according to Fitch Ratings. Excluding CVA/DVA, which were immaterial, Citi reported net income of $4.1 billion on $20.1 billion of revenues. Although 1Q'14 was sequentially higher, this reflects seasonal factors, particularly in securities trading. Expenses remain controlled, reflecting Citi's focus on improving its overall efficiency. Core return on assets came in at 0.89 basis points (bps), which reflects progress towards closing the gap with some of its large bank peers. While overall results were solid, Citi was not immune to the slowdown in fixed income markets, which hurt its Institutional Clients Group results. Fixed income trading was down 18% (excluding CVA/DVA) vs. 1Q'13 reflecting the fall off in activity, particularly in securitized products, rates, and currencies. Investment Banking was down sequentially and vs. 1Q'13. Some of the decline in fixed income and investment banking was offset by growth in Corporate Lending and Equities. International Consumer Banking showed modest revenue growth overall despite the impact of market exits in some EMEA countries. The year-over-year growth mainly came from Latam. Fitch notes that net charge-offs (NCOs) in Latin American continue to deteriorate mainly stemming from higher credits in Mexico. Some of the increase was related to incremental credit costs related to the Pemex supplier program, while Citi also attributed some of the deterioration to Mexico card portfolio seasoning. Citi expects that the full-year NCO rate in Latin America will stabilize around 4.6% due to fiscal reforms in Mexico and generally slower pace of economic recovery in the country. As a result, Fitch expects Citi to maintain a conservative approach to loan loss reserve levels in the international consumer segment, which continued to be the only business segment reporting a reserve build in 1Q'14. North American Consumer Banking reported strong growth on a sequential basis in net income despite overall revenue declines, mainly due to lower mortgage refinancing activity. Results were helped by improved credit costs and $269 million reserve release. In terms of efficiency, the consumer banking business is somewhat below Citi's targeted 2015 efficiency ratio of between 49% and 52%, running around 55% in 1Q'14. Citi Holdings was less of a drag on 1Q'14 earnings with a loss of $292 million as revenues showed some growth, though Fitch does not consider the 10% linked-quarter revenue growth to be sustainable. Citi continues to wind down its assets, and ended the quarter with $114 billion in total assets at Citi Holdings or 6% of consolidated assets. Following the announcement of the proposed settlement regarding private-label securitization repurchase claims, Fitch views future repurchase risk as manageable. Assuming this settlement is ratified, Citi has now addressed a majority of its legacy repurchase claims, including Fannie, Freddie, FHFA, and now a bulk of the PLS activity that occurred between 2005 and 2008. This agreement does not cover mortgage loans sold through CitiMortgage, Inc., or roughly $24.6 billion, a manageable amount to potentially resolve. Legal and related charges remain elevated at approximately $945 million during the quarter, reflecting ongoing challenges facing the industry on a number of fronts. Fitch expects legal charges will likely remain elevated over the near-to-intermediate term for Citi and its large bank peers. Although Citi's legal charges have been below peer banks thus far, 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. Citi's capital ratios continued to remain very strong and generally above global peers. Citi reported that it would already be in compliance with the supplementary leverage ratio at the holding company with a 5.6% ratio. The Federal Reserve's rejection of Citi's capital distribution will cause Citi to continue to build capital over the coming quarters and further delays Citi's return on capital objectives. Contact: Julie Solar Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 West Madison Street 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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