April 16 - Standard & Poor's Ratings Services said today that its ratings on
Citigroup Inc. (Citi; A-/Negative/A-2) are not immediately affected by the
company's good first-quarter results, given the current operating conditions.
Excluding Citi's $1.3 billion loss on the fair value adjustment of its debt,
the company generated Standard & Poor's-adjusted pretax earnings of $4.9
billion in first-quarter 2012, compared with $4.3 billion in first-quarter
2011. The first-quarter results benefited from $1.2 billion in reserve
releases, versus $1.5 billion in fourth-quarter 2011 and $3.3 billion in
Standard & Poor's adjusted revenue for Citicorp rose 5.7% year over year, with
all lines of business contributing to revenue growth. In North America, higher
mortgage revenues buttressed Citicorp's retail banking business, while strong
fixed income trading results, particularly in interest rates and currencies,
resulted in higher securities and banking revenue. Based on the seasonality of
its capital markets business, our expectation for lower mortgage fees, and
possible macroeconomic uncertainty, we believe Citi's revenue will decline
moderately during the remaining quarters of 2012.
Citi's total expenses declined 6.8% in the first quarter, compared with the
previous quarter, and were basically flat year over year. Management believes
it is still on track to reduce expenses by $2.5 billion to $3 billion in 2012
(assuming currency rates remain flat).
Citi's losses in Citi Holdings Inc., the unit that houses the nonstrategic
assets, continue to weigh down returns. Pretax losses totaled $1.7 billion in
the first quarter, down slightly from the $1.8 billion in the previous quarter
and $1.5 billion in first-quarter 2011. Citi Holdings' assets declined 7%,
from fourth-quarter 2011 (adjusted to exclude the transfer of retail branded
cards to Citicorp) to $209 billion. We expect Citi Holdings' assets to
decrease $40 billion to $65 billion by year-end 2013. To improve its risk
profile, we believe Citi would need to further reduce its North American
mortgage portfolio within Citi Holdings, which totaled $104 billion at the end
of the first quarter.
Although credit costs remain elevated, net credit losses were down 3.7% in the
first quarter, compared with a decline of 12.3% in the fourth quarter.
Delinquency trends were mixed, with delinquencies rising in some of Citi's
international exposures, while declining in North America, including
residential mortgages. Still, we believe that charge-offs may increase in this
asset class in the coming quarters, assuming further declines in home prices.
Reserve coverage to nonperforming loans was an adequate 248%, but below the
previous quarter's coverage of 268%.
Citi's Basel I Tier 1 common capital ratio was 12.4% as of the first quarter,
up 60 basis points from the previous quarter. Management is targeting a Tier 1
Basel III common capital ratio of more than 8% by year-end 2012. Given that
regulators recently rejected Citi's plan for capital return, we believe that
the company will build its capital ratios at a quicker pace than most of its
peers. We also believe that Citi will increase its Standard & Poor's
risk-adjusted capital ratio to more than 7.0% over the next 18-24 months.
Citi's net exposure to Greece, Ireland, Italy, Portugal, and Spain totaled
$8.1 billion at the end of the first quarter, slightly higher than the
previous quarter but still manageable, in our view. We believe a contagion of
the European financial crisis in the U.S. could have a negative affect on the
Our outlook on Citi remains negative. We will continue to evaluate the
potential impact regulatory reform could have on Citi and the evolution of its
stand-alone credit profile. We will also continue to monitor Citi's ability to
shed additional assets from Citi Holdings, including further reducing the
firm's North American mortgage holdings over the next two years, which, if
achieved, would help reduce Citi's risk exposure. However, the challenging
macroeconomic conditions could make it difficult for Citi to further lower the
risk on its balance sheet. We will monitor Citi's earnings capacity and any
significant impact it may have on our forecasted RAC ratio.
Standard & Poor's, a part of The McGraw-Hill Companies (NYSE:MHP), is the
world's foremost provider of credit ratings. With offices in 23 countries,
Standard & Poor's is an important part of the world's financial infrastructure
and has played a leading role for 150 years in providing investors with
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