DBRS Morningstar Confirms Long-Term Ratings of Citigroup at A (high), Stable Trend

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Citigroup Inc. (Citi or the Company), including the Company’s Long-Term Issuer Rating of A (high). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Citibank, N.A. (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA (low), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The ratings and Stable trend reflect the scale, quality and diversity of Citi’s franchise. The Company’s strong balance sheet fundamentals also provide key support to the ratings. The ratings and trend also consider the challenges Citi is facing with improving profitability, while making the necessary investments in response to its regulatory Consent Orders, along with executing its strategy transformation. Furthermore, we also see Citi as exposed to a wide range of capital markets activities, which support the franchise value, but elevate risk levels. Citi’s susceptibility to emerging market weakness, trade disruptions and political uncertainties, given its unique global positioning is also taken into consideration.

RATING DRIVERS
Given Citi’s ongoing transformation, an upgrade is unlikely over the medium term. Over the longer term, if Citi demonstrates success in leveraging its franchise to improve risk-adjusted returns across businesses, while demonstrating improved controls and systems through the termination of its Consent Orders, the ratings would be upgraded. Conversely, signs of notable credit deterioration that has a prolonged adverse impact on profitability would result in a ratings downgrade.

RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong
The Company has a very strong franchise with an extensive global reach. The most global of U.S. banking organizations, Citi is one of only a few banking organizations worldwide with the brand and infrastructure to provide a full range of banking services to multi-national corporations globally. At the same time, these global operations can provide customers in local markets with access to Citi’s broad international capabilities. The Company’s global scope shows in the scale of its international revenues, with more than half of its revenues generated outside North America in 2022.

Earnings Combined Building Block (BB) Assessment: Good
Citi’s earnings power remains resilient. For 2022, the Company reported a return on average common equity of 7.7%, still at the low end of the U.S. peer group. Performance reflected significantly higher net interest income and strong trading results, partially offset by elevated operating expenses related to the Company’s ongoing transformation. Over the medium term, Citi is targeting a return on tangible common equity of 11% to 12%, which we view as achievable.

Risk Combined Building Block (BB) Assessment: Strong/Good
While Citi’s size and scale provide many benefits, particularly with its ability to spread costs across a broader platform, managing risk across such a large, complex organization is a critical challenge. In October 2020, the Federal Reserve and OCC issued Consent Orders against the Company that cited "significant ongoing deficiencies", criticizing Citi's systems and controls, and requiring demonstrated progress for remediation. Remediation efforts will result in additional expenses at a time when profitability metrics already lag peers. Until these issues are resolved, we expect that Citi will continue to have challenges closing the earnings gap between peers, which is a ratings constraint. Positively, the Company’s credit performance continues to be strong across regions and reserves remain substantial at $17.0 billion, or 2.60% of total loans.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong
Citi’s sizable deposit base of $1.4 trillion, which is sourced through various channels, including its retail bank and Treasury and Trade Solutions business, anchors the Company’s sound funding profile. Citi’s reliance on wholesale funds primarily reflects its capital markets businesses, and is well diversified by geography and investor. Long-term debt is well-laddered by maturity. Secured funding is done shorter-term, presenting potentially an overnight funding risk, though funding for less liquid assets is typically done on a term basis. Liquidity remains robust, with high-quality liquid assets averaging $569 billion during 4Q22, representing about one-quarter of total assets.

Capitalization Combined Building Block (BB) Assessment: Strong
Citi’s capital metrics and improving internal capital generation provides a substantial cushion to absorb unexpected losses. The Company’s Standardized CET1 ratio stood at 13.0% at YE22, in line with its internal target (for mid-2023) and above its 12.0% regulatory requirement in 2023.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/409600

ESG CONSIDERATIONS
Governance (G) Factors
This factor is relevant for Citi, but it does not affect the ratings or assigned trend to Citi. In October 2020, the Federal Reserve and OCC issued Consent Orders against the Company that cited "significant ongoing deficiencies", criticizing Citi's systems and controls, and requiring demonstrated progress for remediation. Remediation efforts have been underway and the Company continues to incorporate regulatory feedback into these ongoing efforts.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Global Methodology for Rating Banks and Banking Organizations (June 23, 2022): https://www.dbrsmorningstar.com/research/398693/dbrs-morningstar-publishes-updated-global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Guarantees and Other Forms of Support https://www.dbrsmorningstar.com/research/394683 (April 4, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.

Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the “Global Methodology for Rating Banks and Banking Organizations” was used to evaluate the Issuer and the “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” was used to rate the subsidiaries guaranteed by the Issuer. In addition the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings was used to asses ESG risk.

The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:
The last rating action on this issuer took place on February 9, 2022, when all ratings were confirmed.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Michael McTamney, Senior Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: 24 July 2001

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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