Citigroup's (Citi) second quarter 2014 (2Q'14) results were negatively
impacted by the company's settlement with the U.S. Department of Justice
(DOJ) and certain state attorneys general. During the quarter, Citi
incurred a $3.8 billion pre-tax charge to reflect the cost of the
settlement. Excluding CVA/DVA, which were immaterial this quarter, Citi
reported net income of $181 million on $19.4 billion of revenues.
Adjusting for this and the settlement, Fitch Ratings views the decline
in adjusted revenues down both sequentially and versus prior year
reflecting general weakness in fixed income trading. The company
continues to keep a focus on operating costs, which were down 3% from
the prior quarter. Excluding the settlement, core earnings would have
been $3.9 billion.
The overall cost of the settlement is $7 billion, with $4.5 billion
representing fines and penalties, while $2.5 billion is earmarked for
consumer relief. Although Citi's 2Q'14 results were marred by the
settlement, Fitch considers the cost to be manageable in the context of
Citi's capital position and future earnings potential. Moreover, it
reflects continued progress by Citi to move past legacy issues stemming
from the financial crisis. Notably, Citi's settlement resolves
investigations into its residential mortgage lending and securitization
as well as its collateralized debt obligation (CDO) activities during
period covered by the settlement (2003-2008).
As expected, Citi's fixed income trading within the Institutional
Clients Group (ICG) struggled, with revenues (ex CVA/DVA) down 12%
versus the prior year. The downdraft in fixed income trading, which is
not unique to Citi, reflects lower market volatility, subdued clients
volumes, and responses to tougher regulatory standards. The company's
investment banking and corporate lending were relative bright spots in
an otherwise challenged quarter for ICG.
International Consumer Banking struggled during the quarter as a result
of repositioning charges, mainly in Korea. Year-over-year revenue growth
came mainly rom Latam, while Asia and EMEA were slightly down. Credit
costs continued to increase owing to portfolio growth and seasoning.
Fitch notes that net charge-offs (NCOs) in Latin America continue to
deteriorate mainly stemming from higher credits in Mexico and Fitch
anticipates that Mexican NCOs will stabilize and moderate from current
levels. As such, Fitch expects that Citi will to maintain a conservative
approach to loan loss reserve levels in the international consumer
North American Consumer Banking also showed weakness mainly due to lower
mortgage refinance volume. For the quarter, the segment reported $1
billion of net income, although this was helped by a $396 million
reserve release reflecting solid credit performance. Citi's credit card
results were relatively flat as lower receivables balances were offset
by higher purchase volumes and improved spreads on the portfolio. Credit
costs in the card portfolio remain strong and in Fitch's view are likely
hovering near a trough in the credit cycle. As such, Fitch would expect
some reversion in card credit metrics over time, but expects this to be
Citi continued to make progress in reducing the impact of Citi Holdings
on overall results. Citi Holdings generated net income of $244 million
while assets continued to shrink and came in at $111 billion. Citi
Holdings now represents 6% of total assets. Fitch would expect the
results from Citi Holdings to remain lumpy going forward repositioning
costs could offset reserve releases as the portfolio continues to wind
down. Nevertheless, Fitch views positively the absence of a drag on
overall results this quarter.
Citi's capital ratios continued to remain very strong and generally
above global peers. Citi's Basel III Tier 1 Common equity (CET1) ratio
modestly increased to 10.6% from 10.5% in the prior quarter. Fitch views
this as significant because it included the DOJ settlement which
restrained capital generation during the quarter as well as $13bn growth
in risk-weighted assets (the denominator in capital ratio calculations).
Citi also reported that it would already be in compliance with the
supplementary leverage ratio at the holding company with a 5.7% ratio.
Additional information is available at 'www.fitchratings.com'.
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