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TMCNet:  Fitch: Citi's 2Q'14 Hurt by $7 Billion DOJ Settlement

[July 15, 2014]

Fitch: Citi's 2Q'14 Hurt by $7 Billion DOJ Settlement

NEW YORK --(Business Wire)--

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 segment.


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 manageable.

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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