There goes Citi...
Moody's Investors Service confirmed the A3 long-term rating of Citigroup and the A1 long-term and Prime-1 short-term ratings of Citibank N.A. At the same time, Moody's downgraded the short-term rating of Citigroup (the holding company) to Prime-2 from Prime-1. The actions conclude a review for possible downgrade announced on June 2, 2011. The outlook on the long-term senior ratings remains negative.
The confirmations reflect two offsetting factors: a decrease in the probability that the US government would support the bank, if needed, and an improvement in the bank's stand-alone credit profile reflected in an increase in Citibank N.A.'s unsupported baseline credit assessment (BCA) to Baa1 from Baa2.The downgrade of the short-term rating of Citigroup results from the reduced assumption of systemic support. Typically A3-rated companies are rated Prime-2 for their short-term obligations.
Citigroup's Prime-1 had been an exception to this general practice, based on the view that short-term creditors benefited the most from the unusually high level of government support provided to banks during the financial crisis. The downgrade to Prime-2 is not a reflection of Citigroup's liquidity profile, which strengthened significantly in the past two years and is robust.
The ratings affected are as follows:
Citigroup Inc.: Moody's confirmed the A3 long-term rating of Citigroup Inc. but downgraded its short-term rating to Prime-2 from Prime-1. The holding company's long-term senior debt ratings now incorporate two notches of uplift due to systemic support, down from three notches previously.
Citibank N.A.: Moody's confirmed or affirmed all of the bank's supported ratings (A1 for deposits and senior debt and short-term at Prime-1). The bank's deposit and senior debt ratings now incorporate three notches of uplift due to systemic support, down from four notches previously. At the same time, the unsupported bank financial strength rating (BFSR) of
C- was affirmed, but the bank's corresponding unsupported BCA was raised to Baa1 from Baa2.
Hybrid-equity securities issued by or guaranteed by Citigroup Inc., which do not incorporate any government support, were upgraded by one notch reflecting the one notch improvement in the bank's unsupported BCA.
Junior subordinated securities were upgraded to Baa3 (hyb) from Ba1 (hyb).
Moody's will publish separate press releases on other institutions covered by the review announced on June 2, 2011.
The reduction in support assumptions resulted in Moody's lowering the short-term rating of Citigroup Inc. to Prime-2 from Prime-1, even though Citigroup's long-term rating was confirmed at A3. Issuers that are rated
A3 are normally also rated Prime-2 by Moody's. Citigroup's Prime-1 was an exception based on the unusually high level of government support provided during the crisis to important financial institutions to the benefit of short-term creditors. With the return of government support to pre-crisis levels, the short-term rating is now positioned at the more common Prime-2 level relative to the A3.
Moody's confirmed the long-term ratings on Citigroup and Citibank at current levels because the rating impact of a fall in Moody's government support assumptions was offset by an improvement in Citibank N.A.'s intrinsic credit strength as reflected in the increase in its stand-alone BCA to Baa1 from Baa2.
The rating uplift from Moody's government support assumptions for Citibank N.A.'s deposits, senior-debt, and senior-subordinated-debt ratings is now three notches, as opposed to the previous four. This represents a pre-crisis level of support.
Moody's continues to see the probability of support for highly interconnected, systemically important institutions in the United States to be very high, although that probability is lower than it was during the financial crisis. During the crisis, the risk of contagion to the US and global financial system from a major bank failure was viewed as too great to allow such a failure to occur -- a view borne out in the aftermath of the Lehman failure. This led the government to extend an unusual level of support to weakened financial institutions and Moody's to incorporate the expectations of such support in its ratings. Now, having moved beyond the depths of the crisis, Moody's believes there is an increased possibility that the government might allow a large financial institution to fail, taking the view that contagion could be limited.
Moody's decision to assign a negative rating outlook reflects the possibility it may further reduce its systemic support assumptions in the future as a consequence of the process set in motion by the enactment of the Dodd-Frank Act. Under the rules recently finalized by the FDIC, the orderly liquidation authority included in Dodd-Frank demonstrates a clear intent to impose losses on bondholders in the event that a systemically-important banking group (such as Citigroup) was nearing failure. If fully implemented, the provisions in Dodd-Frank could further lower systemic risk by reducing interconnectedness among large institutions and could further strengthen regulators' abilities to resolve such firms.
However, the final form of several critical components of Dodd-Frank intended to reduce such interconnectedness, such as resolution plans or changes to the over-the-counter derivatives market, are still pending.
There is also no global process yet in place whereby regulators could resolve a global financial company such as Citigroup in an orderly fashion. As a result, Moody's believes that it would be very difficult for the US government to utilize the orderly liquidation authority to resolve a systemically important bank without a disruption of the marketplace and the broader economy.
The increase in Citibank N.A.'s unsupported BCA to Baa1 from Baa2 reflects improvement in Citigroup's risk profile and progress in installing better risk management. The improvement in the risk profile is a product of 1) much higher capital, which was initiated by the government-led bailout in the third quarter of 2009, 2) new management effectively reducing a sizable inventory of problematic assets, during a time when the government's ownership was reduced to zero, 3) the installation of a risk-management framework that is reducing risk concentrations, and 4) the improvement in the liquidity profile of both the bank and non-bank entities. The outlook on the BFSR is stable.
The principal methodologies used in rating were "Bank Financial Strength
Ratings: Global Methodology" published in February 2007, "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" published in March 2007, and "Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt" published in November 2009.
Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Citigroup Inc. is headquartered in New York City. Its reported assets were $1,957 billion at June 30, 2011.