The report below.
Fitch Ratings-New York-06 February 2009: Fitch Ratings has downgraded the following ratings for Citigroup Inc. (Citi):
--Individual to 'C/D' from 'C'
--Preferred to 'BB' from 'BBB'.
These ratings are on Rating Watch Negative by Fitch. At the same time, Fitch has affirmed Citi's Long-term and Short-term Issuer Default Ratings (IDRs) of 'A+' and 'F1+', respectively,given Citi's systemic importance and the magnitude of support measures from the U.S. government. The Outlook for the Long-term IDR remains Stable. A list of Citigroup entities affected by rating changes is listed below.
Fitch's downgrade of Citi's Individual Rating reflects current and expected financial performance challenges. Citi recorded massive losses in fourth quarter-2008 (4Q'08) and faces the
prospect of surging asset quality problems globally. Fitch recognizes Citi's efforts in building up its loan loss reserves and reducing problematic exposures across many different categories (including subprime ABS CDOs, Alt-A securities,leveraged finance, CMBS, monolines, and SIVs, among others).Nevertheless, global economic difficulties are causing the inflow of new problems ranging from U.S. and international consumer exposures to large corporate exposures. Consequently,provisioning needs are expected to remain quite elevated for2009. The U.S. government's loss cap guarantee reduces the long tail risk on a U.S. portfolio of approximately $300 billion.That said, Citi's first loss exposure of $30 billion (above existing reserves) remains sizeable.
In addition to performance challenges, the following factors drove Fitch's decision to downgrade the Preferred Rating:
--a very high level of preferred in the capital structure;--large servicing costs on preferred;
--the potential for the deferral to conserve capital.
Following the U.S. government capital injections, preferred and trust preferred instruments now total over $100 billion versus tangible common equity of $29 billion at year-end 2008. The cost associated with preferred and trust preferred is considerably higher in 2009 when compared to 2008. Quarterly costs associated with preferred and trust preferred instrument snow total $1.8 billion including the new government preferred issues. When combined with a weak performance outlook, the magnitude of these ongoing costs raises the probability for deferral. (Please see commentary: Fitch Sees Elevated Risk of Bank Hybrid Capital Coupon Deferral in 2009 dated Feb. 4, 2009 available on Fitch's web site at 'www.fitchratings.com').
The Individual Rating and Preferred Ratings could face incremental pressure depending on the scope of future losses by Citi. On the other hand, a return to profitability and positive internal capital generation are key factors towards stabilizing Citi's Individual and Preferred Ratings.
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