Citigroup's (Citi) fourth quarter 2014 (4Q'14) results reflect the ongoing drag of legal-related charges on the company, and the difficult operating environment. Excluding the impact of CVA/DVA during all periods, Citi's adjusted return on assets (ROA) was just 7 basis points (bps) in 4Q'14, and 40bps for the year, well below next year's targets of 90bps to 110bps. The full-year ROA improves to 59bps when both CVA/DVA and the 2Q14 mortgage settlement are excluded. Citi's earnings profile continues to lag its large bank peers, though the company remains committed to an ROA of at least 90bps in 2015.
The legal and repositioning charges were not excluded, as they represent more ongoing costs to the company, in Fitch's view. These amounts, previously disclosed, were $2.9 billion and $655 million, respectively, during the quarter. While Citi disclosed it believes it has also already recorded a 'significant portion' of legal-related charges, there continues to be very little visibility into pending litigation for Citi or its peers. As such, it is unclear how well prepared Citi is prepared for any settlements, particularly further foreign-exchange matters that may occur in 2015.
While Citi was able to report revenue growth in North America Consumer Banking, partially aided by a mortgage loan sale, performance in Markets was worse than previously guided, reflecting a difficult trading environment and seasonality. Fixed income was down 16% from a year ago, and 33% on a linked-quarter basis, while equity markets were down 3% and 38%, respectively. The FICC decline, particularly in spread products (including credit and muni), and G10 rates was attributed to more volatile markets, wider credit spreads, and less liquid market conditions, especially in October and again in December.
While a focus for Citi, along with the industry given revenue headwinds, expenses (including legal and repositioning charges) continue to tick up given increased regulatory and compliance-related spending. Expenses were 11% higher on a linked-quarter basis, and up 21% from a year ago. The revenue headwinds and elevated expenses contributed to negative operating leverage both in 4Q'14 and for the full year.
With regard to Citi's exposure to falling oil prices, the company disclosed energy-related funded and unfunded exposure totaled approximately $60 billion, or around 35% of tangible common equity at YE2014. The company also disclosed during its earnings call that around 80% of its borrowers are Investment Grade, viewed favorably as this is likely a higher proportion than some peer banks.
Global Consumer Banking's reported loan losses increased to 2.33% during the quarter, and were 2.24% excluding losses related to homebuilder exposure in Mexico that was fully reserved for. Given Citi's higher loss content credit card book and emerging markets exposure, loan losses tend to be higher than peer averages. Citi's total NCOs, including consumer and wholesale, were approximately 140bps in 4Q14, as compared to just 40bps for BAC and 65bps for JPM. As such, Fitch expects Citi to maintain a conservative approach to loan loss reserve levels. Citi reported a 19% increase in its provision for loan losses, with reserves-to-total loans now at 2.5% at YE2014.
Citi continues to wind down its Citi Holding assets, and ended the quarter with less than $100 billion in total assets or roughly 5% of consolidated assets. Citi Holdings also reported a quarterly profit during the quarter, its second in a row, and excluding the 2Q14 mortgage settlement, three quarters in a row.
There will likely be an increase in total assets in Citi Holdings next quarter, as consumer operations in the 11 markets that Citi plans to exit will be reported in this segment. The financial impact of these planned exits would have improved the pro forma ROA in Global Consumer Banking by 15bps to 1.88% for the full year 2014. In addition to this decent earnings improvement, Fitch views these planned divestitures favorably as they reduce future compliance, operational, and reputational risks.
Citi announced it also has plans to exit some non-core securities services and transaction businesses in the Institutional Clients Group (ICG), including from hedge fund administration, prepaid cards, certain transfer agency operations, and wealth management administration. The ROA for ICG would have improved by 1bp to 0.92% in 2014, on a pro forma basis, and the efficiency ratio would improve by 100bps as well to 58.4%. These operations will also be reported in Citi Holdings next quarter.
Citi's capital ratios continued to remain very good and generally above global peers. The company's estimated Common Equity Tier 1 under Basel III on a fully phased-in basis fell 15bps to 10.5% at quarter-end. The decline was primarily attributed to a pension-related other comprehensive income adjustment and an incremental increase in operational risk weighted assets. It is difficult to calculate Citi's potential G-SIB surcharge under the proposed U.S. rules. However, Fitch expects that its capital surcharge will likely increase from its current 2% buffer under international rules.
Citi also reported that it would already be in compliance with the supplementary leverage ratio at the holding company with a 6% ratio.
Additional information is available at 'www.fitchratings.com'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
