ACRA Modelling Day - 2018

ACRA affirms AAA(RU) to AO Citibank, outlook Stable

The credit rating assigned to AO Citibank (hereinafter, Citibank) is based on high standalone creditworthiness assessment (SCA) and very high likelihood of extraordinary support from its parent company with a high creditworthiness. The Bank's SCA stems from notable positions in target market segments, strong capital adequacy, and adequate risk profile.

Citibank is a large universal bank, one of the top 20 Russian banks in terms of assets and capital, and it ranks 18th among bank groups in terms of capital. Citibank is a 100% subsidiary, through a chain of intermediate structures, of Citigroup Inc. (hereinafter, Citigroup or the Supporting Organization).

Key rating assessment factors

Very high likelihood of extraordinary support from the key shareholder. ACRA is of the opinion that, in case of need, Citigroup will provide Citibank with short-term and long-term funding and capital injections, because:

  • The Russian market is strategically important for Citigroup as part of its global presence;
  • There is a pronounced operational integration: Citibank is integrated in the Citigroup’s unified capital management, risk management, strategic planning and internal control systems;
  • There is a substantial amount of guarantees issued by Citigroup companies for loans granted by Citibank (40% of its loan portfolio as at December 31, 2017);
  • In case of Citibank’s default, Citigroup may face substantial operational and financial risks.

ACRA assesses the country risk of the Supporting Organization’s jurisdiction (USA) against the country risk of Russia and the Supporting Organization’s creditworthiness as strong and the degree of association between Citibank and Citigroup as very strong. Therefore, the Bank's credit rating is on par with the Russian Federation.

High business profile assessment hinges on the Bank's strong franchise in the premium retail banking and the large corporate and international business segments. Such range of business lines and a moderate risk appetite result in the Citibank’s ability to generate a sustainably high operating income with a minimum susceptibility to economic cycle phases. Due to the universal nature of its business, Citibank’s operating income is highly diversified, which is evidenced by the Herfindahl-Hirschman Index of 0.11 in 2017. The management quality has remained high.

Strong capital adequacy has a positive effect on the SCA. Due to a sustainably high level of its common capital, under both international standards (Tier-1 ratio was 10.4% at end-March 2018) and Russian standards (N1.2 ratio was 10.44% at June 1, 2018), Citibank is able to withstand a substantial (much above 500 bps) increase in the cost of risk, without the risk of trespassing the regulatory standards. Citibank shows stable returns, irrespective of the economic cycle phases, due to its high NIM of 5.8% in 2017 and a low cost of risk. Citibank applies a large portion of profits to pay dividend, which is negative for its average capital generation ratio (ACGR) (54 bps on average for the last five years).

ACRA affirms the adequate assessment of the Bank's risk profile, as the volume of problem loans is low and the loan portfolio concentration is relatively high. As of March 31, 2018, the share of NPL90+ was as low as 0.1% of the loan portfolio, while the share of problem and potentially problem loans was below 5%. The share of loans granted to top 10 groups of borrowers exceeded 30%. ACRA assesses the financial stability of the Bank's counterparties under contingent liabilities as high. The Bank places most of its temporary free funds with the Bank of Russia and Citigroup companies or purchases Russian sovereign bonds. The risk profile assessment is also supported by the adequate quality of the risk management system.

Strong liquidity combined with well-balanced funding profile. Citibank firmly withstands the outflow of deposits under both base case and stress scenarios of ACRA. The long-term liquidity is assessed as adequate. The portfolio of securities (primarily, federal bonds that may cover about 16% of deposit outflow as at the beginning of 2018) may serve an additional source of liquidity. The funding profile is well-diversified by source: as of June 01, 2018, corporate funds, the largest funding source, comprised 58.3% of liabilities. As of April 01, 2018, the share of top 10 groups of lenders was 28.5%, and the share the largest lender was 14.1%). The Bank has continued to demonstrate low dependence on borrowings from the Supporting Organization.

Key assumptions

  • Citigroup will retain its shareholding and operating control over Citibank;
  • The cost of credit risk will be below 1%;
  • NIM will be in range of 4.5–6%;
  • Tier 1 CAR (N1.2) will be above 9% within the 12 to 18-months horizon;
  • The current funding profile will not change.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • A loss by Citigroup of its shareholding and operating control over Citibank, or a lower propensity of the Supporting Organization to support Citibank;
  • A declining strategic importance of Citibank for Citigroup;
  • A substantial decline in the creditworthiness of the Supporting Organization.

Rating components

SCA: aa+

Adjustments: none

Support: on par with the RF

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and Supporting Organizations outside the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating assigned to AO Citibank was first published by ACRA on July 06, 2018. The credit rating and its outlook are expected to be revised within one year following the rating action date (July 5, 2018).

The credit rating was assigned based on the data provided by AO Citibank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of AO Citibank and the financial statements of AO Citibank drawn up in compliance with Bank of Russia Ordinance No. 4212-U of November 24, 2016. The credit rating is solicited, and AO Citibank participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by AO Citibank in its financial statements have been discovered.

ACRA provided no additional services to AO Citibank. No conflicts of interest were discovered in the course of credit rating assignment.

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