Training on sovereign risk credit analysis, October 24

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

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

Citibank is a large universal bank and one of the top 20 Russian banks in terms of assets and capital. The ultimate parent of AO Citibank is Citigroup Inc, one of the largest global banks.

Key rating assessment factors

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

  • The Russian market is strategically important for Citigroup as part of its global presence;
  • There is a pronounced operational integration; Citibank is integrated in 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 (44% of its loan portfolio as of December 31, 2018);
  • In the 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 strong. Therefore, the Bank's credit rating is on par with the Russian Federation.

The high business profile assessment (a+) hinges on the Bank's strong franchise in the premium retail banking and large corporate and international business segments. Such a range of business lines and moderate risk appetite result in Citibank’s ability to generate sustainably high operating income with minimum susceptibility to economic cycle phases. Due to the universal nature of its business, Citibank’s operating income is highly diversified, indicated by the Herfindahl-Hirschman Index of 0.19 for 2018. The Bank’s management quality has remained high.

Adequate capital position. ACRA notes that a substantial unexpected loss absorption cushion along with high operational profitability allow the Bank to withstand a substantial increase in the cost of credit risk well above 500 bps without the risk of breaching regulatory requirements. The absorption cushion is backed by steady capital adequacy indicators both under IFRS (Tier 1 of 11.3% as of end-2018) as well as under RAS (N1.2 of 11.5%).  As of June 1, 2019, N1.2 (= Tier 1 ratio) stood at 9.6%. The decline in capital ratios mainly reflects dividend payout in 1Q19. The Bank’s ability to earn net profit independently of economic cycle phases is based on a high net interest margin (NIM), which averaged 6% from 2016 to 2018. However, a large portion of the Citibank’s net profit goes to dividend payments, which negatively affects the Bank’s ability to increase capital. ACRA assessed this ability using the averaged capital generation ratio, which has averaged 22 bps over the past five years.

ACRA affirms the adequate assessment of the Bank's risk profile, as the volume of problem loans is low and loan portfolio concentration is relatively high. As of March 31, 2019, 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 the top 10 groups of borrowers exceeded 35%. ACRA assesses the financial stability of the Bank's counterparties under contingent liabilities as high. The Bank places most of its temporarily 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 Bank’s risk management system.

Strong liquidity combined with a well-balanced funding profile. Citibank firmly withstands the outflow of deposits under both base case and stress scenarios of ACRA. The Bank’s long-term liquidity is assessed as adequate. The securities portfolio (primarily federal bonds that can cover about 15% of deposit outflow as of the end of Q12019) may serve as an additional source of liquidity. The funding profile is well diversified in terms of sources; as of May 1, 2019, corporate funds, the largest funding source, accounted for 56% of liabilities. As of April 1, 2019, the share of the top 10 groups of lenders was 13.5%, and the share the largest lender was 3.1%. The Bank has continued to demonstrate low dependence on borrowings from the Supporting Organization.

Key assumptions

  • Citigroup maintaining its shareholding and operating control over Citibank;
  • Cost of credit risk below 1%;
  • NIM within 5.5-6.5%;
  • Tier 1 CAR (N1.2) above 9% within the 12 to 18-month horizon;
  • Maintaining the current funding structure. 

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:

  • Loss by Citigroup of its shareholding and operating control over Citibank, or the lower propensity of the Supporting Organization to support Citibank;
  • Decreased strategic importance of Citibank for Citigroup;
  • 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 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 6, 2017. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

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 № 4927-U of October 8, 2018. 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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