Moody’s lowers Citigroup’s ratings (snr to Aa3)

Moody’s Investors Service has downgraded the long-term ratings of Citigroup Inc. (senior to Aa3 from Aa2) and lowered the Bank Financial Strength Rating (BFSR) of Citibank, N.A. (Citibank) to B from A-. The rating on Citibank for long-term deposits and senior debt was lowered to Aa1 from Aaa, but the rating outlook remains ‘stable’.

The downgrade was prompted by Moody’s view that Citigroup’s capital ratios will remain low.

According to Senior Vice President Sean Jones, “this situation is likely because management will need to take sizable write-downs against its subprime RMBS and CDO portfolio.”

The New York-based bank with reported assets of $2.4 trln as of September 30, is also expected to make significant sustained provisions against its residential mortgage book, which is over $200 bln. These charges are likely to occur when Citigroup’s normal earnings power is depressed, particularly in the United States.

“During 2008,” the analyst said, “Citigroup’s weak earnings should prohibit the bank from rapidly restoring capital ratios, despite its recent issuance of $7.5 bln hybrid capital.”

Moody’s believes that Citigroup has options for rebuilding its capital base: through additional sources of external capital; through more aggressive balance sheet management; and through internal capital retention by means of dividend reduction. This flexibility supports the stable outlook.

For Citigroup’s ratings to be upgraded, the company would need to rebuild its capital ratios to levels maintained prior to 2007. As well, the firm’s pre-provision earnings power has to return to its previous strong level, while reducing its concentration risks.

The company’s failure to restore its capital ratios in the medium term would possibly lead to a further downgrade.

As a result of this rating action, the following Citigroup subsidiaries’ ratings are being placed on review for possible downgrade: Citigroup Pty Limited, Citigroup Global Mkts Deutsch AG & Co., Citibank Europe plc, Citibank International Plc, Citibank (South Dakota), N.A., Nikko Cordial Corporation, Nikko Cordial Securities Inc., Nikko Citigroup Ltd., Nikko Citigroup Services Ltd., Egg Banking plc and Citibank Japan Ltd.