Moody’s on Friday put Citigroup Inc’s long (senior debt at A2) and short-term (Prime-1) ratings under review for possible downgrade, citing “further deterioration in Citibank’s standalone creditworthiness that is represented by its relatively low tangible common equity ratio and growing pressures on its franchise value. ”
From the statement, emphasis FT Alphaville’s:
Moody’s review will focus on three issues: the potential for and possible implications of further systemic support, Citigroup’s financial prospects, and the credit implications of Citigroup’s strategic initiatives.
Moody’s believes that Citigroup enjoys a very high level of systemic support from the U.S. government. Citibank’s deposits now benefit from four notches of ratings lift as a result of this support assumption. “Recent government actions confirm that Citigroup is systemically important” , said Mr. Jones. However, Moody’s will consider the extent of this ratings lift during its review.
Regarding Citigroup’s financial prospects, Moody’s said that the credit costs taken against many of Citigroup’s investment banking portfolios and U.S. consumer assets in the fourth quarter were within its recently increased expectations. However, the sizable marks Citigroup took against its derivatives portfolio were not incorporated in Citigroup’s ratings. Those marks resulted from changes in Citigroup’s credit spreads and those of its counterparties. Moody’s said it will review the potential need for further increases in the credit valuation allowances and the implications of this on Citigroup’s credit strength.
Moody’s noted that the U.S. government’s Eligible Asset Guarantee Program does not include some of Citigroup’s investment banking assets. The program covers $301 billion of assets in which Citigroup has a $29 billion first-loss position. Moody’s initially believed that the program was sufficient to cover all of Citigroup’s problematic investment banking portfolios. These portfolios have been subject to very sizable marks, including in the fourth quarter of 2008. Some of these portfolios will not be covered under the asset guarantee program, leaving Citigroup exposed to any further deterioration. Moody’s noted that a high proportion of those assets, going forward, will not be subject to mark-to-market valuations, which will potentially lead to greater earnings stability. The review will focus on these financial issues in the context of Citigroup’s capital structure, which is highly skewed towards hybrid securities as opposed to tangible common equity.
The third major area for review is the credit impact of Citigroup’s proposed reorganization. While the proposal will enhance management focus on the numerous challenges Citigroup faces, in the longer-term it could also facilitate the sale of stronger businesses within the new “Citicorp” that might diminish the overall credit profile of the holding company. Moody’s noted that the proposed reorganization does not entail any changes to Citigroup’s legal structure.