On Monday, Moody’s Investors Services, a unit of Moody’s Corp. (MCO) raised its outlook for Citigroup (C) stand-alone bank financial strength rating to “Stable” from “Negative”. The revision is based on the company’s fortified capital position and improved risk profile.
Currently, Citibank’s financial strength rating is “Baa2”. Additionally, the rating outlook on Citi’s hybrid securities was also upgraded to “Stable” from “Negative”, as they are related to the company’s stand-alone financial strength rating.
According to the rating agency, the revision in outlook comes on the back of steps taken by bank to improve its cash reserves, which are expected to provide a support against the losses that Citi is expected to incur.
The rating agency, however, anticipates Citi to incur losses from its exposure to residential mortgage portfolio, credit cards and to structured residential mortgage securities. Nevertheless, Citi’s effort to diminish its risk profile is also encouraging.
Citi’s senior long-term and short-term ratings are “A3” and “Prime-1,” respectively. The rating outlook remains stable for these ratings.
Last Friday, Citi reported second quarter earnings of 9 cents per share, ahead of the Zacks Consensus Estimate of 5 cents. However, the results were below the prior quarter earnings of 14 cents and the year-ago quarter’s earnings of 51 cents.
Results reflect an improvement in credit quality and lower loan loss provisions. While Citi’s results in the first quarter significantly benefited from strong trading revenues, as expected, the market declines negatively impacted the revenues from its trading business in the second quarter.
Though Citi’s restructuring efforts are welcome, the sluggish rate of economic recovery and the high level of unemployment are expected to be a drag on its earnings in the upcoming quarters. In its core business, Citicorp remains attractive. However, the obscurity around the valuation of Citi Holdings will be a headwind in the near term.
Going forward, we expect the financial reform bill to partially restrict proprietary trading of commercial banks. Additionally, dealing in derivatives, which are used to hedge risk or speculate the future value of assets, would also be limited.
We expect these actions to have a significant impact on the profitability of a number of commercial banks. Beside Citi, these banks include JPMorgan Chase & Co. (JPM), Goldman Sachs (GS), Bank of America (BAC), Wells Fargo (WFC) and Morgan Stanley (MS).
However, reflecting positive investor sentiments on Citi, its shares increased 8 cents or 2.05% to $3.98 in Monday’s regular session on the New York Stock Exchange.