NEW YORK (S&P Global Ratings) July 12, 2024--S&P Global Ratings today said that the fines that two U.S. bank regulatory agencies assessed on Citigroup Inc. (BBB+/Stable/A-2)--for making insufficient progress in addressing certain previously identified problems--reflect the major challenge the company faces in a multiyear effort that it calls its "transformation."
The fines related to the consent orders the Federal Reserve and the Office of the Comptroller of the Currency (OCC) issued to the company in 2020 to fix deficiencies in its data governance, risk management, and internal controls.
This week, the regulators said they fined Citi $136 million in aggregate. The Fed said Citi has made insufficient progress remediating its problems with data quality management and failed to implement compensating controls to manage its ongoing risk. The OCC said the company has not made sufficient and sustainable progress since 2020 in addressing deficiencies, particularly pertaining to data management.
The OCC also ordered Citi's U.S. subsidiary commercial bank, Citibank N.A., to submit a plan within 30 days detailing a process to determine whether it is allocating sufficient resources to achieve "timely and sustainable compliance."
Until that plan is finalized, the company must ensure the OCC does not object to payment of intercompany dividends from Citibank N.A. to Citi above amounts necessary for Citi's debt service, preferred dividends, and other nondiscretionary obligations. We don't expect that stipulation, which Citi will look to resolve quickly, to disrupt its recent announcement of a 6% increase in common dividend. We believe the company's common dividend equated to about 35% of its earnings after preferred dividends in the first half of 2024.
Positively, the regulators credited Citi with making meaningful progress overall in addressing the consent orders, including by simplifying the organization. The company has exited consumer banking in several markets and simplified important parts of its technology infrastructure, such as by retiring more than 1,000 applications since 2022 and automating many controls.
However, Citi said it has fallen short in some data-related areas, especially in regulatory reporting, a complex part of its operations that involves submitting thousands of reports to regulators globally.
We expect Citi to progress further but view the recent fines as a setback and will continue to monitor its path forward. While the fines are small related to the roughly $3 billion Citi earned in the second quarter, we believe they underscore the uncertainty of how long and expensive it will be for Citi to address the consent orders and how effective it will be in its overall transformation. That effort, which Citi has called its top priority, involves addressing the issues regulators have pointed out as well as generally automating more of its controls and processes, and enhancing its infrastructure for management and usage of data.
Citi has already spent significant sums to address the consent orders and on transformation in general. We are uncertain if a potential need for additional resources would hamper Citi's aim to boost its profitability to a level commensurate with more of its large peers.
Furthermore, the fines came just weeks after the Fed and Federal Deposit Insurance Corp. (FDIC) identified a weakness in Citi's resolution plan. Citi must submit a plan to those regulators for addressing that weakness (see "Citigroup Inc.'s Regulatory-Identified Weakness In Resolution Planning Underscores Challenge To Improve Processes," June 24, 2024).
This report does not constitute a rating action.
| Primary Credit Analyst: | Brendan Browne, CFA, New York + 1 (212) 438 7399; brendan.browne@spglobal.com |
| Secondary Contact: | Stuart Plesser, New York + 1 (212) 438 6870; stuart.plesser@spglobal.com |
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