Moody's Investors Service on Thursday said it lowered its financial strength rating on Citigroup Inc.

The rating agency lowered its rating on Citi's banking unit three notches, to C from B.

Moody's said in a press release, that its concerns are offset some by the federal government's implied backing of Citigroup, and that its action had no impact on Federal Deposit Insurance Corp.-guaranteed debt issued by Citi, which remained at Aaa with a stable outlook. The action completed a rating review that was announced on Sept. 29.

But Moody's said Citi faces "an array of sizable challenges" and it expects that the New York firm's fourth-quarter results "will be saddled by significant marks on its large inventory of trading assets because of falling market values."

Moody's also expects that in the quarter Citi will need to maintain high loan-loss provisions as the company increases its reserves primarily against its U.S. consumer portfolio and some of its international credit-card portfolios.

Moreover, "there is the possibility that Citigroup could generate additional quarterly losses in 2009 and 2010 due to the need to continue to building loan loss reserves, particularly against its residential mortgage and credit-card portfolios," Moody's senior vice president Sean Jones said in the release.

In a prepared statement e-mailed to American Banker, Citigroup said it "has very strong Tier 1 capital and many sources of liquidity from our unique global franchise. We remain focused on executing our strategy driven by our core businesses and have … significantly reduced our expense base and headcount. We believe the benefits will be seen over time."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.