Fed rejects Citi capital plan

Wednesday wasn’t the best for Citigroup or its shareholders. The Federal Reserve Board again said the bank wasn’t ready to deal with financially stressful situations and rejected plans for stock buybacks.

Writing for Reuters, Emily Stephenson and David Henry had this story:

The Federal Reserve said Citigroup Inc’s ability to plan to cope with stressful scenarios is still not sufficient, and it nixed the bank’s plans to return more capital to shareholders, dealing a blow to a bank still fixing itself after the financial crisis.

The decision marks the second time in three years that the bank has failed to win the Fed’s approval for plan to return money to shareholders, known as the “capital plan.” The bank’s ability to return money to shareholders through buying back shares is critical for its meeting a key target for profitability.

Shares of Citi fell 4.5 percent to $47.90 in after-hours trading on Wednesday.

Winning regulatory approval for the bank’s capital plan is crucial for the credibility of Citigroup Chief Executive Michael Corbat, who was charged with improving the bank’s relationship with regulators when he took over as CEO in October 2012.

On Wednesday, the Fed said that Citigroup has improved its risk management practices in recent years, but the bank cannot determine well enough how its revenue and income would be hurt under stressful scenarios around the world. The bank’s internal examination process does not sufficiently consider how global crises could influence its broad number of businesses, the Fed added.

But despite being the headline on all the stories, Citigroup wasn’t alone in their rejection, according to The Wall Street Journal story by Stephanie Armour and Ryan Tracy:

The five institutions that didn’t get approval—Citigroup, Zions Bancorp, and the U.S. units of HSBC Holdings PLC, Royal Bank of Scotland Group PLC and Banco Santander —must submit revised capital plans and must suspend any increased dividend payments unless they get the Fed’s approval in writing. The foreign banks that didn’t pass muster with the Fed are restricted from paying increased dividends to their parent firm. The five banks that failed to get their plans approved can continue to pay dividends at last year’s level.

The Fed approved the shareholder-reward plans for Bank of America Corp. and Goldman Sachs Group Inc. only after the two banks adjusted their requests. Both of the banks initially fell below minimum capital levels in the Fed’s ‘severely adverse’ stress testing scenario and resubmitted their plans last week.

The Fed’s annual “stress” tests are designed to ensure that large banks can handle a deep slump like the 2008 financial crisis and continue lending without needing a government rescue. A first round of tests last week concluded that 29 of the banks had adequate capital buffers to withstand a severe drop in housing prices and surging unemployment.

Michael Corkery wrote for The New York Times that overall health of U.S. banking operations is improving, but this is a blow for Citi:

Over all, the results of the annual test showed that most of the banking system has healed substantially since the financial crisis. The Fed used the annual test to review the capital plans of 30 large banks under a series of stressful scenarios.

Citigroup’s failure is a setback for a bank that has aggressively tried to shed risks and cut costs after receiving a taxpayer rescue five years ago. The Fed also rejected the bank’s plans in 2012. Shares of the bank fell as much as 5 percent in after-hours trading.

In its report, the Fed said there were “sufficient concerns regarding the overall reliability of Citigroup’s capital planning process.”    The central bank said that while Citigroup had made progress in the areas of “risk-management and control practices” its capital planning process “reflected a number of deficiencies.”

Citigroup, the Fed said, had failed to make “sufficient improvement” in certain areas that supervisors had previously identified as “requiring attention.”

Specifically, the Fed questioned the sprawling bank’s “ability to project revenue and losses under a stressful scenario for material parts of the firm’s global operations, and its ability to project revenue and losses under a stressful scenario.”

One of the big winners today, according to Bloomberg’s Michael J. Moore and Elizabeth Dexheimer, was Bank of America:

Bank of America, ranked second by assets, raised its quarterly payout to 5 cents from 1 cent after the Fed’s decision and authorized a new $4 billion stock buyback. The increase is a victory for Bank of America Chief Executive Officer Brian T. Moynihan, who has pressed to raise the payout from the token level that prevailed since the financial crisis.

The Fed blocked plans in 2011 for an increase by the Charlotte, North Carolina-based company, which didn’t ask for anything the following year and won permission for a $5 billion stock buyback last year.

JPMorgan Chase & Co., which won approval last year while still having to resubmit to address qualitative weaknesses, had its capital plan ratified as it maintained a Tier 1 common ratio of 5.5 percent, a half-point above the minimum. The quarterly dividend will rise to 40 cents a share from 38 cents, and the company authorized a $6.5 billion stock buyback, according to statement from the New York-based lender, ranked first by assets.

The ratio at Wells Fargo & Co., the biggest U.S. home lender, was 6.1 percent, while Morgan Stanley’s was 5.9 percent.

After the 2008 financial crisis, regulators began looking at the health of the nation’s largest lenders in an attempt to reassure the public they could survive another stressful situation. It’s likely been a slight drag on bank stocks, however, as the government is able to accept or reject companies’ plans for using capital. It looks like it’s back to the planning stages for Citigroup, leaving the bank behind peers.