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Citigroup: Post-Pandit Glow Winner

Stocks in this article: C JEFF JPM

When the Fed completed its 2012 stress tests in March, investors cheered as many of the nation's largest banks, including JPMorgan Chase, Wells Fargo, and U.S. Bancorp, announced dividend increases and regulatory approval for significant repurchases of common shares. Citigroup's initial capital plan -- which would have included an increased quarterly dividend, as well as share buybacks -- was rejected by the Fed, while a revised capital plan, which included no increased capital return to investors, was approved in August.

This time around, the Fed will allow a much quicker resubmission of revised capital plans for banks whose initial plans are rejected, which according to Barclays analyst Jason Goldberg "would have helped Citigroup and SunTrust (STI) this year."

Goldberg said that the Fed's recent approval for PMorgan Chase to restart its stock repurchase plan with $3 billion in buybacks during the first quarter -- after the buybacks were suspended in the second quarter, after CEO James Dimon first announced the company's hedge-trading losses -- was one of three "positive data points" for banks last week.

Once again, the stress tests are likely to be a positive event for most of the banks involved, and analysts are expecting several of the largest banks to significantly increase their payouts next year. Goldberg said that "over the past year, employment and housing data has improved, while the group has built capital. In fact, if one takes current tier 1 common ratios and applies the haircut used in last year's CCAR process, this lot has over $150bn in excess capital."

In the wake of CEO Vikram Pandit's ouster and replacement with Michael Corbat, investors are looking for a more aggressive approach from Citigroup on the disposition of noncore assets and return of capital. Corbat formerly headed Citi Holdings, which is the subsidiary into which the company placed noncore assets, as part of Pandit's "good bank/bad bank" strategy of right-sizing the company's balance sheet.

Goldberg expects Citigroup in the second quarter of 2013 to increase its quarterly dividend from the current nominal payout of a penny, to 15 cents. The analyst also expects Citi to be granted approval to buy back $2 billion worth of common shares next year.

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