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Citigroup Stock Plunges After Capital Plan Rejected by Fed

Updated from 5:14 p.m. ET with comment on Citigroup from CSLA analyst Mike Mayo. 

NEW YORK (TheStreet) -- The Federal Reserve Wednesday afternoon released the results of its annual Comprehensive Capital Analysis and Review (CCAR), with five of 30 banks having their 2014 capital plans rejected.

Citigroup (C - Get Report)C and Zions Bancorporation  (ZION)ZION had their capital plans rejected by the Federal Reserve, along with three foreign-held U.S. bank holding companies: HSBC North America Holdings (a unit of HSBC HSBC), RBS Citizens Financial Group (held by Royal Bank of Scotland (RBS)RBS) and Santander Holdings USA, which is held by Banco Santander (SAN)SAN.

Citigroup's shares were down 5.6% in after-market trading, to $47.32.

It was no surprise to see Zions Bancorporation having its capital plan rejected when the Fed completed CCAR, in light of the bank's failure in in the first round of stress tests last week.

The Federal Reserve objected to the other four banks' capital plans, based on "qualitative concerns."

All five banks will be expected to submit revised capital plans to the regulator, and aside from Zions, could still deploy excess capital over the next year.

CCAR is the second part of the Fed's annual stress-test process for the largest U.S. banks. The first part of the tests -- the Dodd-Frank Act Stress Tests (DFAS) -- were completed last week, and gauged 30 banks' ability to remain well-capitalized, with minimum Tier 1 common equity ratios of at least 5.0%, through a nine-quarter "severely adverse" economic scenario.

This year's scenario assumes an increase in the U.S. unemployment of four percentage points, with the unemployment rate peaking at 11.25% in mid-2015. The scenario also includes a decline in real U.S. GDP of nearly 4.75% through the end of 2014, a 50% decline in equity prices and a 25% decline in home prices.

For banks considered global systemically important financial institutions (G-SIFIs), this year's scenario also includes "the instantaneous and unexpected default of the bank holding company's counterparty with the largest net stressed losses."

Another new element in this year's stress tests is a "Global Market Shock" component of the severely adverse economic scenario, which the Federal Reserve describes as "one-time, hypothetical shocks to a large set of risk factors."

All of the banks subject to DFAST passed the stress tests, with the exception of Zions Bancorporation which came through with a minimum Tier 1 common equity ratio of 3.6%, according to the corrected results released by the Federal Reserve Monday. The bank passing DFAST with the lowest minimum Tier 1 common equity ratio was Bank of America (BAC)BAC, at 5.9%.

CCAR incorporates stress-tested banks' annual plans to deploy capital through dividend increases, share buybacks and/or acquisitions to the same severely adverse scenario. CCAR covers capital deployment from the second quarter of 2014 through the first quarter of 2015.

""With each year we have seen broad improvement in the industry's ability to assess its capital needs under stress and continuing improvements to the risk-measurement and -management practices that support good capital planning," Federal Reserve Governor Daniel Tarullo said in the regulator's press release. "However, both the firms and supervisors have more work to do as we continue to raise expectations for the quality of risk management in the nation's largest banks."

This year's group of banks subject to DFAST and CCAR was expanded by 12 banks, including six foreign-held holding companies. Three of those had their capital plans rejected. Zions Bancorporation was among the regional banks added to this year's stress-test list.

Zions said in a press release Wednesday afternoon that its 2014 capital plan had included a common-equity raise of $400 million, which would have raised its minimum Tier 1 common equity ratio in the CCAR stress test to 4.5%, which would still be below the 5.0% required to pass DFAST.  Zions will submit a revised capital plan by April 30, but the company didn't say whether or not it was planning for a larger common-equity raise.

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