NEW YORK (TheStreet) -- The Federal Reserve's stress-test process was greatly expanded this year and produced more than the usual number of surprises.
The rejection of Citigroup's (C) 2014 capital plan late Wednesday was the most important surprise for bank stocks investors, and no doubt brought about some very bitter feelings among long-suffering shareholders who have been waiting for years for the bank to begin deploying excess capital. The Fed said its objection to Citi's plan to raise its quarterly dividend to a nickel a share from a penny and to buy back up to $6.4 billion in shares was based on "qualitative" concerns and not on the company's level of capital.
The group of banks subject to this year's stress tests was expanded to 30 from 18, with six foreign-held bank holding companies included in the 12 being added to the list. The first part of the tests, known as the Dodd-Frank Act Stress Tests (DFAST) ended last week, with all 30 banks except for Zions Bancorporation (ZION) of Salt Lake City showing they could remain well-capitalized with Tier 1 common equity ratios of at least 5.0% through a nine-quarter "severely adverse" economic scenario.The second part of the stress tests is the Comprehensive Capital Analysis and Review (CCAR), which incorporates banks' submitted plans to deploy excess capital into the same severely adverse scenario. This year's stress tests were augmented to include a "global market shock" component that was especially important to Citigroup, which is unique among large-cap U.S. banks in that it derives most of its revenue and earnings from outside North America. Citi actually passed DFAST with flying colors, with a minimum tier 1 common equity ratio of 7.2%, and there's no question the company has excess capital to deploy. The Fed said its objection to Citi's plan "in part reflects significantly heightened supervisory expectations for the largest and most complex BHCs in all aspects of capital planning." KBW analyst Fred Cannon on Thursday downgraded Citi to a "market perform" rating from "outperform," and CLSA analyst Mike Mayo late on Wednesday bashed the Fed, writing in a client note, "In the new world of Big Brother Banking, the government can make decisions such as this, even if a bank is well above regulatory minimums, allowing a new level of regulatory discretion. The Fed's decision makes it look like there is no level of capital that is sufficient whereby Citi could repurchase stock." Mayo stuck with his "buy" rating for Citigroup, but lowered his price target for the shares to $58 from $60.00. Citi's shares were down 5.1% in the first minutes of trading Thursday, to $47.56. Here's what other Wall Street analyst had to say about other losers and winners following the Fed's CCAR announcement, with Thursday morning stock action not necessarily reflecting the opinions of the analysts: