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Citigroup Was Punished for Not Playing Nice With the Feds

NEW YORK (TheStreet) -- Although Citigroup (C - Get Report) passed the first round of stress tests (called the Dodd-Frank Act Stress Tests), the Big Four bank failed to impress in the second round announced Wednesday.

The bank met the capital requirements with Tier 1 common ratio at more than 5% (first round of stress testing), and review of quantitative charts of the Fed's report showed adequate ratios on the capital requirements with a proposed capital plan including dividends and share buybacks in the second round of tests (see table below).

So why was the bank's 2014 capital plan rejected in the second round, known as the Comprehensive Capital Analysis and Review?

According to the Federal Reserve's comments from its report, the central bank objected to Citigroup's capital plan (dividend increases and share buybacks) based on qualitative concerns. The wording the Fed used was: "significantly heightened supervisory expectations for the largest and most complex Bank Holding Company (BHCs) in all aspects of capital planning."

The Federal Reserve also had concerns about Citigroup's ability "to project revenues and losses under a stressful scenario for material parts of the firm's global operations and its ability to develop scenarios for its internal stress testing that adequately reflects its full range business activities and exposures."

A comparison of the Big Four U.S. money center banks in the table below shows that Citigroup has key financial metrics in line with the other three biggest U.S. banks, including some of the highest capital ratios and 2015 financial performance ratios.

Bank

Federal Reserve Tier 1 Results

FY 2013 Performance

Common Equity Ratio1

"DFAST"

Common Equity Ratio1

"CCAR"

Risk-Based Capital Ratio1

"CCAR"


Leverage Ratio1

"CCAR"


Adj. NPL

to Loans %2

Revenue Growth %2

Net Income Growth %2

JPMorgan Chase (JPM)

6.3%

5.5%

6.6%

4.2%

1.93%

-1.1%

-15.8%

Bank of America (BAC)

5.9%

5.3%

6.3%

4.1%

2.39%

6.7%

172.9%

Citigroup (C)

7.2%

6.5%

9.1%

5.6%

1.47%

9.2%

79.1%

Wells Fargo (WFC)

8.2%

6.1%

6.9%

5.6%

2.34%

-2.7%

14.7%

Threshold1

5.0%

5.0%

6.0%

4.0%

     

1 Source: Federal Reserve stress test results. CCAR results/thresholds from Table 6A of report (Projected minimum in 2015).

2 Statistical data provided by FDIC and Yahoo! Finance Web sites.

Citigroup's dividend proposal was in line with Bank of America (BAC) but Citigroup proposed a share buyback plan that was five times greater than what was already allowed and 50% more than what Bank of America submitted in its reduced proposal.

Citigroup has 30 days to resubmit another plan while addressing the Fed's operational concerns or it can choose not to contest the results and wait until next year to work on the risk concerns addressed in the report.

Bank

Proposed Dividend

(per share)

Proposed Share Buybacks

$ ( in bil)

Current Dividend (per share)

Current Share Buybacks

$ (in bil)

JPMorgan Chase (JPM)

$0.40

$6.50

$0.38

X

Bank of America (BAC)

0.05

4.00

0.01

X

Citigroup (C)

0.05

6.40

0.01

$1.20

Wells Fargo (WFC)

0.35

0.35

0.30

X

In defense of the Federal Reserve, Citigroup does have the highest exposure to foreign global markets with nearly 50% of business coming from foreign concerns. The table below shows the risk exposure of the Big Four from foreign customers (source: FDIC call reports).

Bank

Foreign Deposit %

Foreign Loan %

Foreign % of Net Income

Original TARP $ (in bil)

Assets Guaranteed $ (in bil)

Citigroup (C)

54%

48%

55%

45.0

306.0

JPMorgan Chase (JPM)

24%

17%

43%

25.0

118.0

Wells Fargo (WFC)

9%

3%

1%

25.0

X

Bank of America (BAC)

7%

12%

0%

45.0

X


Note: Bank of America and Goldman Sachs (GS) had to modify their plans to be accepted.

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