Citigroup Primed for Dividend

NEW YORK ( TheStreet) -- Citigroup ( C) is well-positioned to meet stringent Basel III capital requirements years ahead of the deadline and still return capital to investors.

One analyst says the company could easily pay out $2 billion in dividends during 2012 while buying back $4 billion in shares, and still meet the new capital requirement many years in ahead of time.

Of course, $2 billion in dividends would translate roughly to a quarterly payout of 17 cents a share, or a modest yield of 1.79% at Thursday's closing share price of $39.02.. Maybe Citi's board could be persuaded to lean more toward a higher dividend rather than support senior management's stock options through buybacks. But that's another story.

The Basel Committee agreed in late June to increase capital requirements for "global systemically important banks" beyond the 7% Tier 1 common ratio originally agreed upon, by adding an additional 1% to 2.5% in additional required capital, "depending on a bank's systemic importance," plus an additional 1% surcharge to discourage banks already facing the highest capital requirements from increasing "materially their global systemic importance."

Citi will certainly need to achieve a Basel III Tier 1 common ratio of 9.5% by January 2019, and that to play it safe, the company should count on hitting the highest possible Tier 1 common equity ratio target of 10.5%.

Citigroup CFO John Gerspach said on Friday that the company expected "to begin returning capital to shareholders next year and end 2012 with an 8%-9% Tier 1 Common Capital Ratio under Basel III. " He added that the timing of any announcement will depend on the Federal Reserve's review of large banks' capital plans.

On June 27, after the Basel Committee announced the enhanced capital requirements for the largest banks, Atlantic Equities analyst Richard Staite reiterated his "Overweight" or "buy" rating for Citigroup, with a $12-month price target of $63, and said the company could "pay a $2bn dividend and up to a $4bn buyback in 2012 and still meet the 2.5% buffer by end of 2013, well ahead of the 2019 deadline.

Staite estimated that if Citigroup were to wait on returning additional capital to investors beyond its current quarterly dividend of a penny a share, its "Basel III Tier 1 common ratio would be 8% at end 2011 and would increase to 9.5% at end 2012." With the aforementioned "modest" $2 billion in dividends and $4 billion buyback in 2012, the analyst estimated the "Basel III ratio would be 9% at end 2012 and would still increase to reach 9.5% in 2013."

Even analysts who are neutral on Citi's shares see the company having no problem complying with the enhanced Basel III capital requirements. KBW analyst David Konrad has modeled "for Citi to arrive at a Tier 1 common ratio of 10% by year-end 2013," assuming a small buyback of $1.3 billion in shares during 2013.

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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