Citigroup Comes Out Strong in Stress Test, Announces Buyback Request

NEW YORK ( TheStreet) -- The Federal Reserve late on Thursday said the nation's largest banks will have sufficient capital to continue lending even under severely adverse economic conditions.

All but Ally Financial passed the regulator's annual stress tests for the nation's largest 18 bank holding companies.

The stress tests gauge the big banks' ability to withstand a deep recession beginning this year, while remaining well-capitalized with Tier 1 common equity ratios of at least 5.0%. This year's "severely adverse scenario" includes a 4% increase in the unemployment rate during 2013, along with 5% negative GDP growth, a 50% decline in equity prices and a 20% decline in real estate prices.

The Fed said that projected losses at the 18 bank holding companies would total $462 billion during the nine quarters of the hypothetical stress scenario. The aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.1 percent in the third quarter of 2012 to 7.7 percent in the fourth quarter of 2014 in the hypothetical stress scenario.

That is well above the regulatory minimum of 5% and is calculated "using capital action assumptions provided within the Dodd-Frank Act stress testing rule."

Here's how the "big four" U.S. banks would perform under the severely adverse scenario described above, according to the Federal Reserve.

Bank of America's ( BAC) Tier 1 common equity ratio would fall from 11.41% as of Sept. 30, to 6.8%.

Citigroup's ( C) Tier 1 common equity ratio would to drop from 12.7% as of Sept. 30, to 8.3%.

JPMorgan Chase's ( JPM) Tier 1 common equity ratio would decline from an actual 10.4% as of Sept. 30 to 6.3%.

Wells Fargo's ( WFC) Tier 1 common equity ratio would decline from 9.9% as of Sept. 30, to 7% under the severely adverse scenario.

"These results, achieved in the face of extreme assumptions and highly pessimistic scenarios, are further proof that the banking industry has rapidly regained its health and is strong enough to withstand even the most challenging economic circumstances," the American Bankers Association President and CEO Frank Keating said in a statement.

What may be confusing for investors in this year's stress test process is the Federal Reserve's decision to hold off on announcing its decision about planned capital actions by banks until March 14. The Comprehensive Analysis and Review (CCAR) applies the stress test scenarios to banks' capital plans, meaning that investors have to wait another week until the banks announce dividend increases and/or plans to buy back shares through the first quarter of 2014.

However, Citigroup said late Thursday that it did not ask for a dividend increase but did ask for a $1.2 billion buyback. Citigroup's capital return request was denied last year. The bank had said that it would be conservative in its request this time around.

Analysts have been bullish about banks' ability to return capital following the stress tests. Credit Suisse analyst Moshe Orenbuch in a report on Wednesday estimated that the 17 banks subject to CCAR covered by his firm will increase their total capital return to 64% of earnings from 36% in 2012, "with a median dividend payout ratio of 24% versus 21% in 2012."

-- Written by Shanthi Bharatwaj and Philip van Doorn.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

If you liked this article you might like

Citigroup Gives CEO Corbat 48% Pay Raise as Profitability Misses Goal

Citigroup Gives CEO Corbat 48% Pay Raise as Profitability Misses Goal

Worst-In-Class Goldman Sachs CEO Blankfein Gets 9% Pay Raise

Worst-In-Class Goldman Sachs CEO Blankfein Gets 9% Pay Raise

Here's One Hint That S&P 500 Stocks Are a Screaming Buy

Here's One Hint That S&P 500 Stocks Are a Screaming Buy

Federal Reserve Who? Stocks Have Historically Done Great With Rising Rates

Federal Reserve Who? Stocks Have Historically Done Great With Rising Rates

JPMorgan, Bank Stocks Have Room to Run Higher in Slow-Motion Economy

JPMorgan, Bank Stocks Have Room to Run Higher in Slow-Motion Economy