Citigroup: Stress Test Winner

NEW YORK ( TheStreet) -- Citigroup ( C) was the winner among the largest U.S. banks on Friday, with shares rising 4% to close at $46.68.

The broad indexes all ended with solid gains, as the Dow Jones Industrial Average continued to push into record territory, after unexpectedly strong employment numbers were reported.

The Department of Labor Statistics said that total nonfarm employment increased by 236,000 during February, and that the U.S. unemployment rate declined to 7.7% from 7.9% the previous month. Economists polled by Thomson Reuters had expected the U.S economy to add 180,000 jobs during February.

Employment growth in housing-related sectors significantly outpaced overall growth, further supporting the significance of the recovery in U.S. home prices.

Following the announcement by the Federal Reserve late Thursday that 17 of 18 large bank holding companies passed the 2013 stress tests, the KBW Bank Index ( I:BKX) rose 1% to close at 56.58.

The Fed's tests gauged the banks' ability remain well capitalized, with Tier 1 common equity ratios through the end of 2013, under a "severely adverse scenario." The harsh scenario included a severe recession beginning this year, with the unemployment rate rising by 4%, along with 5% negative GDP growth, a 50% decline in equity prices and a 20% decline in real estate prices.

The stress test process is different this year from previous years, in that the Fed will make a separate announcement on Thursday, March 14, of which banks' 2013 capital plans have been approved. Most of the large banks are expected to announce dividend increases and/or share buybacks after the market close on that day.

Citigroup fared quite well in the stress tests, with the Fed saying the bank would lose $28.6 billion through the end of 2014 under the severely adverse scenario, with a minimum Tier 1 common equity ratio of 8.3%. The tests showed Citi to have plenty of excess regulatory capital. Citi's minimum stressed capital ratio according to the Federal Reserve would be the highest among the "big four" U.S. Banks, which also include JPMorgan Chase ( JPM), Bank of America ( BAC) and Wells Fargo ( WFC).

But investors will have to wait until at least 2014 to see a dividend increase. The company jumped the gun by announcing late on Thursday that its 2013 capital plan submitted to the Federal Reserve included $1.2 billion in share buybacks. Citi's quarterly dividend will remain at a nominal $0.01 a share.

Bank of America Merrill Lynch analyst Erica Penala said in a report that Citigroup's results were a " clear standout," that implied "significant long-term capital return capacity." The analyst reiterated her "buy" rating for Citigroup, while raising her price target for the shares to $50.00 from $46.00.

Bank of America was also called a stress-test winner by FBR analyst Paul Miller, after the Federal Reserve said the bank would weather a severe recession with a minimum tier 1 common equity ratio of 6.8%, despite projected pre-tax losses of $51.8 billion. Bank of America's own stress tests -- using the same economic scenario as the Fed -- showed potential pretax losses of $43.8 billion, with a minimum Tier 1 common equity ratio of 7.7%.


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 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.