Updated March 23 at 12:28am

Citigroup fails Fed stress test as Goldman, BofA modify plans

U.S. units of RBS, Santander also don’t pass muster

Citigroup Inc.’s capital plan was among five that failed Federal Reserve stress tests, while Goldman Sachs Group Inc. and Bank of America Corp. passed only after reducing their requests for buybacks and dividends.

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Citigroup fails Fed stress test as Goldman, BofA modify plans

U.S. units of RBS, Santander also don’t pass muster


(Updated at 6:50 p.m.

NEW YORK - Citigroup Inc.’s capital plan was among five that failed Federal Reserve stress tests, while Goldman Sachs Group Inc. and Bank of America Corp. passed only after reducing their requests for buybacks and dividends.

Citigroup, as well as U.S. units of Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Banco Santander SA, failed because of qualitative concerns about their processes, the Fed said today in a statement. Zions Bancorporation was rejected as its capital fell below the minimum required. The central bank approved plans for 25 banks.

Regulators seeking to prevent a repeat of the 2008 financial crisis have run annual tests on how the largest banks would fare in a similar recession or economic shock. Analysts estimate that banks were planning to pay out about $75 billion in excess capital to reward shareholders and boost returns. This is the second straight year that the Fed has criticized the quality of some plans.

“As this progresses, the Fed is going to ask for more and more information, and the quality of information is going to have to improve,” Chris Mutascio, a Baltimore-based analyst at Stifel Financial Corp.’s KBW unit, said before the results were announced. “With it becoming more complex, you really have to make sure you dot your I’s and cross your T’s.”

Citigroup, which last year asked for the least capital return among the five largest U.S. banks after having its plan rejected in 2012, would have passed this year’s test on quantitative grounds alone. It had a 6.5 percent Tier 1 common ratio, above the Fed’s 5 percent minimum. It’s ranked third by assets among U.S.-based lenders.

The central bank identified multiple deficiencies in Citigroup’s planning practices, including areas the Fed had flagged previously. The regulator expressed concern with the New York-based company’s ability to project losses in “material parts of its global operations” and to reflect all business exposures in its internal stress test.

“Taken in isolation, each of the deficiencies would not have been deemed critical enough to warrant an objection, but when viewed together, they raise sufficient concerns regarding the overall reliability of Citigroup’s capital planning process,” the Fed said.

Mike Corbat, the bank’s chief executive officer, said in a statement that Citigroup is “deeply disappointed” by the rejection and said the company will “work closely with the Fed to better understand their concerns so that we can bring our capital planning process in line with their expectations.” The timing of any resubmission hasn’t been decided, he said.

Citigroup shares fell 4.3 percent to $47.98 at 4:15 p.m. in extended trading in New York. Bank of America dropped 0.8 percent and Goldman Sachs was little changed.

Bank of America and Goldman Sachs saw each of their Tier 1 leverage ratios drop to 3.9 percent in their original capital plans, below the required 4 percent. Both firms lowered their requests and were approved, meaning they don’t have to resubmit.

The two banks asked for too much in buybacks and dividends after their own internal stress tests showed better performance than in the central bank’s exam. New York-based Goldman Sachs predicted its Tier 1 common ratio would be about 3.8 percentage points stronger than the Fed estimated in a worst-case scenario. The gap for Bank of America was 2.7 percentage points.

Bank of America, ranked second by assets, raised its quarterly payout to 5 cents from 1 cent after the Fed’s decision and authorized a new $4 billion stock buyback. The increase is a victory for Bank of America Chief Executive Officer Brian T. Moynihan, who has pressed to raise the payout from the token level that prevailed since the financial crisis.

The Fed blocked plans in 2011 for an increase by the Charlotte, North Carolina-based company, which didn’t ask for anything the following year and won permission for a $5 billion stock buyback last year.

JPMorgan Chase & Co., which won approval last year while still having to resubmit to address qualitative weaknesses, had its capital plan ratified as it maintained a Tier 1 common ratio of 5.5 percent, a half-point above the minimum. The quarterly dividend will rise to 40 cents a share from 38 cents, and the company authorized a $6.5 billion stock buyback, according to statement from the New York-based lender, ranked first by assets.

The ratio at Wells Fargo & Co., the biggest U.S. home lender, was 6.1 percent, while Morgan Stanley’s was 5.9 percent.

Zions, the Salt Lake City-based bank that had a 4.4 percent Tier 1 common ratio in the test, said before today’s results were announced that it planned to resubmit its capital plan.

The Tier 1 common ratio measures a bank’s core equity, made up of common shares and retained earnings, divided by its total assets adjusted for risk using global banking guidelines.

The Fed cited Santander Holdings USA Inc., the U.S. unit of Madrid-based Santander, for “widespread and significant deficiencies” across the firm’s processes. The central bank also faulted HSBC North America Holdings Inc. and RBS Citizens Financial Group Inc. for estimates of revenue and losses in the test. The rejection means the lenders won’t be able to increase dividends to their European parent companies, freezing them at current levels, according to a Fed official.

Banks typically announce planned dividend increases and buybacks shortly after the Fed releases results of the stress tests. Raises may boost yields closer to the norms that prevailed before the financial crisis, when the stocks were favored by income-oriented investors. The average yield for the 24-company KBW Bank Index stood at 4.9 percent at the end of 2007. It’s now under 2 percent.

The banks in this year’s test collectively received approval to pay out about 60 percent of their estimated net income during the next four quarters, according to a Fed official. That ratio is higher than in recent years and closer to what lenders were returning to shareholders in 2005, before the crisis, according to data from Bloomberg Industries.

The Fed last week disclosed how banks performed in a hypothetical recession in which U.S. unemployment peaks at 11.3 percent, home prices fall 25 percent and stocks plunge almost 50 percent.

Projected losses for the 30 banks under a scenario of deep recession would total $366 billion over nine quarters, the Fed said last week. The aggregate Tier 1 common capital ratio would fall from an actual 11.5 percent in the third quarter of 2013 to a minimum of 7.6 percent, before factoring in the banks’ proposed capital plans.

The KBW Bank Index advanced 4.9 percent this year through yesterday, compared with the 0.9 percent gain for the benchmark Standard & Poor’s 500 Index.

The Fed last week corrected its initial calculations of banks’ capital ratios under the stress test.


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