Fed blocks Citigroup from raising dividends
By Marcy Gordon and Joshua Freed, AP
March 28, 2014, 12:08 am TWN
WASHINGTON--The Federal Reserve on Wednesday barred Citigroup from raising its dividend or boosting its stock buybacks, saying it's too hard to predict how some parts of the bank's global operation would fare in a sharp economic downturn.
It was a setback for Citigroup Inc., one of America's biggest banks, which has been cutting jobs and trimming some businesses in an effort to improve its finances.
Citi was the biggest of five banks whose plans the Fed rejected as part of its so-called "stress tests," an annual check-up of the nation's biggest financial institutions. This year 30 banks underwent the tests to determine if they have large enough capital buffers to keep lending through another financial crisis.
Citi had asked the Fed's permission to buy back US$6.4 billion in shares through the first quarter of next year, and to raise its dividend to 5 cents each quarter, up from a penny per quarter now.
New York-based Citigroup was blocked from raising its dividend in 2012, too, after failing its stress test. Later that year it brought in a new CEO, Mike Corbat, with a mandate to speed up its turnaround. .
Corbat said Wednesday that the company is "deeply disappointed" by the Fed decision. The dividend and buyback would have been a "modest level of capital" for shareholders, and Citi still would have exceeded requirements for its financial health, he said in a written statement.
The Fed announcement caused investors to re-assess bank stocks across the board. Citigroup's stock was down more than 5 percent in after-hours trading.
CLSA analyst Mike Mayo called Citi's rejection "a shocker."
"Citi needs to make this defeat into victory by improving the pace of restructuring," Mayo wrote in a note. That would include selling off businesses and holding managers more accountable, especially after executives had offered reassurances about how the bank is monitoring its finances, Mayo said.
The Fed said that the capital plans of Citigroup fell short in some areas, including its ability to forecast revenues and losses in parts of its global operations, should they come under economic stress.
As with Citigroup, the Fed said it found deficiencies in the capital plans of HSBC North America Holdings, RBS Citizens Financial Group, Santander Holdings USA and Zions Bancorp. The central bank, however, approved requests outright from the other 25 tested banks, which included JPMorgan Chase, Wells Fargo and Morgan Stanley, in addition to Bank of America and Goldman Sachs
Before the financial crisis, Citigroup's dividend peaked at US$5.40 per quarter in 2007. After eliminating its dividend altogether in 2009, it reinstated a payout in June 2011 at a token penny per quarter, where it remains.