Citigroup fell 3.8 percent in New York trading today after becoming the biggest U.S. lender to fail the regulator’s exam because of Pandit’s plan to boost dividends or stock repurchases. Bank of America, whose payout request was rejected last year, passed the 2012 test -- designed to see if banks have enough capital to handle a hypothetical economic slump -- after Moynihan decided to keep his dividend at 1 cent.
“Pandit misread the situation badly, you just don’t ask for something if you don’t know you can get it,” said Greg Donaldson, chairman of Evansville, Indiana-based Donaldson Capital Management LLC, which oversees $540 million including Bank of America shares. “Moynihan was chastened by what happened last year, he absolutely wasn’t going to take any chances of getting rebuffed again.”
The Fed’s rejection of Citigroup is a setback for Pandit, who has told investors since October 2010 that the bank may return more capital this year. The CEO, who in the past 12 months was rewarded with pay and multi-year retention packages valued at as much as $53 million, will submit a new capital plan to regulators while rivals including JPMorgan Chase & Co. and Wells Fargo & Co. won approval to raise their dividends.
Pandit, 55, had primed shareholders of the New York-based firm for increasing payouts as recently as Jan. 17, when he said during a conference call that “this will be the year that we’ll start returning capital.”
Analysts agreed, predicting the bank would pay shareholders $744 million in dividends and repurchase $2.18 billion of shares, according to a Bloomberg survey. Citigroup’s stock gained 39 percent this year through yesterday. Pandit’s comments prompted analysts to draw their conclusions, said Charles Peabody, an analyst at Portales Partners LLC in New York.
“He shouldn’t have been making the comments he made if they were skirting the line of approval,” said Peabody, who has an “outperform” rating on Citigroup shares. “They misjudged their own models.”
Citigroup was the biggest loser on the 24-company KBW Bank Index, dropping to $35.08 at 11:14 a.m. Pandit told employees yesterday that the bank still had the ability to return more capital to shareholders and he will seek clearance for a “meaningful” payout.
Bank of America
Citigroup and Charlotte, North Carolina-based Bank of America took the largest bailouts among U.S. lenders and each has since repaid $45 billion in taxpayer assistance. The firms’ shares were pummeled last year on concern the European sovereign-debt crisis and rising costs tied to mortgages would hurt results.
Citigroup’s projected Tier 1 common capital ratio fell to 4.9 percent, below the central bank’s minimum requirement of 5 percent in an estimate of a severe economic slump, according to data the Fed released yesterday. The lender would have surpassed the threshold if it didn’t pursue a dividend increase or share buyback, Citigroup said in a statement.
Citigroup’s “leverage ratio” also failed, tumbling from 7 percent to 2.9 percent if the bank’s capital plan took place under the Fed’s adverse scenario. The ratio, which measures the amount of Tier 1 capital that a lender has as a proportion of its assets, was the lowest of the 19 banks and missed the central bank’s 3 percent minimum requirement. This could have led the Fed to reject Pandit’s plan, according to Peabody.
Total losses on soured loans under the Fed’s stress scenario was 11.3 percent for Citigroup, a “puzzlingly high” rate of default, said Glenn Schorr, a New York-based analyst with Nomura Holdings Inc. The projected level of losses was second only to McLean, Virginia-based Capital One Financial Corp., which didn’t request a dividend increase.
“This is kind of an ‘oops’ for Citigroup,” said David Knutson, a credit analyst in Chicago with Legal & General Investment Management, which owns Citigroup debt. “All of a sudden, they’re kind of lumped into the bad-boy category.”
About 23 percent of Citigroup’s consumer loans, excluding mortgages and credit cards, would sour under the adverse scenario, more than double the rate of any other lender, Fed data show. The projections probably are tied to CitiFinancial, the consumer lender Pandit has sought to sell since 2009, Peabody said. CitiFinancial, renamed OneMain Financial in 2010, offers loans for purposes including auto repairs, medical bills, weddings and kitchen remodeling, according to its website.
The bank’s commercial and industrial loans would post an 11 percent loss rate, also the worst of the banks tested, according to the Fed. This could be tied to the bank’s “locally funded international exposures,” including a $7.4 billion portfolio of loans to retail customers and small businesses in Greece, Ireland, Italy, Portugal and Spain, Peabody said. Most of the loans are in Citi Holdings, the division Pandit created to hold unwanted assets, the bank said in an annual filing.
Bank of America’s Tier 1 ratio -- a measure of a firm’s ability to withstand unexpected losses -- was 5.9 percent assuming a severe economic slump and the company’s capital actions. Shannon Bell, a Citigroup spokeswoman, and Jerry Dubrowski at Bank of America declined to comment.
Pass the Test
“Their objective was to just pass the test, and so basically they put a plan together that accumulated as much capital as they could,” said Marty Mosby, an analyst at Guggenheim Securities LLC who has a “neutral” rating on Bank of America. “It is better to be conservative and pass than to ask for too much and have to resubmit your plans.”
Bank of America rose 21 cents, or 2.5 percent, to $8.70 in New York.
The firms also had to demonstrate a path to more stringent international rules on capital approved by the Basel Committee on Banking Supervision. The world’s biggest banks must reach Tier 1 capital levels of at least 9 percent by 2019.
“We are not asking to change the dividend posture because, frankly, we’re close enough to Basel 3 that we just want to blow through it,” Moynihan said in a Jan. 19 staff meeting. “For 2012, we’re sticking to building back capital.”
SunTrust Banks Inc. (STI), Ally Financial Inc. and MetLife Inc. (MET) also fell short by at least one measure under the Fed’s most dire economic scenario, according to the stress-test results. Ally, the largest U.S. auto lender, and SunTrust, based in Atlanta, intends to resubmit their plans, the firms said.
SunTrust rose 59 cents, or 2.6 percent, to $23.17 and MetLife fell 4.9 percent to $37.54.
The Fed’s stress tests showed that a U.S. unemployment rate of as high as 13 percent, a 50 percent drop in stock prices and a decline in house prices of more than 20 percent would produce aggregate losses of $534 billion over nine quarters.
“My view is that they failed a very onerous test that, frankly, is probably unrealistic as we move through the next two years,” said Michael Rose, an analyst with Raymond James & Associates Inc. in St. Petersburg, Florida. “Out of the realm of possibilities? I wouldn’t say that. But certainly a very onerous, unlikely-to-occur scenario.”
Regulators’ focus on the capital deployment of the l9 largest institutions’ reflects a wary attitude toward boards that paid out more than $43 billion in dividends before the 2007 crisis, Patrick Parkinson, the former director of the Fed’s Division of Banking Supervision and Regulation, said last year.
“I don’t think these stress tests are about who needs more capital, clearly it’s about who can return capital,” Rose said. “So maybe what they asked for might have been a little aggressive.”