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An employee walks inside the Royal Bank of Scotland Group Plc's (RBS) headquarters in Gogarburn, Edinburgh on Feb. 21, 2012. Photographer: Mike Wilkinson/Bloomberg

Citigroup Inc., the largest U.S. bank to miss Federal Reserve capital requirements, erred when signaling that it would boost payouts before winning regulatory approval, said Michael Mayo, an analyst at CLSA Ltd.

“One would think Citi would operate beyond reproach, whether it is with accounting conservatism, adherence with regulations, executive compensation or items such as the announcement of a return of capital before authority is granted,” Mayo wrote in a note to clients today. “The capital mishap is one more sign that the culture has not changed.”

The Fed objected yesterday to Citigroup’s plan, prompting the bank to say it will submit a revised version this year. Chief Executive Officer Vikram Pandit had said the company was ready to return more capital to shareholders after cutting dividends during the financial crisis. Firms need clearance from the Fed before boosting payouts or buying back shares.

“Citi gave signals that it would return more capital this year and then got denied, leading us to question why Citi yet again operates in a gray area such as this,” said Mayo, who has an “underperform” rating on the stock and has criticized the New York-based firm’s corporate governance.

The central bank estimated that Citigroup’s proposal would have caused capital to fall below a minimum requirement in a severe economic slump. The Fed didn’t object to the company’s current dividend levels.

Pandit, 55, had said in September of last year that any dividend increases or share buybacks would be done “in conjunction with the regulators.”

The CEO, after yesterday’s finding, wrote a memo to employees saying the bank still has capacity to disburse capital and will seek clearance for a “meaningful” payout. The firm “remains among the best capitalized large banks in world,” Citigroup said in a statement. Without taking proposed capital measures, it met the Fed’s requirements.

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