Another year, another failure by Citigroup to i) pass the Fed’s stress test and ii) be able to stop investing cash in such idiotic fundamental concepts as CapEx, and instead reward activist shareholders with increased dividends and buybacks. As the WSJ reports, Citigroup “failed to get Federal Reserve approval to reward investors with dividends and stock buybacks, a significant blow to Chief Executive Michael Corbat’s effort to bolster the bank’s reputation following a 2008 government rescue.” Hardly surprising for a bank which effectively was wiped out in the crisis and which only survived thanks to the Fed-backed crammed-up, spinoff of billions of toxic assets into a bank bank, however certainly surprising for a bank that is supposed to be “fixed” five years into a “recovery.” What’s worse, the stock is now trading below the infamous $5 level on a pre-split adjustment level – the same split that was supposed to at least optically, give the impression that things at Citi are ok. Turns out optics is only half the answer.
Citi wan’t the only one: the Fed rejected capital plans of five large banks and approved 25 as part of its annual “stress tests” measuring a firm’s ability to survive a severe economic downturn. Companies must fare well on the test to win the regulator’s approval for returning money to shareholders. Citigroup’s rejection was based on deficiencies in the bank’s capital-planning practices, including its ability to project revenue and losses under a stressful scenario and to adequately measure its exposures, according to the Fed.
The five institutions that didn’t get approval—Citigroup, Zions Bancorp, and the U.S. units of HSBC Holdings PLC, Royal Bank of Scotland Group PLC and Banco Santander —must submit revised capital plans and must suspend any increased dividend payments unless they get the Fed’s approval in writing. The foreign banks that didn’t pass muster with the Fed are restricted from paying increased dividends to their parent firm. The five banks that failed to get their plans approved can continue to pay dividends at last year’s level.
Others, those closer to the Fed of course, were more lucky:
The Fed approved the shareholder-reward plans for Bank of America Corp. BAC -0.06% and Goldman Sachs Group Inc. GS -0.92% only after the two banks adjusted their requests. Both of the banks initially fell below minimum capital levels in the Fed’s ‘severely adverse’ stress testing scenario and resubmitted their plans last week.
And from Bloomberg, here is why specifically, the Fed just sent Citi’s stock back under $5 on a split-adjusted basis:
- Citigroup’s plan was objected to because “heightened supervisory expectations for the largest and most complex [bank holding companies] in all aspects of capital planning,” Federal Reserve said in its annual Comprehensive Capital Analysis and Review released today.
- “While Citigroup has made considerable progress in improving its general risk-management and control practices over the past several years, its 2014 capital plan reflected a number of deficiencies in its capital planning practices, including in some areas that had been previously identified by supervisors as requiring attention, but for which there was not sufficient improvement.
- “Practices with specific deficiencies included Citigroup’s ability to project revenue and losses under a stressful scenario for material parts of the firm’s global operations, and its ability to develop scenarios for its internal stress testing that adequately reflect and stress its full range of business activities and exposures.
- “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 to warrant an objection to the capital plan and require a resubmission.”
It is almost as if the Fed has already picked which bank will be this round’s sacrificial Lehman when the moment comes to pull the plug on this particular bubble…
whocouldanode? credit, that’s who!
via Zero Hedge http://ift.tt/1rBziLR Tyler Durden