WASHINGTON / NEW YORK (Reuters) — The
Federal Reserve on Wednesday rejected Citigroup Inc's plans to buy
back $6.4 billion of shares and boost dividends, saying the bank is
not sufficiently prepared to handle a potential financial crisis.
The decision marks the second time in three years that Citigroup has
failed to win the Fed's approval for its plan to return money to
shareholders, known as the "capital plan."
Officials at the bank never saw the rejection coming, a source close
to the matter said on Wednesday.
The rejection underscores that whatever strides Citi's chief
executive, Michael Corbat, has made in fixing the bank's
difficulties, he still has work to do. Shares of Citigroup, the
third-largest U.S. bank, fell 5.4 percent to $47.45 in after-hours
Since taking the reins at the bank in 2012, Corbat has been working
hard to cultivate close relationships with regulators in Washington.
His predecessor, Vikram Pandit, had a famously testy relationship
with the Federal Deposit Insurance Corp's then chairman Sheila Bair,
among other regulators.
But even after mending fences in Washington, Corbat was blindsided
by the Fed's decision to nix his plan for paying out money to
shareholders. His first hint that something might be awry with the
bank's capital plans came last week, when the Fed disclosed its
views of how global turmoil would affect the bank's capital levels,
the source said. The Fed's projections were much less rosy than
The bank, like its competitors, faces two opposing goals. It wants
to have large amounts of capital to please regulators; it also wants
to please its shareholders, and high levels of capital weigh on
Citi was one of five banks whose payout plans were rejected by the
Fed on Wednesday. Three were the U.S. units of European banks. The
fifth, Zions Bancorp, was expected because it was the only bank last
week to fail a model run of a simulated crisis similar to the
2007-09 credit meltdown in the first part of the Fed's stress tests.
The Fed said it approved capital plans submitted by the remaining 25
big banks in this year's tests.
Corbat, said in a statement that the Citigroup is "deeply
disappointed" by the Fed's decision and that the bank's request for
returning additional capital to shareholders was modest.
Last year, the Fed granted Citigroup permission to buy back $1.2
billion worth of shares and said it could continue to pay $120
million a year in dividends, representing a quarterly rate of a
penny a share.
This year Citigroup sought to spend more than five times as much
buying back shares and to lift its quarterly dividend to 5 cents a
share. The bank earned $13.67 billion last year.
Analysts, on average, had estimated that Citigroup's quarterly
dividend would increase to 12 cents per share, according to surveys
by Thomson Reuters.
ANALYSTS SEE PROBLEMS IN CITI'S COMPLEXITY
On Wednesday, the Fed said that Citigroup has improved its risk
management practices in recent years, but the bank cannot determine
well enough how its revenue and income would be hurt under stressful
scenarios around the world. The bank's internal examination process
does not sufficiently consider how global crises could influence its
broad number of businesses, the Fed added.
In 2012, the Fed rejected the plan by Citi's then CEO Pandit, a step
that contributed to his ouster in October of that year. In the 2012
test, Citigroup did not prove to the Fed's satisfaction that it
could adequately measure risk in loans to some consumers in
Southeast Asia, where credit rating standards are not as well
developed as in the United States, according to a person familiar
with the matter.
The Fed said on Wednesday that some of Citigroup's deficiencies had
been "previously identified by supervisors as requiring attention"
and that "there was not sufficient improvement."
A Fed official said that regulators had raised their expectations
for banks with each set of stress tests, and it expected
improvements in areas that had previously been identified as needing
Citigroup's complexity — it operates in over 100 countries, and was
built over decades of acquisitions — may be working against it,
"Citi needs to make this defeat into victory by improving the pace
of restructuring," said Mike Mayo, an analyst at CLSA, saying the
bank should consider breaking itself up more dramatically than it
The other banks blocked by the Fed on Wednesday in their plans for
higher dividends or share buybacks were the U.S. units of HSBC, RBS
and Santander, due to weaknesses in their capital planning
Zions, the fifth bank whose plan was barred, was the only bank out
of 30 to miss minimum hurdles for regulatory capital in a first
stage of the stress tests, which simulate a future crisis as severe
as the 2007-09 credit meltdown.
"Both the firms and supervisors have more work to do as we continue
to raise expectations for the quality of risk management in the
nation's largest banks," Fed Governor Daniel Tarullo said in a
statement on Wednesday.
The five banks can continue with shareholder payouts at the same
pace as they did last year. They can also change their proposals and
resubmit them, a move that Citigroup said it is considering.
Fed officials told reporters that capital distributions at the banks
had been sufficiently modest in past years that they could continue
at current levels without hurting the firms.
The Fed's criticism of internal controls, risk-identification and
other planning elements at the foreign banks underscores regulators'
concerns about the safety of those firms' operations in the United
Foreign banks will have to wall off their U.S. units and meet
tougher capital requirements under rules recently finalized by the
The Fed has said HSBC, RBS and Santander all would likely fall under
those new rules.
Two large Wall Street banks, Bank of America and Goldman Sachs, had
to resubmit their capital plans after seeing their first set of
stress test results.
Bank of America received approval to increase its quarterly dividend
to 5 cents per share from 1 cent per share previously, and approval
for the authorization a new $4.0 billion share buyback program. Last
year, the Federal Reserve approved Bank of America's request to
redeem $5.5 billion in preferred stock and $5.0 billion in common
The annual tests aim to determine whether banks are robust enough to
weather the next crisis. Under the toughest stress scenario
considered this year, the banks had to show how they would cope with
the stock market falling by 50 percent. The eight biggest banks had
to weigh the impact of a default by their largest derivatives
Last week, the Fed looked at what the banks' capital levels would
look like in stress scenarios, assuming they did not change their
payouts to investors. In the results released on Wednesday,
regulators looked at whether banks could carry out their planned
capital distributions and still maintain a buffer in a downturn.
(Reporting by David Henry in New York and Emily Stephenson in
Washington; additional reporting by Douwe Miedema in Washington, and
Peter Rudegeair and Lauren Tara LaCapra in New York; editing by Dan Wilchins and Leslie Adler)