(Adds detail on Citigroup CEO, analyst comment)
By Emily Stephenson and David Henry
WASHINGTON/NEW YORK, March 26 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
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
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
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 Citi's.
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 profitability.
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
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
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 work.
Citigroup's complexity -- it operates in over 100 countries,
and was built over decades of acquisitions -- may be working
against it, analysts said.
"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
dramtically than it already has.
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 processes.
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
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 States.
Foreign banks will have to wall off their U.S. units and
meet tougher capital requirements under rules recently finalized
by the Fed.
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 shares.
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 trading counterparty.
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)