Tags: Fed | Payout | Citi | banks

Fed Bars Shareholder Payout Plans from Citi, 4 Other Banks

Wednesday, 26 March 2014 05:31 PM

The Federal Reserve on Wednesday rejected Citigroup Inc.'s plans to buy back $6.4 billion of shares and boost its dividends, citing deficiencies in the bank's ability to plan for how stressful situations would hurt its business.

The decision marks the second time in three years that Citigroup has failed to win the Fed's approval for plan to return money to shareholders, known as the "capital plan," and is a blow for a bank still recovering from the financial crisis. Returning money to investors through buying back shares is critical for Citigroup's meeting a key target for profitability.

Shares of Citi, the third-largest U.S. bank, fell 4.5 percent to $47.90 in after-hours trading.

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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.

Citigroup's chief executive officer, Michael Corbat, said the bank 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.

Failing to win regulatory approval for the capital plan is a setback for Corbat, who was charged with improving the bank's relationship with regulators when he took over as CEO in October 2012.

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 chief executive, Vikram 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."


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 tranche 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 will not be allowed to move forward with proposed raises in dividends and share buybacks, though they can continue with shareholder payouts at the same pace as they did last year.

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.

The annual tests aim to determine whether banks are robust enough to weather the next crisis.

For this round, regulators looked at whether banks could carry out their planned capital distributions and maintain a buffer. The rejections indicate that officials are not satisfied with banks' preparations for a hypothetical future downturn.

The Fed did not disclose the details of banks' proposed capital plans. Banks whose plans were approved are expected to announce them soon.

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The Federal Reserve on Wednesday rejected Citigroup Inc.'s plans to buy back $6.4 billion of shares and boost its dividends, citing deficiencies in the bank's ability to plan for how stressful situations would hurt its business.
Wednesday, 26 March 2014 05:31 PM
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