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Citigroup, SunTrust Banks Capital Plans Fail Fed Stress Tests

Wednesday, March 14, 2012

Citigroup Inc. (C), the lender that took the most government aid during the financial crisis, will try again to win approval for its capital plan after failing to meet minimum standards in U.S. stress tests.

The Federal Reserve objected yesterday to Citigroup’s plan -- which may have included a request for a higher dividend -- prompting the bank to say it will submit a revised version later this year. SunTrust Banks Inc. (STI), Ally Financial Inc. and MetLife Inc. (MET) also fell short in the Fed’s test of how 19 of the nation’s biggest lenders would fare in a severe economic slump.

“Investors are going to be disappointed,” said Michael Shemi, a director at Christofferson, Robb & Co., a New York- based investment firm with about $1.5 billion under management, referring to Citigroup. “Citi appears to have been too aggressive with their capital plans.”

The results are a blow to Chief Executive Officer Vikram Pandit, who has told investors the New York-based bank is ready to return capital to shareholders after slashing the dividend during the financial crisis. Capital plans submitted for the tests typically involve requests for higher dividends and share buybacks, which the Fed allowed for JPMorgan Chase & Co. and Wells Fargo & Co.

Pandit scrapped Citigroup’s dividend in 2009 as part of the company’s $45 billion bailout, which was later repaid. He reinstated a 1-cent payout last year and has been selling riskier assets to rebuild the bank’s strength. The Fed didn’t object to keeping the current quarterly payout, Citigroup said.

Ally’s Setback

The tests may also set back Ally, the Detroit-based auto and home lender rescued by taxpayers, which had planned an initial public offering to repay its bailout. Ally, run by CEO Michael Carpenter, and SunTrust, led by CEO William H. Rogers, said they will submit revised plans.

The Fed is testing to see how the capital of U.S. banks might hold up through a deep recession and a second housing crisis. The scrutiny focused on variables such as trading and counterparty losses and write-offs on credit cards and first- lien mortgages. Most of the 19 banks passed.

Disclosure of stress-test results in May 2009 boosted confidence in the financial system by giving investors more certainty on the maximum losses firms might sustain, and bank stocks beat the Standard & Poor’s 500 Index in the next 12 months. The KBW Bank Index jumped 4.6 percent yesterday after JPMorgan, the biggest U.S. lender, announced it had passed the test and was raising its dividend 20 percent.

Analytical Gaps

The average estimate of six analysts surveyed by Bloomberg was for Citigroup to increase its payout to 28 cents this year from 3 cents. They projected the bank would buy back about $2.18 billion in shares, or 2.2 percent of the total, after making no repurchases last year.

Shannon Bell, a spokeswoman for Citigroup, declined to comment on what was in the capital plan. Ally said in an e-mailed statement that the Fed’s analysis overstated some risks and didn’t account for some of the auto and home lender’s financial and management resources.

Citigroup’s projected Tier 1 common capital ratio fell to 4.9 percent, below the central bank’s minimum requirement of 5 percent, in a test estimating the effects of a severe economic slump, according to data released by the Fed. Citigroup would surpass the threshold if the bank didn’t pursue a dividend increase or share buyback, according to the Fed’s data.

Orphaned Assets

Citigroup still has more than $200 billion of unwanted assets in the Citi Holdings unit, including more than $100 billion of mortgages, according to a filing.

“We continue to have the same goals that I mentioned before, which is that this will be the year that we’ll start returning capital,” Pandit told analysts on Jan. 17.

Ally has benefited from $17.2 billion of federal aid, which it needed after losses swelled on subprime home mortgages made by its Residential Capital mortgage subsidiary. A statement e-mailed by Gina Proia, a spokeswoman for Ally, said the Fed’s analysis “dramatically overstates potential contingent mortgage risk, especially with respect to newer vintages of loans.”

The tests also didn’t give enough credit for “management’s track record” and commitment to addressing the mortgage risks, and doesn’t “adequately contemplate contingent capital that already exists,” according to the statement.

The U.S. Treasury holds $5.9 billion of preferred shares that must be converted into common equity no later than Dec. 30, 2016, according to the lender’s annual securities filing.

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