The US Federal Reserve on Wednesday barred Citigroup Inc from raising its dividend or boosting its stock buybacks, saying it was too hard to predict how some parts of the bank’s global operation would fare in a sharp economic downturn.
It was a setback for Citigroup, one of the US’ biggest banks, which has been cutting jobs and trimming some businesses in an effort to improve its finances.
Citi was the biggest of five banks whose plans the Fed rejected as part of its so-called “stress tests,” an annual checkup of the nation’s biggest financial institutions.
The bank had asked the Fed’s permission to buy back US$6.4 billion in shares through the first quarter of next year and to raise its dividend to US$0.05 each quarter, up from US$0.01 per quarter now.
New York-based Citigroup was blocked from raising its dividend in 2012, too, after failing its stress test. Later that year it brought in a new CEO, Mike Corbat, with a mandate to speed up its turnaround. .
Corbat said on Wednesday that the company is “deeply disappointed” by the Fed decision. The dividend and buyback would have been a “modest level of capital” for shareholders, and Citi still would have exceeded requirements for its financial health, he said in a written statement.
The Fed announcement caused investors to reassess bank stocks across the board. Citigroup’s stock was down more than 5 percent in after-hours trading.
CLSA analyst Mike Mayo called Citi’s rejection “a shocker.”
“Citi needs to make this defeat into victory by improving the pace of restructuring,” he wrote in a note.
That would include selling off businesses and holding managers more accountable, especially after executives had offered reassurances about how the bank is monitoring its finances, Mayo said.
The Fed said that the capital plans of Citigroup fell short in some areas, including its ability to forecast revenues and losses in parts of its global operations, should they come under economic stress.
As with Citigroup, the Fed said it found deficiencies in the capital plans of HSBC North America Holdings, RBS Citizens Financial Group, Santander Holdings USA and Zions Bancorp.
However, the central bank approved requests outright from the other 25 tested banks, which included JPMorgan Chase, Wells Fargo and Morgan Stanley, in addition to Bank of America and Goldman Sachs
The announcement on Wednesday follows last week’s results of the Fed’s annual “stress tests.” The central bank determined that the US banking industry is better able to withstand a major economic downturn than at any time since the financial crisis struck in 2008.
The Fed said that only one of the 30 biggest banks in the country needed to take more steps to shore up its capital base. That bank was Zions.