Citigroup Inc Capital Plan Rejection A Big Surprise: Credit Suisse


Credit Suisse analysts were surprised at the Fed’s objection to Citigroup Inc (NYSE:C)’s plan on qualitative factors despite stressed capital ratios coming in well above the minimums

Moshe Orenbuch and team at Credit Suisse in their Equity Research report dated March 27, 2014, however, note the Fed’s 2014 CCAR results reveal dividend and total payout ratios came in roughly in line with the analysts’ estimates.

Fed rejecting Citigroup’s capital plans

On Wednesday, the Federal Reserve announced it has approved the capital plans of 25 bank holding companies participating in the Comprehensive Capital Analysis and Review (CCAR). The Federal Reserve objected to the plans of other five participating firms–four based on qualitative concerns and one because it did not meet a minimum post-stress capital requirement.

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The Credit Suisse analysts point out that while Citigroup Inc (NYSE:C), HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HBCA), Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) and Banco Santander, S.A. (ADR) (NYSE:SAN) received ‘objections’ to their capital plans based on qualitative assessments, Zions Bancorporation (NASDAQ:ZION)’s capital plan received an objection based on the quantitative assessment.

Drawing attention to the Fed’s noting, the Credit Suisse analysts point out that the Fed’s objection to Citi’s capital plan was partly due to ‘significantly heightened supervisory expectations for the largest and most complex BHCs in all aspects of capital planning.’ The Fed also noted several deficiencies in Citi’s capital planning processes including some areas that had previously been identified by regulators.

The analysts however note Citigroup Inc (NYSE:C) will be permitted to continue with its current capital actions through 1Q15 which include a $1.2 billion common stock repurchase program and a quarterly dividend of $0.01 per share.

However, as highlighted in the following table, the analysts point out that the median dividend payout ratio increased to 26% as against 23% in 2013. Total capital return increased to 71% as against 59% approved by the Fed last year.

Tougher standard for large banks

The Credit Suisse analysts note it appears the Fed is holding the largest banks to a significantly tougher standard both quantitatively and qualitatively. Among the large cap banks, Wells Fargo & Co (NYSE:WFC), U.S. Bancorp (NYSE:USB) and PNC Financial Services Group Inc (NYSE:PNC) were approved for healthy levels of capital return at an estimated 79%, 68% and 66% respectively. The following graph highlights the estimated 2014E capital deployments for various banks:

Capital deployment Citigroup

The analysts point out that of the companies with strong capital return, The Bank of New York Mellon Corporation (NYSE:BK), Capital One Financial Corp. (NYSE:COF), KeyCorp (NYSE:KEY), Huntington Bancshares Incorporated (NASDAQ:HBAN), PNC Financial Services Group Inc (NYSE:PNC) and Wells Fargo & Company (NYSE:WFC) had payouts that came in above their expectations.