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Citigroup fails Fed stress test

citigroup logoCitigroup Inc.’s capital plan was among five that failed Federal Reserve stress tests, while Goldman Sachs Group Inc. and Bank of America Corp. passed only after reducing their requests for buybacks and dividends.

Citigroup, as well as U.S. units of Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Banco Santander SA, failed because of qualitative concerns about their processes, the Fed said today in a statement. Zions Bancorporation was rejected as its capital fell below the minimum required. The central bank approved plans for 25 banks.

Regulators seeking to prevent a repeat of the 2008 financial crisis have run annual tests on how the largest banks would fare in a similar recession or economic shock. Analysts estimate that banks were planning to pay out about $75 billion in excess capital to reward shareholders and boost returns. This is the second straight year that the Fed has criticized the quality of some plans.

“As this progresses, the Fed is going to ask for more and more information, and the quality of information is going to have to improve,” Chris Mutascio, a Baltimore-based analyst at Stifel Financial Corp.’s KBW unit, said before the results were announced. “With it becoming more complex, you really have to make sure you dot your I’s and cross your T’s.”

Citigroup, which last year asked for the least capital return among the five largest U.S. banks after having its plan rejected in 2012, would have passed this year’s test on quantitative grounds alone. It had a 6.5 percent Tier 1 common ratio, above the Fed’s 5 percent minimum.

The central bank identified multiple deficiencies in Citigroup’s planning practices, including areas the Fed had flagged previously. The regulator expressed concern with the New York-based company’s ability to project losses in “material parts of its global operations” and to reflect all business exposures in its internal stress test.

Bank of America and Goldman Sachs saw each of their Tier 1 leverage ratios drop to 3.9 percent in their original capital plans, below the required 4 percent. Both firms lowered their requests and were approved, meaning they don’t have to resubmit.

The two banks asked for too much in buybacks and dividends after their own internal stress tests showed better performance than in the central bank’s exam. New York-based Goldman Sachs predicted its Tier 1 common ratio would be about 3.8 percentage points stronger than the Fed estimated in a worst-case scenario. The gap for Bank of America was 2.7 percentage points.

Chief Executive Officer Brian T. Moynihan seeks to fulfill his quest to raise the firm’s dividend, five years after it was cut to 1 cent during the crisis. The Fed blocked plans in 2011 for an increase by the Charlotte, North Carolina-based bank, which didn’t ask for anything the following year and won permission for a $5 billion stock buyback last year.

JPMorgan Chase & Co., which won approval last year while still having to resubmit to address qualitative weaknesses, had its capital plan ratified as it maintained a Tier 1 common ratio of 5.5 percent, a half-point above the minimum. Wells Fargo & Co.’s ratio was 6.1 percent, while Morgan Stanley’s was 5.9 percent.

Zions, the Salt Lake City-based bank that had a 4.4 percent Tier 1 common ratio in the test, said before today’s results were announced that it planned to resubmit its capital plan.

The Tier 1 common ratio measures a bank’s core equity, made up of common shares and retained earnings, divided by its total assets adjusted for risk using global banking guidelines.

Banks typically announce planned dividend increases and buybacks shortly after the Fed releases results of the stress tests. Raises may boost yields closer to the norms that prevailed before the financial crisis, when the stocks were favored by income-oriented investors. The average yield for the 24-company KBW Bank Index stood at 4.9 percent at the end of 2007. It’s now under 2 percent.

The banks in this year’s test collectively received approval to pay out about 60 percent of their estimated net income during the next four quarters, according to a Fed official. That ratio is higher than in recent years and closer to what lenders were returning to shareholders in 2005, before the crisis, according to data from Bloomberg Industries.

The Fed last week disclosed how banks performed in a hypothetical recession in which U.S. unemployment peaks at 11.3 percent, home prices fall 25 percent and stocks plunge almost 50 percent.

Projected losses for the 30 banks under a scenario of deep recession would total $366 billion over nine quarters, the Fed said last week. The aggregate Tier 1 common capital ratio would fall from an actual 11.5 percent in the third quarter of 2013 to a minimum of 7.6 percent, before factoring in the banks’ proposed capital plans.

The KBW Bank Index advanced 4.9 percent this year through yesterday, compared with the 0.9 percent gain for the benchmark Standard & Poor’s 500 Index.

The Fed last week corrected its initial calculations of banks’ capital ratios under the stress test.-Bloomberg