1 Possible Explanation for the Disastrous Week at Citigroup Inc.
Many investors know Citigroup had a terrible week following the announcement the Federal Reserve would reject its dividend and share buyback plans, but one possible reason behind that rejection hasn't been discussed.
The painful rejection
After the market closed on Wednesday last week, the Federal Reserve announced it had rejected the request of Citigroup to raise its dividend from $0.01 to $0.05 and repurchase $6.4 billion worth of its common stock. This sent the stock tumbling on Thursday, when it fell more than 5%.
Of course this rejection came at the same time when, despite seemingly worse results during the stressed scenario, Bank of America watched its plan to buy back $4 billion in common stock and raise its dividend also from $0.01 to $0.05 get approved. Unsurprisingly, Wells Fargo posted the best results, and also witnessed its plans to raise its dividend from $0.30 to $0.35 and repurchase a staggering $17.5 billion in common stock get approved as well:
Source: Federal Reserve.
The reason for denial
The Federal Reserve noted Citigroup passed the quantitative measures for the tests, but ultimately qualitative questions swirled surrounding its ability to project losses in revenue. In addition, the ability of its stress tests to "adequately reflect and stress its full range of business activities and exposures," were not up to the Fed's standards.
But this reason for rejection has not been a sufficient explanation for many investors, as a simple glance at the results above reveals Citigroup was seemingly in a much better position than Bank of America and JPMorgan Chase both initially and in the stressed scenarios.
Yet there has been one thing which has been absent from the discussion surrounding the rejection at Citigroup.
The honest admission
In 2013 Bank of America was approved by the Federal Reserve to repurchase $5 billion of its common stock and redeem $5.5 billion of its expensive preferred stock. Meanwhile Citigroup was only approved for a $1.2 billion share buyback program.
That means in 2014 Bank of America went from requesting $10.5 billion in shareholder returns to a little more than $6 billion, a decrease of 40%. Whereas Citigroup bumped its request nearly six times higher from $1.2 billion to $7 billion.
When you consider Bank of America and Citigroup each were seemingly in worse position this year compared to last year -- as shown in the chart to the right -- one has to wonder if the honest admission from Bank of America to request less this year was the reason for its approval.
And while things at Citigroup didn't deteriorate quite like they did at Bank of America, it's not unreasonable to think part of the Federal Reserve's hesitations in approving the plans of Citigroup stemmed from the sizable increase it sought. While it certainly wasn't stated, perhaps this was one of the "qualitative," issues the Federal Reserve questioned.
The Foolish bottom line
It's a touch troubling to see Bank of America be in an apparently worse position this year versus last, but its approval from the Federal Reserve should quell any fears of investors, as it means it is actively working toward improvement. And while the rejection from the Fed shouldn't result in Citigroup being crossed off the list of investors everywhere, it nonetheless shows it still has a long road ahead of it.
Big banking's little $20.8 trillion secret
While it's no secret Bank of America, Citigroup, and Wells Fargo have been on remarkable runs following the bottom financial crisis, there is one major change coming to banking as we know it. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.
The article 1 Possible Explanation for the Disastrous Week at Citigroup Inc. originally appeared on Fool.com.Patrick Morris owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.