Citigroup Inc. (C)’s Surprising Post Stress-Test Move

Last Thursday, the Federal Reserve announced the results from part one of its Comprehensive Capital Analysis and Review, known informally as “stress tests.” For Citigroup Inc. (NYSE:C) investors there were two surprises: one sure to please, and one almost surely not to.

Surprise #1: Great stress-test performance
But just in case you missed the breaking Citigroup Inc. (NYSE:C) stress-test news from last week, here’s a quick recap:

Source: Dodd-Frank Act Stress Test 2013: Supervisory Stress Test Methodology and Results.

In the Fed’s simulated, severe economic downturn, Citigroup Inc. (NYSE:C) — which had an excellent capital position of 12.7% going into the test — would lose 4.4% off its Tier 1 common capital ratio, still leaving it at 8.3%: strong in absolute terms, as well as in relation to its peers.

The median Tier 1 common capital ratio performance for the banks this year was 7.7%. The minimum regulatory standard the Fed requires is 5%. A stressed 8.3% common ratio easily surpasses the Fed’s minimum, and comfortably surpasses the average. There’s no arguing Citi’s performance on the test itself.

Nor is there much arguing to be done regarding how well Citigroup Inc. (NYSE:C) did up against its big-banking peers: The superbank easily outperformed many of them. JPMorgan Chase & Co. (NYSE:JPM)‘s stressed common ratio was only 6.3% versus Citi’s 8.3%. The normally indefatigable Wells Fargo & Co (NYSE:WFC) only emerged with a 7% common ratio , and Bank of America Corp (NYSE:BAC) came in with a 6.8% stressed common ratio. Well done all around, Citigroup Inc. (NYSE:C).

Surprise #2: No dividend for you
Citigroup Inc. (NYSE:C) has already announced it will not seek a post stress-test dividend increase from the Fed. This will come as an unexpected surprise to the bank’s investors; given how well it did in the 2013 CCAR, it could almost certainly have gotten one (versus last year, when Citigroup Inc. (NYSE:C) failed its stress test and was unable to raise its dividend).

The Fed had recently indicated it wouldn’t look kindly on any dividend increase that would cause a bank to go beyond a 30% payout ratio. But Citi’s is currently 2%, so from the Fed’s perspective, there’s obviously excessive room for maneuver there. To the best of my knowledge, CEO Michael Corbat hasn’t commented on why his bank isn’t seeking a dividend increase, but here’s my best guess.