All eyes have been on bank stocks this week as investors waited to hear of the results of the Fed’s stress test results. While much of the excitement centered on Bank of America Corp (NYSE:BAC) and its nicely padded capital cushion, Citigroup Inc. (NYSE:C) , a stress-test loser last year, surfaced as a clear winner, showing up fellow big banks B of A, JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group, Inc. (NYSE:GS), Morgan Stanley (NYSE: MS), and Wells Fargo & Co (NYSE:WFC) in the post-test, Tier 1 common capital category.
Playing it safe
Citigroup Inc. (NYSE:C) came out of the test — which required a minimum post-test 5% capital reserve — with an 8.3% capital ratio, higher than Wells’ 7%, B of A’s 6.8%, and JPMorgan Chase & Co. (NYSE:JPM)’s 6.3%. Both Goldman and Morgan Stanley emerged with ratios under 6%.
The super-charged stress scenario, reserved for the six largest banks, entailed an economic climate that featured 12% unemployment, a drop in real estate prices of 20%, and a general weakening of GDP by nearly 5%. In other parts of the world, the toughest scenario envisioned nasty recessions in Europe and Japan, with stalled economies in developing nations.
Despite going into the test with a Tier 1 ratio of 12.7% — the highest of any other bank — Citigroup Inc. (NYSE:C) choose to be conservative in its capital requests from the Fed. In an early release of this information, the bank revealed that it had asked for a $1.2 billion stock repurchase, and the maintenance of its current $0.01 per share quarterly dividend.
While some analysts expected Citi to increase its shareholder payout, it appears that new CEO Michael Corbat elected to play it safe. Along with SunTrust Banks, Inc. (NYSE: STI) and Fifth Third Bancorp (NASDAQ: FITB), Citigroup Inc. (NYSE:C) was stung last year by having its capital plan denied by the Fed. Although it submitted a revision that was eventually accepted, this particular incident has been considered key in the downfall of Vikram Pandit last fall.