Since Michael Corbat was named CEO of Citigroup Inc. (NYSE:C) in October of last year, he has emphasized his intent to cleanse the global behemoth of its struggles stemming from the financial crisis and implement a numbers-driven approach to right the ship he has sailed on for his entire 30-year career. Corbat is supposedly aiming to use scorecards to gauge the performance of the bank’s upper management, and tomorrow at 4:30 p.m., Corbat will receive his first scorecard: the results from the Federal Reserve’s annual stress tests.
Crushed under pressure
Despite being at the helm of the recovering bank for only four months, investors will not show any patience if the bank fails to meet minimum capital requirements under the Fed’s “severely adverse scenario,” as it did last year. Despite posting a Q3 2011 Tier 1 common ratio of 11.7% at the time of the last stress tests, the highest ratio among Bank of America Corp (NYSE:BAC) , Wells Fargo & Co (NYSE:WFC) , and JPMorgan Chase & Co. (NYSE:JPM) , when the harsh hypothetical economic conditions were applied, Citi’s Tier 1 common ratio crippled to below 6%. The main driver of the theoretical deterioration was losses in Citi’s consumer credit card and mortgage portfolios. This year, the conditions in the Fed’s most drastic scenario include:
Real GDP decline by between 4%-5% by the end of 2013
Unemployment rises another 4% from current levels
Housing and commercial real estate decline more than 20%
50% decline in equity prices over the course of the hypothetical recession
As previously mentioned, although Citi has built stronger capital ratios throughout 2012, investors will be watching how those ratios stand up when the global economy is waning.
Good things come to those who wait
The most important thing for Citigroup Inc. (NYSE:C) investors may be patience. Unlike the three other major U.S. banks, Citigroup Inc. (NYSE:C) is much more of a global institution with only around 30% of its revenues coming from North American operations. Therefore, a Citi recovery is not as a correlated with a continued U.S. economic recovery as success at Wells Fargo is. It hasn’t been all bad news for the bank as allowance for credit losses as a percentage of total loans has declined for nine consecutive quarters as high quality loans are bought onto the books.