This was a big week for all of the big banks. The Federal Reserve released results from part two of its annual, Dodd-Frank mandated stress tests, also known as the 2013 Comprehensive Capital Analysis and Review, or CCAR.
Judging by the 1.84% rise in Citigroup Inc. (NYSE:C)‘s share price over the last week, investors seem to have liked what the Fed had to say, and what the bank had to say in return — as shocking a statement as it was.
The stress test
Part one of the CCAR revealed how well each of 18 banks performed in a simulated, severe economic downturn, and Citi did surprisingly well.
The bank’s actual Tier 1 common ratio (a measure of its capital reserves against risk-weighted assets) was a hardy 12.7%. In the throes of the simulated economic downturn, that common ratio went down to 8.3%. The Fed requires each bank’s stressed common ratio to be above 5%. Citi’s scores on both ends were impressive, and better than many of its peers.
JPMorgan Chase & Co. (NYSE:JPM) only managed an actual common ratio of 10.4% and a stressed minimum of 6.3%. Goldman Sachs Group, Inc. (NYSE:GS)‘ fabulous actual common ratio of 13.1% went entirely to pieces in the grinder of the simulated economic downturn, ending up all the way down at 5.8%.
And even the normally top-of-the-game Wells Fargo & Co (NYSE:WFC) only had an actual common ratio of 9.9% and a stressed minimum of 7%. Bank of America Corp (NYSE:BAC) — the other bank, in addition to Citi, still reeling from the aftershocks of the financial crisis — did surprisingly well, though, with an actual common ratio of 11.4% and a stressed minimum of 6.8%.
The acid test
But for investors, part two of the CCAR is what really mattered, because it would reveal whether or not each bank would get its proposed capital actions approved.
Again, with Citi performing so well on its stress test, most investors assumed Citi was going to get approval for whatever it asked for, and investors would get a dividend increase or share buybacks. This was a reasonable assumption, especially after the bank failed its test last year and investors got precisely none of those things.
But before the Fed could say yay or nay about any proposed capital actions, Citi pre-empted the central bank by announcing it wouldn’t seek any increase in its dividend or share repurchases. This came as a big surprise, and while no official explanation was given, there are a few reasonable theories going around.