The Fed nixed Citigroup's (C) plan to raise its dividend and increase its stock buyback which would have provided compensation for shareholders whose stock has underperformed. In the past year Citigroup shares have gained just 13% while J.P. Morgan (JPM) shares were up more than 25% and Bank of America (BAC) stock gained just over 40%. This was the second time the Fed has rejected a Citigroup capital plan.
David Nelson, chief strategist at Belpointe, a wealth management firm, says Citigroup's failing grade is "qualitative." The Fed looked at Citi and "thought they don't have the people in place to handle a downturn," he says. That's code for weak risk management.
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Nelson suspects the Fed's decision reflects recent revelations of a $400 million loan fraud at Citigroup's Mexico unit, which resulted in a $235 million writedown to its 2013 profit. The Fed didn't mention the suspected fraud in Mexico nor more recent revelations by the bank of three more problem loans valued at less than $10 million each.
Following the latest Fed decision for Citigroup, Keefe Bruyette and Sanford Bernstein both downgraded the stock Thursday morning. Citi stock fell almost 6% after the news broke on Wednesday but has recovered slightly; it's trading 4% lower early morning Thursday.
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"Why would I want to own Citigroup, take on this baggage when J.P. Morgan is trading at 10 times earnings," says Nelson. "There are just better names to own out there."
Nelson also expects heads will roll at Citi beause of the capital plan rejection.
"This is serious news for Michael Corbat," says Nelson, referring to the bank's current CEO who followed the ouster of former CEO Vikram Pandit almost 18 months ago. Ironically, the bank highlighted Corbat's work on improving "risk outcomes and controls" in a statement explaining his 2013 compensation of $14.3 million. His compensation and perhaps his future could be hot topics at Citigroup's annual shareholder meeting next month.
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