Citi Clears Stress Test, Finally
The stress test results are out and this time Citigroup Inc. (C) has come out with flying colors. The company has not only managed to clear this year’s stress test but has outperformed other major banks including JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC) and Wells Fargo & Company (WFC).
In its latest capital plan, Citi has asked for $1.2 billion worth of share repurchases through the first quarter of 2014 and no change in dividend levels. The company currently pays common stock dividend of 1 cent per share with no share buyback plan.
The Fed had set the Tier I common capital ratio at 5% or above to clear the current stress test. As per the Fed’s data, Citi’s projected Tier I common capital ratio came in at 8.3% under hypothetical economic environment. The stressful circumstances included unemployment rate reaching 12.1%, home prices plummeting nearly 21%, severe recession in the U.S., Europe and Japan leading to about 50% fall in equity prices along with the U.S. GDP falling 6.1%.
Though Citi satisfied the stress test requirements, the approval of its latest capital plan is contingent on the Federal Reserve. The Fed will announce its approval or rejection of the plan on Mar 14, 2013.
Last year, the Fed had stated that Citi’s capital ratio would fall to 4.9% after considering its capital plan. Hence, the regulator had rejected the company’s new proposal.
The clearing of the stress test shows that Citi’s efforts to streamline its operations are now bearing fruit. Over the past few years, the company has been restructuring its business, making several layoffs, selling assets and trimming costs.
The news will also enhance the confidence of the investors in the company. Citi has come a long way since 2008, when it had to take $45 billion of bail-out money to survive the economic downturn. Through the stress test the company has shown that its capital position has significantly improved from 2008.
Now that it has cleared the stress test, Citi should not get complacent with its capital enhancement initiatives. The company should continue to strive for improvement in its balance sheet and capital ratios.
Citi currently retains its Zacks Rank #3 (Hold).
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