USB US Bancorp

The stress test results are out and it has been a disappointing one for Citigroup Inc. (C). The company could not manage to pass the stress test with its proposed plan to return capital to shareholders.

According to its press release, though Citi satisfied the stress test requirements, the Fed has objected to its plan to deploy capital to shareholders. As a result, Citi will need to submit a revised capital plan to the Fed later this year.

Citi can, however, continue with its existing dividend levels on its preferred and common stocks. Notably, the company currently pays 1 cent per quarter as common stock dividend. The Fed also has no objection to Citi redeeming certain series of outstanding trust preferred securities.

Citi’s situation this year is quite similar to that of Bank of America Corp. (BAC) in the last year. BofA, whose plan to return capital to shareholders was rejected last year by the Fed, passed the stress test this year without its request for increasing capital redeployment to shareholders this year.

Unlike Citi, the other Wall Street biggies such as JPMorgan Chase & Co.(JPM), U.S. Bancorp (USB) and Wells Fargo & Co. (WFC) passed the stress test well and have already declared increases in dividends and share repurchases. The Fed found that even in adverse scenarios, these banks capital ratios would be above the regulatory requirements after considering their capital plans.

The news is quite a disappointing one for Citi and its shareholders. The stock was down over 3% in after hours trading yesterday. Besides Citi, the three other companies which have failed the stress test this time are Ally Financial Inc., MetLife Inc. (MET) and SunTrust Banks Inc. (STI).

Investors were widely speculating about the amount of money companies like Citi will be allowed by the Fed to return to their shareholders this year. Notably, Citi has failed to significantly enhance shareholder value following the financial crisis and this somewhat weakened its competitive position.

Moreover, with the weakness in the economy as a whole and fundamental stress on the banking sector in particular, top-line headwind continues at Citi. While we believe that investments and efficiency savings will help in garnering a solid market share, volatile equity markets, a low interest environment, low liquidity and a tough regulatory environment remain our major concern.

Citicurrently retains its Zacks #5 Rank, which translates into a short-term Strong Sell rating.

 
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