The Fed rejects Citigroup capital plan for the second time since bank stress tests have been conducted, sending shares more than 5 percent into the red in after hours trading.
The Federal Reserve Wednesday rejected the capital plan submitted by Citigroup (C) as part of an annual bank stress test, saying it “reflected a number of deficiencies” in planning practices. Shares of the financial giant fell more than 5 percent in after hours trading.
Citigroup wasn’t the only bank to be rejected. Though 25 big U.S. banks examined by the Fed got a green light to go ahead with their capital plans, four others did not.
HSBC (HSBC) North America Holdings, RBS Citizens, which is a unit of Royal Bank of Scotland (RBS) and Santander (SAN) Holdings USA, all must resubmit capital plans. Further, the three big foreign firms cannot send dividends or repatriate cash back to their parent companies until their new capital plans are approved by the Fed.
Except for Citigroup, who has now been rejected twice by the Fed since they first did in 2012, each of the other four banks asked to resubmit capital plans never participated in the annual stress tests, until 2014.
“Although the Federal Reserve has different expectations for (banks) new to (the stress tests), weaknesses at HSBC, RBS Citizens, and Santander were considered significant enough to warrant an objection based on the Federal Reserve’s qualitative assessment,” the Fed said.
The Fed said it objected to HSBC’s and RBS Citizens’ plans due to “significant deficiencies” in their capital planning processes, including inadequate governance and weak internal controls around the processes. Santander’s plan was rejected due to “widespread and significant deficiencies” across the bank’s capital planning processes.
Two of the 25 banks got the go-ahead, JPMorgan Chase (JPM) and Morgan Stanley (MS), immediately announced they were raising their quarterly dividends in an effort to avoid share price precipitation. However, the Fed can reject banks’ plans for raising dividends and stock buybacks if the Fed says lenders fail to meet minimum standards for capital and crisis planning.
The bank stress test, which was released on March 20, are a product of the Dodd-Frank banking reform bill, which requires the Fed to determine how the banks — those in the too-big-to-fail category — would perform in the event of another financial crisis.
Zions Bancorp (ZION) with a total of $56 billion in assets, is one other bank required to resubmit a capital plan. Zions, which was the only bank to fail in the initial bank stress test results, had a tier 1 capital ratio that fell to 3.5 percent during the most severe stress scenario, naturally below the minimum.
In its current report, the Fed said Citigroup had made “considerable progress” toward improving its risk management in recent years. However, its 2014 capital plan did not reflect “sufficient improvement” in areas the Fed has already cited them on in the past.
For instance, Citigroup lacks enough of an ability to project revenue and losses under a stressful scenario at important segments of the bank’s global operations.
“Taken in isolation, each of the deficiencies would not have been deemed critical enough to warrant an objection, but, when viewed together, they raise sufficient concerns regarding the overall reliability of Citigroup’s capital planning process to warrant an objection to the capital plan and require a resubmission,” the Fed said.
“We will continue to work closely with the Fed to better understand their concerns so that we can bring our capital planning process in line with their expectations and meet their standards on a qualitative basis as well. We have not yet made a decision as to when we will resubmit our plan,” Citigroup’s CEO Michael Corbat said in a statement.
