Citigroup Is the New Bank of America
That was the instant verdict delivered by the markets following the results of the Federal Reserve's CCAR (Comprehensive Capital Analysis and Review) announced after the bell on Tuesday. Shares of Bank of America have risen nearly 16% since Monday's close, while Citigroup has gained about 5.7%.
But if one sets aside Citi's request to return capital, which may have proved to be overly ambitious, the banks actually fared roughly the same in the hypothetical stress scenario. Citi's "minimum stressed capital ratio with no capital actions" was 5.9%, above the Fed's required minimum of 5%. Bank of America's stressed capital ratio was 5.7%.
What sets them apart is that Bank of America CEO Brian Moynihan learned from his mistake last year when he submitted a request for a modest dividend increase and was denied. This time the bank said it would not submit a request to return more capital, thus saving it from the embarrassment of being turned down.
Now Citigroup CEO Vikram Pandit is feeling the pain of having been too eager to return capital to shareholders in 2012. Pandit has repeatedly said that the bank will be in a position to reward shareholders with more dividends and buybacks in 2012, so the rejection has delivered a serious blow to investor confidence and Citi's credibility.
"One would think Citi would operate beyond reproach, whether it is with accounting conservatism, adherence with regulations, executive compensation or items such as the announcement of a return of capital before authority is granted," Mike Mayo wrote in a note cited by Bloomberg News . "The capital mishap is one more sign that the culture has not changed.
Oppenheimer analyst Chris Kotowski estimates that Citigroup must have asked to return $10 billion over the next 9 quarters or about 1% of its $1 trillion risk-weighted asset base, based on the difference between the minimum capital ratios before and after the request. That works to about $4.5 billion per year.
Had Citi asked for half of that, Kotowski calculates, its minimum stressed ratio after all proposed capital actions would have been 5.4%, in line with JPMorgan Chase's (JPM) and US Bancorp (USB) , which positively surprised.
The bull case for Citigroup then is that the management got too optimistic on the proposal and this is a temporary setback. The bank can make a request for a lower capital return program later in the year and could win approval from the regulator.
"We believe significant capital returns remain a matter of when, not if. While we believe that the Fed's objection to C's 2012 capital return plan is embarrassing, it is likely not indicative of an underlying capital problem," Sandler O' Neill analyst Jeffrey Harte wrote in a report. "We continue to expect C to generate more than $60B of excess regulatory capital over the next few years and to return the vast majority of that regulatory capital to shareholders."