Citi, Four Others Fail Stress Tests

(RTTNews) - The Federal Reserve on Wednesday rejected the 2014 capital plans of Citigroup Inc (C) and four other bank holding firms, citing lacunae in their capital planning process.

But others passed muster as the Fed cleared the capital plans of 25 banks including JP Morgan Chase & Co (JPM), Goldman Sachs Group Inc (GS), Bank of America Corp (BAC), Morgan Stanley (MS) and Wells Fargo & Co (WFC).

For Bank of America and Goldman Sachs, it was not a smooth sail as the Fed passed their capital plans only after submitting adjusted actions.

The Fed results were part of the Comprehensive Capital Analysis and Review - so called stress tests that gauge if banks can endure an assumed economic lull into 2015 and still continue to lend as well as pay dividend and buyback stock.

The stress tests, now in its fourth year, imagines a period of steep unemployment, falling housing prices and lethargy across the economy.

The Fed objected to the capital plans of Citigroup, HSBC North America Holdings Inc (HSBC, HSBA.L), RBS Citizens Financial Group Inc (RBS, RBS.L), and Santander Holdings USA Inc, and Zions Bancorp (ZION).

While Citigroup has progressed in its risk-management and control practices, its 2014 capital plan had deficiencies including projection of revenue and losses under a stressful scenario for its global operations, the Fed said.

Citi, in its capital plans, had proposed with the Fed for a $6.4 billion stock buyback through the first quarter of 2015 and a raise in quarterly dividend to $0.05 per share.

The Fed rejected the plans from HSBC, Santander and RBS Citizens due to reasons ranging from deficiencies in governance, weak internal controls and inefficient planning processes. HSBC, RBS Citizens, and Santander are all new to the stress tests in 2014.

Also Zions Bancorp failed in its capital plans on quantitative grounds, the Fed said.

U.S. firms have strengthened their capital since the first stress tests in 2009. The aggregate tier 1 common equity ratio - which compares high-quality capital to risk-weighted assets - of the 30 bank holding companies in the 2014 stress tests more than doubled from the 2009 tests to 11.6 percent in the fourth quarter of 2013.

Banks overall have benefited from some pickup in the economy as well from cost cuts.

The Fed results enables the banks to go ahead with their plans to return a part of income to shareholders. Wells Fargo announced its 2014 capital plan that includes a 16.7 percent increase in dividend to $0.35 per share for the second quarter. The plan also includes a raise in stock buyback for 2014.

Morgan Stanley said its capital plans include share repurchase of up to $1 billion beginning in the second quarter of 2014 through the first quarter of 2015, and quarterly stock dividend increase to $0.10 per share.

JPMorgan plans to increase the quarterly stock dividend to $0.40 per share as well as a $6.5 billion stock buyback between April 2014, and March 2015.

Bank of America said it intends to increase its stock dividend to $0.05 per share and buyback stock of up to $4 billion.