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Citi Among Banks Failing Fed's Stress Test


Citigroup, Inc. (C), SunTrust Banks Inc. (STI), Ally Financial Inc. and MetLife Inc. (MET) fell short by at least one measure of the U.S. Federal Reserve's four regulatory minimum levels under a hypothetical stress scenario, according to results of the latest round of bank stress tests released by the Fed Tuesday.

According to the Fed, however, the stress test results show that the majority of the largest U.S. banks would continue to meet supervisory expectations for capital adequacy despite large projected losses in an extremely adverse hypothetical economic scenario.

The tests, called the Comprehensive Capital Analysis and Review, were conducted by the Fed to evaluate whether the large bank holding companies would have sufficient capital in times of severe economic and financial stress to continue to lend to households and businesses.

Under a severe stress scenario, which included a peak unemployment rate of 13%, a 50% drop in stock prices and a 21% decline in housing prices, the Fed estimated that the 19 large bank holding companies tested would lose a total of $534 billion during the nine quarters of the hypothetical stress scenario.

The 19 bank holding companies would see their aggregate tier 1 common capital ratio fall to 6.3% in that hypothetical stress scenario, which is well above the minimum 5% stipulated by the Fed.

Despite the significant projected capital declines, 15 of the 19 bank holding companies were estimated to maintain capital ratios above all four of the regulatory minimum levels under the hypothetical stress scenario, even after considering the proposed capital actions, such as dividend increases or share buybacks, the Fed said.

Under that extremely adverse hypothetical economic scenario, Citi's tier 1 common capital ratio was estimated to fall to 4.9%, which is just shy of the 5% minimum capital ratio stipulated by the Fed. SunTrust's ratio was estimated at 4.8% and Ally Financial's ratio was estimated at 2.5%, both missing the minimum required level. MetLife's tier 1 common capital ratio was estimated at 5.1%, but the company fell short of the Fed hurdle on the measure of total risk-based capital.

Meanwhile, Citi said it will submit a revised capital plan to the Fed later this year after being advised by the regulator that it objected to the company's proposed return of capital to shareholders.

"The Federal Reserve advised Citi that it has no objection to our continuing the existing dividend levels on our preferred stock and our common stock, and we plan to do so, subject to approval by the Board of Directors each quarter. The Federal Reserve also advised that it has no objection to Citi redeeming certain series of outstanding trust preferred securities, as Citi proposed in its Capital Plan," Citi said in a statement.

MetLife said it was deeply disappointed with the Fed's announcement. "We do not believe that the bank-centric methodologies used under the CCAR are appropriate for insurance companies, which operate under a different business model than banks," said Steven Kandarian, chairman, president and chief executive officer of MetLife.

MetLife said it continues on track with its plan to cease being a bank holding company by the end of the second quarter of 2012.

The Fed had initially planned to release the results of stress tests on Thursday,. but later decided to release them on Tuesday.

Many of the large bank holding companies, which passed the stress tests, later announced dividend increases and/or stock buyback programs. JPMorgan Chase & Co. (JPM) was the first to act. The company announced a new $15 billion stock repurchase program and raised its dividend.

U.S. Bancorp (USB) announced a 56% increase in the dividend rate and an authorization to repurchase up to 100 million shares of its common stock. Wells Fargo & Co. (WFC) and BB&T Corp. (BBT) also announced dividend hikes.

Citigroup shares closed Tuesday's regular trading session at $36.45, up $2.16 or 6.30%, but lost $1.17 or 3.21% in after hours trading. SunTrust shares also lost more than 3% in after hours trading after closing the day's session up 3.20% at $22.58. MetLife shares closed the day's regular trading session at $39.46, up $1.78 or 4.72%, but lost $1.46 or 3.70% in after hours trading.

by RTTNews Staff Writer

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