Bank stress test aftermath: Citi down, BofA up

March 14, 2012|By E. Scott Reckard
  • A Citibank branch in New York. A Federal Reserve stress test concluded that bank parent Citigroup Inc. is not yet strong enough to increase its payout to shareholders.
A Citibank branch in New York. A Federal Reserve stress test concluded that… (Seth Wenig / Associated…)

There’s nothing like a slap in the face from the Federal Reserve to take the shine off a stock price. Just ask investors in Citigroup Inc.

Citi shares tumbled more than 4% as trading opened Wednesday after its poor showing in the Fed's stress tests for the big banks whose failures could blow up the financial system. 

Many of the giants, including Wells Fargo & Co., JPMorgan Chase & Co. and US Bancorp, were sound enough to return more of their profit to shareholders, the Fed said in its report, issued late Tuesday.

Citi, however, was not quite there yet.

Bank shares had skyrocketed earlier Tuesday, when Chase, Wells and others announced big dividend increases after passing the tests. Long-suffering Bank of America didn’t raise its dividend, but its shares rose 6% Tuesday and an additional 3% Wednesday morning on investor relief at its passing grade.

Citi’s executives had led investors to expect a dividend increase, share buyback or both. Those hopes were dashed when the Fed said Citi could pass the stress test only by retaining more profit to further beef up its reserves again a sharp economic downturn.

JPMorgan analysts downgraded Citi to neutral, saying the news “is surprising and hurts management's credibility.”

Rochdale Securities analyst Dick Bove, a bull on bank stocks, said the tests results proved that “this industry for the last year has been doing extraordinarily well." But of Citi, Bove said in an email: “The company will be very embarrassed.”

Citi found defenders among Nomura Securities analysts, who described the stock as undervalued and said a return of capital to shareholders had only been delayed until later this year or next year.

In afternoon trading Wednesday, Citi shares were down $1.25 at $35.20, a drop of 3.4%. An index of banking stocks was up nearly 1%, with JPMorgan and Wells down a fraction and Bank of America showing a 3.2% gain for the day.


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