Citigroup Inc. (C) has finally decided against any hike in its shareholders payout in 2012. The company, which could not pass the stress test in March with its proposed plan to return capital to shareholders, and has now decided to readdress the issue "later this year." Instead of boosting its capital payouts, the company intends to build its capital level and continue with its efforts to trim its non-core assets.
The Story Behind
It was back in 2009 when Citi’s dividend was scrapped following the financial crisis. The company was saved from near collapse through a number of bailouts. Over the course of time, Citi repaid these and reinstated a 1 cent per share quarterly dividend in 2011. It was hoping to boost its shareholders payout this year and submitted its capital plan accordingly for the 2012 stress test.
Unfortunately, the stress on a company’s capital position under a hypothetical situation of difficulty, found that with its projected payouts, Citi’s capital ratios fell short of the regulatory requirements. The company, however, satisfied the stress test requirements without a capital deployment plan.
At that time, the Fed had allowed Citi to continue with its existing dividend levels on its preferred and common stocks and had no objection to the company redeeming a certain series of outstanding trust preferred securities.
In fact, Citi’s situation this year was quite similar to that of Bank of America Corp. (BAC) last year. BofA’s plan to return capital to shareholders was rejected last year by the Fed, but it passed the stress test this year without its request to increase capital redeployment to shareholders this year.
Besides Citi, the three other companies which have failed the stress test this time are Ally Financial Inc., MetLife Inc. (MET) and SunTrust Banks Inc. (STI).
TruPS Redemption
In order to adhere to the financial reform law, Citi will redeem two series of trust preferred securities which will lead to a decrease in its Tier 1 Capital of around $4.9 billion and its Tier 1 Capital ratio is likely to bear a negative impact of around 50 basis points. These redemptions would have no impact on Citi's Tier 1 Common capital and related Tier 1 Common ratio, under Basel I and as estimated under Basel III.
Notably, according to the Dodd-Frank Act, from 2013, banks will no longer be able to include these securities as regulatory capital.
In Conclusion
Citi has failed to significantly enhance shareholder value following the financial crisis, and this somewhat weakened its competitive position. Unlike Citi, the other Wall Street big players such as U.S. Bancorp (USB) and Wells Fargo & Co. (WFC) passed the stress test well and declared increases in dividends and share repurchases.
In fact, prior to the declaration of the stress test results this year, investors were widely speculating about the extent of capital payout that Citi would go for. Their speculations suffered a blow when Citi failed the stress test.
We believe that it is a wise decision on part of Citi to strengthen its capital levels first and then ask for such payouts. That would serve as a long-term catalyst for the stock. TruPS redemption is also a strategic move to abide by the financial reform norms.
Going forward, we believe that investments and efficiency savings would help in garnering solid market share. Improved credit trends are encouraging. Expense outlook is also impressive.
In fact, one can consider a company like Citigroup as a value investment given its global footprint and attractive core business. A low interest environment, low liquidity and a tough regulatory environment remain our concerns.
Citi shares currently retain the Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
METLIFE INC (MET): Free Stock Analysis Report
SUNTRUST BKS (STI): Free Stock Analysis Report
US BANCORP (USB): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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