WASHINGTON – Citigroup cannot raise its dividend or buy back its own stock because it needs better plans to cope with a severe recession, the Federal Reserve ruled Wednesday, a disappointing reversal for one of the nation’s largest banks.
The Fed also rejected the capital plans of four other big banks as part of its so-called stress tests, an annual checkup of the nation’s 30 biggest financial institutions.
The Fed said that the capital plans of Citigroup fell short in some areas, including its ability to forecast revenues and losses in parts of its global operations, should they come under economic stress.
Citi said it asked the Fed for permission to buy back $6.4 billion in shares through the first quarter of next year and to raise its dividend to 5 cents each quarter.
Citi CEO Michael Corbat said the company was deeply disappointed by the Fed decision. The dividend and buyback would have been a modest level of capital for shareholders, and Citi still would have exceeded requirements for its financial health, he said in a written statement.
As with Citigroup, the Fed said it found deficiencies in the capital plans of HSBC North America Holdings, RBS Citizens Financial Group, Santander Holdings USA and Zions Bancorp.
The central bank approved requests outright, however, from the other 25 tested banks, which included JPMorgan Chase, Wells Fargo and Morgan Stanley, in addition to Bank of America.
The dividends and share buybacks that the Fed was weighing are important to ordinary investors and banks. The banks know their investors suffered big losses in the financial crisis and are eager to reward them. Some shareholders, especially retirees, rely on dividends for a portion of their income.
Raising dividends costs money. The regulators don’t want banks to deplete their capital reserves, making them vulnerable in another recession. Buybacks also are aimed at helping shareholders. By reducing the number of a company’s outstanding shares, earnings per share can increase.
The announcement Wednesday follows last week’s results of the Fed’s annual stress tests. The central bank determined that the U.S. banking industry is better able to withstand a major economic downturn than at any time since the financial crisis struck in 2008.