Citigroup Inc, which failed the Federal Reserve's stress test of its capital plan in March, on Friday said it will not ask the regulator for permission to increase its dividend or buy back more stock this year. The decision means Citi's shareholders will not receive an increase in the bank's penny per share quarterly dividend until at least next year.
In April, CEO Vikram Pandit had hinted the bank might not ask for further capital actions this year. In March, the third-largest US bank by assets was one of four institutions to fail the Fed's stress test, an embarrassing setback for Pandit's efforts to turn around a bank that needed multiple bailouts during the financial crisis.
The test aimed to determine whether 19 US banks would have enough capital to sustain a financial shock that included 13 percent unemployment and a drop in housing prices of 21 percent. Citi would have passed without its planned actions to distribute capital, which it has not disclosed.
Citi said it will re-submit its 2012 plan to the Fed, as required, on Monday. It will decide later this year whether to ask for a dividend increase or share buy backs in its 2013 plan, which is due in January. "In the meantime, we will continue to build additional capital through earnings and the ongoing reduction of non-core assets," the bank said in a statement.
In a move allowed by the Fed in March, Citi on Friday also said it has decided to redeem two series of trust preferred securities, which it expects will decrease its Tier 1 Capital by about $4.9 billion. The bank's Tier 1 Common capital and related Tier 1 common ratio, under Basel I international capital standards and as estimated under Basel III rules, will not be affected by these redemptions, it said in a statement.
Citi said a notice of rulemaking issued by the Fed on June 7 constituted a "regulatory capital event" allowing the bank to redeem all of the securities, instead of a portion of them. As part of the Dodd-Frank financial reform law, the Fed is determining when certain trust preferred securities will no longer qualify as Tier 1 capital under regulatory guidelines. The new capital rules proposed by the Fed are expected to result in the biggest US banks redeeming at least $30 billion of Trust Preferred Securities and issuing as much as $80 billion of perpetual preferred over the next few years.
In the weeks leading up to the stress test results, Pandit had convinced investors the bank had rebuilt its balance sheet to the point it had more capital than needed to weather a severe economic downturn. Several analysts had forecast the bank would win permission to raise its quarterly dividend from a penny a share to 10 cents. Meanwhile, some of Citi's rivals, including Wells Fargo & Co and J.P. Morgan Chase & Co, received permission to move ahead with dividend increases and share buy backs. Bank of America Corp, which had its dividend request blocked in 2011, did not ask permission for a dividend increase or share buy backs this year.