Today we had some big news with the Federal Reserve announcing the results of the dramatic stress tests. As a whole the US banking industry did quite well, which is to be expected considering they have double the capital that they had three years ago.
I was somewhat surprised to see Citigroup, which has one of the highest Tier 1 Capital Ratios of the large banks test. The issue wasn’t whether or not Citigroup wold have adequate capital even under the stress conditions, but instead the issue was the amount of capital the company wanted to spend on dividends and share buybacks, in addition to the stress scenario. To resolve the issue it is very likely that the bank will just lower their proposed capital plans to a level that the Fed is more comfortable with.
JP Morgan came out as the biggest winner of the tests with the announcement that they have been approved for a $15 Billion buyback, and a substantial dividend increase. While Jamie Dimon looks great, Vikram Pandit the CEO of Citigroup doesn’t look very good by being too aggressive in their capital plans. Brian Moynihan of Bank of America didn’t ask for any share buybacks or dividends and therefore was able to pass the test. This is much more of a short term perception issue that will probably be forgotten in a few months, and I think that any weakness in Citi’s stock as a result of this would ultimately be a buying opportunity.
Wells Fargo, US Bancorp, Bank of New York, Goldman Sachs, Morgan Stanley, all fared quite well. Below is the link to the Bloomberg article outlining the results: