By PALLAVI GOGOI
By PALLAVI GOGOI
Associated Press
NEW YORK — Everyone expected Citigroup to pass the Federal Reserve’s latest stress test easily.
It had just posted two years of profits, and CEO Vikram Pandit said as recently as March 7 that he was “confident” about rewarding shareholders with more dividends. Pandit himself was handsomely rewarded with a $14.8 million pay package last year.
But in a shock to Wall Street, Citigroup failed the stress test, the Federal Reserve’s annual checkup for banks. The Fed said Citi, unlike any of its peers, does not have enough capital to raise its stock dividend and still withstand a financial crisis worse than 2008.
Analysts were left wondering Wednesday what lies inside of Citi’s loan portfolios and whether the nation’s third-largest bank had fully recovered from the meltdown three and a half years ago.
“I was very surprised,” says Jason Goldberg, a bank analyst at the brokerage Barclays Capital, who had expected Citi to increase its quarterly dividend to 10 cents per share from 1 cent. “The Fed gets to see much more financial data than any of us and has taken a much harsher view of Citi’s loan portfolio.”
The test put banks through a hypothetical nightmare of stock prices dropping by half, home prices falling 21 percent from today’s levels and an unemployment rate of 13 percent, far higher than today’s 8.3 percent.
The banks had to submit plans in January to prove their balance sheets were strong enough to handle the scenario and say how they planned to use excess capital to pay dividends to shareholders or buy back their own stock.
The results were mostly positive. Only four of 19 banks failed the test, and none of the 19 was ordered to raise money. In 2009, 10 banks were ordered to raise money.
Besides Citi, the Fed rejected the plans of Ally Financial, MetLife and SunTrust Banks. The central bank said those four financial institutions fell below regulatory minimum levels for capital. All four must resubmit their plans.
Citi, the third-largest U.S. bank by assets, objected to any characterization that it had failed the test. It said it had enough capital to withstand the Fed’s crisis scenario, just not enough to do that and raise the dividend at the same time.
“The Federal Reserve’s objection to our capital plan does not equate with ‘failing’ the stress test,” said Edward Skyler, a spokesman for the bank.
Matt McCormick, a portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel, said it was clear the Fed didn’t endorse Citi’s plan. Citi stock fell 3.4 percent Wednesday.