Citigroup Failure in Fed Test Raises Questions

Citigroup Inc on Wednesday stood by its pledge to reward shareholders, as Wall Street sought to understand why the bank failed to win approval from regulators to increase its dividend or buy back stock.

Citigroup Inc on Wednesday stood by its pledge to reward shareholders, as Wall Street sought to understand why the bank failed to win approval from regulators to increase its dividend or buy back stock.

Citigroup said late on Tuesday the Federal Reserve turned down its plan to return capital to shareholders, following the latest stress test of top U.S. banks.

In the weeks leading up to the announcement, Chief Executive Officer Vikram Pandit had convinced analysts the bank had rebuilt its balance sheet to the point it had more capital than needed to weather a severe economic downturn. By late last week, several analysts had forecast the bank would win permission to raise its quarterly dividend from a penny a share to 10 cents.

Surprised investors sent Citigroup shares down 3.4 percent on Wednesday, while the KBW Index of bank stocks gained 1.3 percent. The stock rose more than 30 percent this year.

What happens next remains unclear. Pandit assured employees in a memo that the bank will continue to work with the Fed to return "meaningful capital" to shareholders.

The bank appeared to still be looking for answers. In its statement on Tuesday after the Fed released results of stress tests of 19 large banks, Citigroup suggested that executives had not been able to learn exactly how the bank would be evaluated and that they would keep trying to get a formula that would allow the bank to take the steps it wants.

"We plan to engage further with the Federal Reserve to understand their new stress loss models," the statement said. "We strongly encourage the public release of these models and the associated benchmarks and assumptions."

Citigroup spokeswoman Shannon Bell declined to comment further.

That left analysts and investors asking if Pandit had been too aggressive in his proposal or if he had misunderstood how examiners would score its potential losses in a brutal economy.

And some were critical of Pandit for apparently misreading what the Fed was seeking.

"The thing that gets me is that he didn't learn from the experience of Brian Moynihan," said bank analyst Nancy Bush.

Moynihan, chief executive of Bank of America Corp, was embarrassed last year after he said the bank would raise its dividend and then the Fed would not allow it.