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All eyes have been on bank stocks this week as investors waited to hear of the results of the Fed's stress test results. While much of the excitement centered on Bank of America (NYSE: BAC ) and its nicely padded capital cushion, Citigroup (NYSE: C ) , a stress-test loser last year, surfaced as a clear winner, showing up fellow big banks B of A, JPMorgan Chase (NYSE: JPM ) , Goldman Sachs (NYSE: GS ) , Morgan Stanley (NYSE: MS ) , and Wells Fargo (NYSE: WFC ) in the post-test, Tier 1 common capital category.
Playing it safe
Citi came out of the test -- which required a minimum post-test 5% capital reserve -- with an 8.3% capital ratio, higher than Wells' 7%, B of A's 6.8%, and JPMorgan's 6.3%. Both Goldman and Morgan Stanley emerged with ratios under 6%.
The super-charged stress scenario, reserved for the six largest banks, entailed an economic climate that featured 12% unemployment, a drop in real estate prices of 20%, and a general weakening of GDP by nearly 5%. In other parts of the world, the toughest scenario envisioned nasty recessions in Europe and Japan, with stalled economies in developing nations.
Despite going into the test with a Tier 1 ratio of 12.7% -- the highest of any other bank -- Citi choose to be conservative in its capital requests from the Fed. In an early release of this information, the bank revealed that it had asked for a $1.2 billion stock repurchase, and the maintenance of its current $0.01 per share quarterly dividend.
While some analysts expected Citi to increase its shareholder payout, it appears that new CEO Michael Corbat elected to play it safe. Along with SunTrust (NYSE: STI ) and Fifth Third Bancorp (NASDAQ: FITB ) , Citi was stung last year by having its capital plan denied by the Fed. Although it submitted a revision that was eventually accepted, this particular incident has been considered key in the downfall of Vikram Pandit last fall.
What's next for Citi?
Corbat has already announced where he wants to take Citi, underlining the fact that the bank must make it or break it in over 20 markets within the next two years. He plans to improve return on assets from 0.6% in 2012 to at least 0.9% by 2015, as well as a minimum 10% return on tangible common equity by that year, as well.
Much like Bank of America's Project New BAC, Corbat will trim the bank holding company by selling off much of its Citi Holdings, which has been a drag on the bottom line.
With such a plan in place, Citi should be on its way. Investors are rallying, having pushed the share price to a $45 closing yesterday -- something the bank hasn't seen in a while. Is Corbat the one that will turn Citi around? It's looking good so far.
Citigroup's stock looks tantalizingly cheap, and, despite the progress made and the stress-test triumph, the bank's balance sheet is still in need of more repair, and there's a considerable amount of uncertainty after a shocking management shakeup. Should investors be treading carefully, or jumping on an opportunity to buy? To help figure out whether Citigroup deserves a spot on your watchlist, I invite you to read our premium research report on the bank today. We'll fill you in on both reasons to buy and reasons to sell Citigroup, and what areas Citigroup investors need to watch going forward. Click here now for instant access to our best expert's take on Citigroup.