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Why Citi is the Big-Bank Winner Today as Bank of America Loses Out

Buoyed by positive employment data for the month of February released this morning, stocks opened significantly higher this morning, and the Dow Jones Industrial Average (INDEX: ^DJI) looked poised to set yet another nominal closing high. However, the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow have since fallen back to just above breakeven, up 0.1% and 0.15%, respectively, as of 10:05 a.m. EST.

Banks are OK
The results of the Fed's third annual round of bank stress tests are in and -- drum roll -- banks passed! (All but Ally Financial, that is.) Were you expecting anything different? Here's how the stress test works: The Fed comes up with a hellfire ("severely adverse") scenario for the economy, and financial markets and banks tot up their expected losses and their capital position under that scenario. The object is to verify whether bank balance sheets can withstand a brutal macroeconomic shock, which, in this case, included:

  • A peak unemployment rate of 12.1% -- roughly 50% higher than it is today and 1.4 percentage points higher than the highest rate achieved since 1948.

  • A greater-than-50% decline in stock prices.

  • A 20% decline in housing prices.

Note that the two remaining pure-play investment banks, Morgan Stanley and Goldman Sachs (NYSE: GS  ) , came in with the lowest stress-scenario capital ratios, barely above the aggregate Tier 1 common equity ratio of 5.6% for the 18 firms at the end of 2008 -- just prior to the first round of stress tests in early 2009, which prompted massive raises. The minimum required ratio is 5%. Goldman's forecast losses under the stress test scenario are $20 billion, above analyst expectations. These results are putting pressure on investment bank shares.

Meanwhile, with respective stress-scenario Tier 1 common equity ratios of 6.8% and 8.3%, Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) look in a more comfortable position. For shareholders, that means the prospect of return of capital via dividend increases or share repurchases. Indeed, Citi announced a $1.2 billion buyback over the next 12 months -- its biggest return of capital since 2006 -- giving the shares a healthy boost this morning. Investors are cheering the news, boosting Citi shares by 1.2%. No word from B of A, whose shares, down 1.6%, are paying the price for this silence.

Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analyst Anand Chokkavelu, CFA, and Financials bureau chief Matt Koppenheffer lift the veil on the bank's operations, including three reasons to buy and three reasons to sell. Click here now to claim your copy.

Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On March 08, 2013, at 10:41 AM, guessorgalor wrote:

    I mean why don't u get off this steve jobs thing? It is a joke, over and over again. try a new approachj

  • Report this Comment On March 08, 2013, at 10:59 AM, constructive wrote:

    $1.2B buyback is ridiculously small compared to what they could be doing.

    Once the stock goes up another 100%, I'm sure they'll really start pumping a lot of money into the buyback.

  • Report this Comment On March 09, 2013, at 11:04 AM, GhostdogWarrior wrote:

    Because Former employee Jack Lew is the treasury Sec and was paid a 1 million dollar bonus IF he took a high ranking governemnt job.... Funny how those things just work out...

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Related Tickers

9/26/2016 10:06 AM
^DJI $18135.64 Down -125.81 -0.69%
^GSPC $2153.02 Down -11.67 -0.54%
S&P 500 INDEX CAPS Rating: No stars
BAC $15.36 Down -0.16 -1.03%
Bank of America CAPS Rating: ****
C $46.42 Down -0.73 -1.55%
Citigroup CAPS Rating: ***
GS $163.18 Down -1.95 -1.18%
Goldman Sachs CAPS Rating: ***