1 Reason for Bank of America Corp. and Citigroup Inc. to be Afraid. Very Afraid.

The latest results from the Federal Reserve and its stress testing has been announced -- but it turns out Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) all have reason to be afraid.

The first glance
The headlines surrounding the recently released results were quite positive. In the story from The Wall Street Journal entitled, Fed 'Stress Test' Results: 29 of 30 Big Banks Could Weather Big Shock, had an introduction which noted, "Results Could Clear Way For Dividends, Share Buybacks."

Things may not be looking up for Bank of America.

The first paragraph said simply, "The Federal Reserve's annual test of big banks' financial health showed the largest U.S. firms are strong enough to withstand a severe economic downturn, a sign that many will get the green light soon to reward investors by raising dividends and buying back shares."

Only one bank, Zions Bancorp (NASDAQ: ZION  ) failed to be adequately prepared for the stressed scenario, with a common capital ratio of 3.5% following the severely adverse scenario, which involved a 50% dip in stock prices, a skyrocketing unemployment rate, and home prices falling by 20%. This level of 3.5% at Zions was well below the 5% required by the Federal Reserve. Yet as shown in the chart below, in aggregate, the banks improved significantly:


And when you consider the 30 banks required to undertake the stress test this year had estimated total losses of $366 billion through the nine quarters of stress versus the 18 banks witnessing $462 billion last year, it's no wonder many believed the banks have finally recovered.

The reason for fear
The problem is one thing notably absent from headlines is the reality Bank of America, Citigroup and JPMorgan Chase (NYSE: JPM  ) each had results which were worse this year versus last year.

Under the almost identical severe stress scenarios, we can see Bank of America, Citigroup and JPMorgan Chase actually lost ground in 2013, whereas Wells Fargo (NYSE: WFC  ) saw its results improve significantly:

Source: Federal Reserve.

And while at first glance Citigroup appears to have done better than Bank of America and JPMorgan Chase, it turns out the Federal Reserve projected its net losses after nine quarters under the severely stressed scenario to balloon from $28.6 billion, following the 2012 test, to a staggering $45.7 billion in 2013:


The dividend fear
As a result of the remarkable improvement in the bottom line results from both Bank of America and Citigroup in 2013 -- Citigroup rose from $7.5 billion in 2012 to $13.9 billion in 2013 and Bank of America was up from $4.2 billion to $11.4 billion -- many have suggested the dividends will surely jump in 2014 for each of the banks with the one penny per quarter payout.

Yet when you consider each of those banks apparently are seemingly in worse shape under a stressed scenario now versus where they were last year, one has to wonder if the dividend boost is further away than one anyone would prefer.

Dividends you can trust
Banks like Bank of America and Citigroup used to deliver delightful dividends, but we may never see those days return. This is important because one of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. But knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 25, 2014, at 12:13 PM, DAT wrote:

    Unfortunately, this commentary is myopic and sensationalistic. It does not educate or illuminate; rather, it rehashes widely disseminated material by lacing it with hyperbole and fear-mongering. Ho hummmm. Nothing new here but an irritating tone.

  • Report this Comment On March 25, 2014, at 12:34 PM, CeaRay wrote:

    So if Citi made 7.5 billion in 2012 and gave none off it back to shareholders and in 2013 they made 13.9 Billion that is a total of 21.4 billion plus they eliminated 40 billion in Citi holding which saved them additional 2 billion. So Citi has around 23 billion to 25 billion to do a buyback or dividend or both. The CEO said no dividend increase until 2015 so that leaves us with buyback. So they can afford to buyback 1/6 of the company stock. If Citi can do that again in 2015 they will have bought 1/3 of Citi's shares back. So 2016 shareholders can expect a nice dividend.

  • Report this Comment On March 25, 2014, at 1:23 PM, mastedon2 wrote:

    I agree with DAT. Stress tests developed by the biggest fraudulent entity in the world, and still passes this hypothetical "test" based upon nothing but conjecture and guessing of the future.


    I do see however that Mostly Stool has once again found a way to create a sensationalist headline in order to create a negative sentiment. Too bad Shorty,,, better cover!!

    OH,,, and leave the writing to the professionals. This was drivol.

  • Report this Comment On March 25, 2014, at 1:28 PM, Rifleman3006 wrote:

    I agree with DAT and Masterdon2 - This fool is the one of the biggest embarrassments to MF I've seen. Nothing but drooling jibberish full of zero content. He'll still be dribbling when the stock is at $25.

  • Report this Comment On March 25, 2014, at 1:31 PM, sluggo47 wrote:

    Poor article. The stress test is really a pass fail event and no conclusions should be drawn from these results other than pass fail.

  • Report this Comment On March 31, 2014, at 6:59 PM, RobertBrad wrote:

    The Criticism by Fed affected many banks which did not the criteria but

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2884959, ~/Articles/ArticleHandler.aspx, 9/5/2015 8:16:59 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 4:01 PM
BAC $15.65 Down -0.29 -1.82%
Bank of America CAPS Rating: ****
C $50.59 Down -1.20 -2.32%
Citigroup Inc CAPS Rating: ***
ZION $28.01 Down -0.51 -1.79%
Zions Bancorporati… CAPS Rating: ***
JPM $61.50 Down -1.18 -1.88%
JPMorgan Chase & C… CAPS Rating: ****
WFC $51.29 Down -1.14 -2.17%
Wells Fargo CAPS Rating: *****