What to Make of the Very Eventful Week for Bank of America Corp. and Citigroup Inc.

Citigroup and Bank of America may have trailed Wells Fargo according to the Federal Reserve, but it turns out things are looking way worse at one of those two compared to the other. And which bank that is may surprise you.

Mar 28, 2014 at 8:00AM

This week the paths of Bank of America (NYSE:BAC) and Citigroup (NYSE:C) went in opposite directions. Investors -- like the banks -- are now asking, what comes next?

By Chris Parker

Source: Flickr / Chris Parker2012.

When the Federal Reserve announced the results of its stress tests last week, things at Bank of America and Citigroup left something to desired when compared to megabank golden child Wells Fargo (NYSE:WFC).

In short, Bank of America and Citigroup saw both their initial and stress outcomes in 2013 fare worse than they did in 2012. Wells Fargo on the other hand, saw improvements across the board in its capital positioning and overall safety in the "severely adverse," scenario.

There's also the reality the Federal Reserve projects Bank of America and Citigroup would lose approximately $49 billion and $46 billion, respectively, in the event of a colossal market crash, whereas Wells Fargo would "only" lose $21 billion.

Yet all of this was revealed last week, and while at the time, it appeared Bank of America and Citigroup were likely headed in the same direction, it turns out the exact opposite was the case.

By Inspiredvision

Source: Flickr / InspiredVision.

The divergent paths
Wednesday, this all changed when it was revealed Bank of America was approved by the Federal Reserve to raise its dividend by 400% and buyback $4 billion worth of its common shares. However despite its higher capital ratios than Bank of America, Citigroup's plan to buyback $6.4 billion worth of its stock and also raise its dividend from $0.01 to $0.05 was rejected by the Fed.

And not only was the end result different, but so too was the tone of the CEOs in their respective announcements. The CEO of Bank of America, Brian Moynihan said, "We know that increasing the common dividend is important to our shareholders and we are pleased that we can continue to return excess capital through both repurchases and dividends."

On the other hand, the Citigroup CEO, Michael Corbat said, "Needless to say, we are deeply disappointed by the Fed's decision regarding the additional capital actions we requested. The additional capital actions represented a modest level of capital return and still allowed Citi to exceed the required threshold on a quantitative basis."


Even despite the lower results on the initial stress test, the Federal Reserve clearly indicated things at Bank of America were better than those at Citigroup.

One more big move
All of this even fails to mention Bank of America cleared one of its final major hurdles when it comes to legal issues, as it reached a nearly $9.5 billion settlement with the Federal Housing Finance Authority resolving its dealings -- and those of the companies it acquired -- with Fannie Mae and Freddie Mac during the housing crisis.

Although the settlement will eliminate an estimated three quarters of its income in the first quarter, it means the bank has resolved almost 90% of the legal issues surrounding its mortgage-backed securities.

What to make of it all
The Federal Reserve noted its denial to Citigroup was the result of "a number of deficiencies in its capital planning practices, including in some areas that had been previously identified by the supervisors as requiring attention, but for which there was not sufficient improvement," which certainly draws in a lot of questions.


Things are looking up for Bank of America.

While Citigroup exceeded Bank of America on every quantitative measure, its failure was the result of swirling qualitative questions. All of this doesn't even include the recent revelation of its $360 million revision to its 2013 net income as a result of fraudulent activity from its subsidiary in Mexico.

In fact, Citigroup's stock fell more than 5% following the announcement, only further exacerbating the discount it trades at relative to peers.

However, while it may be compelling from a value perspective, one has to wonder if investors -- like the Federal Reserve -- must look beyond the quantitative measures and evaluate the qualitative ones before they consider an investment in it.

The biggest change you never saw coming
While the rejection of Citigroup's plan was likely a surprise, an even bigger one is coming to the banking industry as a whole. Although that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Editor's note: A previous version of this article stated Bank of America increased its dividend 500% instead of 400%. The Fool regrets the error.

Patrick Morris owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information