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

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?

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.

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.

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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.

Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On March 28, 2014, at 8:13 AM, mastedon2 wrote:

    And I quote:

    "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."

    The REALITY of a HYPOTHETICAL event...

    Man, your basher articles get further out there every day. Truth doesn't matter?

    CITI didn't get to boost their dividend.

    BAC did, and will also buy back some float.

    BAC passed the stress test results. PERIOD.

    Your smerging of the facts display how far piss poor bloggists like yourself would go to help your short position.

  • Report this Comment On March 28, 2014, at 8:18 AM, Rifleman3006 wrote:

    The articles here are useless!

  • Report this Comment On March 28, 2014, at 8:55 AM, TMFMorris wrote:

    "Your smerging of the facts display how far piss poor bloggists like yourself would go to help your short position."

    "Patrick Morris owns shares of Bank of America. "

    Perhaps your "smerging" of the facts too should be noted. I clearly do not have a "short position" in Bank of America, in fact just the opposite is the case.

  • Report this Comment On March 28, 2014, at 10:55 AM, AdamB1978 wrote:

    Think the Fed comes out of this who thing looking incompetent. The tests are ridiculously opaque and smacks of the Fed making it up as they go along. It also makes it look like every year they want to veto one bank's capital actions in order to show who's in charge

    They provide the inputs for these tests and they obviously know the starting point for each bank (ie their Q3 2013 results) yet they come up with vastly different figures than the banks do! For BAC, the Fed's stressed ratio was 6.0% which BAC's was 8.6%!!

    They need to make their calculations public such that its clear to investors (and the banks) what is driving their calculations and decisions, rather than just wanting to be the boss. They shouldnt be coming to hugely different decisions to the banks. Regulators aim should be to provide clarity to the market, not to leave everyone guessing as to whats going on. They also shouldnt be making the tests more and more stressed every year - again it smacks of them wanting to ensure one bank fails each year, just to prove they're the boss.

  • Report this Comment On March 28, 2014, at 2:45 PM, PEStudent wrote:

    "Bank of America was approved by the Federal Reserve to raise its dividend by 500%"

    Actually it was approved to raise the dividend by 400%, to 500% of the 100% it was.

    And it's pure sensationalism and disregard for the reader to phrase it that way when it's only being raised from $0.01 per quarter to $0.05 per quarter, which is currently a 1.2% yield. Personally, when I began investing in BAC last March, I expected the yield to be 2.5% to 3.0% by the end of 2015 and still do.

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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.

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