1 Possible Explanation for the Disastrous Week at Citigroup Inc.

Questions have swirled about Citigroup since its capital plans were denied by the Federal Reserve while Bank of America, Wells Fargo, and others watched theirs get approved, but investors may be missing one key thing.

Apr 1, 2014 at 7:00AM

Many investors know Citigroup (NYSE:C) had a terrible week following the announcement the Federal Reserve would reject its dividend and share buyback plans, but one possible reason behind that rejection hasn't been discussed.

The painful rejection
After the market closed on Wednesday last week, the Federal Reserve announced it had rejected the request of Citigroup to raise its dividend from $0.01 to $0.05 and repurchase $6.4 billion worth of its common stock. This sent the stock tumbling on Thursday, when it fell more than 5%.

Of course this rejection came at the same time when, despite seemingly worse results during the stressed scenario, Bank of America (NYSE:BAC) watched its plan to buy back $4 billion in common stock and raise its dividend also from $0.01 to $0.05 get approved. Unsurprisingly, Wells Fargo (NYSE:WFC) posted the best results, and also witnessed its plans to raise its dividend from $0.30 to $0.35 and repurchase a staggering $17.5 billion in common stock get approved as well:

Source: Federal Reserve.

The reason for denial
The Federal Reserve noted Citigroup passed the quantitative measures for the tests, but ultimately qualitative questions swirled surrounding its ability to project losses in revenue. In addition, the ability of its stress tests to "adequately reflect and stress its full range of business activities and exposures," were not up to the Fed's standards.

But this reason for rejection has not been a sufficient explanation for many investors, as a simple glance at the results above reveals Citigroup was seemingly in a much better position than Bank of America and JPMorgan Chase (NYSE:JPM) both initially and in the stressed scenarios.

Yet there has been one thing which has been absent from the discussion surrounding the rejection at Citigroup.


Source: Federal Reserve.

The honest admission
In 2013 Bank of America was approved by the Federal Reserve to repurchase $5 billion of its common stock and redeem $5.5 billion of its expensive preferred stock. Meanwhile Citigroup was only approved for a $1.2 billion share buyback program.

That means in 2014 Bank of America went from requesting $10.5 billion in shareholder returns to a little more than $6 billion, a decrease of 40%. Whereas Citigroup bumped its request nearly six times higher from $1.2 billion to $7 billion.

When you consider Bank of America and Citigroup each were seemingly in worse position this year compared to last year -- as shown in the chart to the right -- one has to wonder if the honest admission from Bank of America to request less this year was the reason for its approval.

And while things at Citigroup didn't deteriorate quite like they did at Bank of America, it's not unreasonable to think part of the Federal Reserve's hesitations in approving the plans of Citigroup stemmed from the sizable increase it sought. While it certainly wasn't stated, perhaps this was one of the "qualitative," issues the Federal Reserve questioned.

The Foolish bottom line
It's a touch troubling to see Bank of America be in an apparently worse position this year versus last, but its approval from the Federal Reserve should quell any fears of investors, as it means it is actively working toward improvement. And while the rejection from the Fed shouldn't result in Citigroup being crossed off the list of investors everywhere, it nonetheless shows it still has a long road ahead of it.

Big banking's little $20.8 trillion secret
While it's no secret Bank of America, Citigroup, and Wells Fargo have been on remarkable runs following the bottom financial crisis, there is one major change coming to banking as we know it. While 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.

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, JPMorgan Chase, 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers