For the first time since the financial crisis, Citigroup (NYSE:C) has received the go-ahead from regulators to raise its dividend. After failing to win approval twice out of the last three years, the nation's third-largest bank by assets said on Wednesday that its quarterly payout will increase from $0.01 per share to $0.05 per share.

The move comes on the heels of the latest round of stress tests, administered each year by the Federal Reserve to assess whether the nation's biggest banks have enough capital to withstand an economic downturn akin to the financial crisis of 2008-2009. Banks that pass the test can increase the amount of capital they return to shareholders, while banks that fail the test cannot.


Dividend Increase

Share Buyback


JPMorgan Chase

$0.40 to $0.44

($600 million)

$6.4 billion

$7 billion

Bank of America


$4 billion

$4 billion


$0.01 to $0.05

($480 million)

$7.8 billion

$8.3 billion

Wells Fargo

$0.35 to $0.375

($515 million)



Goldman Sachs

$0.60 to $0.65

($87.2 million)



Morgan Stanley

$0.10 to $0.15

($395 million)

$3.1 billion

$3.5 billion

Source: Company filings.

Even more impressive than Citigroup's dividend hike was the size of its share buyback program. The bank announced Wednesday that it intends to repurchase $7.8 billion in common stock. That was the biggest buyback program announced by a major bank after the stress test results were published, comfortably exceeding runner-up JPMorgan Chase's $6.4 billion repurchase proposal.

Although some shareholders will be disappointed that Citigroup is favoring buybacks over an even bigger dividend, it was a prudent move. The Fed looks at buyback programs more favorably, as they're easier for a bank to stop midstream, whereas the suspension of a bank's dividend telegraphs bigger problems at a financial institution.

Additionally, because Citigroup's shares still trade for a considerable discount to book value -- a 20% discount at today's share price -- repurchases at the current price are immediately accretive to the book value per share of remaining shares.

Between Citigroup's repurchase plan and its dividend raise, the New York-based bank is cleared to return nearly $8 billion to shareholders over the next five quarters.

According to CEO Michael Corbat:

We are committed to delivering meaningful returns of capital to our shareholders and today's decision will allow us to begin doing so. We have worked very hard over the last twelve months to further strengthen our capital planning process, with the goal of embedding it into the way we run the firm. We are committed to building on the progress we have made and ensuring that we have a sustainable process that serves the financial system as well as our shareholders. We want Citi to be an indisputably safe and sound institution and will do everything in our power to make that the case, year in and year out.

Above and beyond the capital return, Citigroup's biggest victory in this year's stress test was that it avoided the fate of its Wall Street peers JPMorgan Chase, Morgan Stanley, Goldman Sachs, and Bank of America, all of which were singled out by the central bank for deficiencies in their capital plans. The first three of those banks submitted capital proposals that would have caused at least one of their capital ratios to dip below the regulatory minimum at the nadir of the Fed's "severely adverse" economic scenario. As a result, they submitted amended -- i.e., less ambitious -- proposals to make up for the deficiency.

Meanwhile, for the second year in a row, Bank of America will be required to resubmit an improved capital plan to the Fed by the end of September. "Bank of America exhibited deficiencies in its capital planning process," reads the Fed's report. "Those deficiencies included weaknesses in certain aspects of Bank of America's loss and revenue modeling practices and in some aspects of the [bank holding company's] internal controls."

Citigroup, by contrast, appears to have sailed through the process without any problem. This was undoubtedly a great relief to CEO Corbat, who many believed would lose his job if the bank failed for a third time in four years.