Last Thursday, the Federal Reserve announced the results from part one of its Comprehensive Capital Analysis and Review, known informally as "stress tests." For Citigroup (C +2.23%) investors there were two surprises: one sure to please, and one almost surely not to.
Surprise #1: Great stress-test performance
But just in case you missed the breaking Citi stress-test news from last week, here's a quick recap:
Source: Dodd-Frank Act Stress Test 2013: Supervisory Stress Test Methodology and Results.
In the Fed's simulated, severe economic downturn, Citigroup -- which had an excellent capital position of 12.7% going into the test -- would lose 4.4% off its Tier 1 common capital ratio, still leaving it at 8.3%: strong in absolute terms, as well as in relation to its peers.
The median Tier 1 common capital ratio performance for the banks this year was 7.7%. The minimum regulatory standard the Fed requires is 5%. A stressed 8.3% common ratio easily surpasses the Fed's minimum, and comfortably surpasses the average. There's no arguing Citi's performance on the test itself.
Nor is there much arguing to be done regarding how well Citi did up against its big-banking peers: The superbank easily outperformed many of them. JPMorgan Chase's (JPM 0.41%) stressed common ratio was only 6.3% versus Citi's 8.3%. The normally indefatigable Wells Fargo (WFC 0.67%) only emerged with a 7% common ratio , and Bank of America (BAC +1.28%) came in with a 6.8% stressed common ratio. Well done all around, Citi.
Surprise #2: No dividend for you
Citi has already announced it will not seek a post stress-test dividend increase from the Fed. This will come as an unexpected surprise to the bank's investors; given how well it did in the 2013 CCAR, it could almost certainly have gotten one (versus last year, when Citi failed its stress test and was unable to raise its dividend).
The Fed had recently indicated it wouldn't look kindly on any dividend increase that would cause a bank to go beyond a 30% payout ratio. But Citi's is currently 2%, so from the Fed's perspective, there's obviously excessive room for maneuver there. To the best of my knowledge, CEO Michael Corbat hasn't commented on why his bank isn't seeking a dividend increase, but here's my best guess.
Having failed its stress test last year, and being the biggest bank outside of B of A still having the most trouble extricating itself from financial-crisis difficulties, Corbat wants to play things coolly and conservatively. The bank is hard at work repairing its balance sheet and has made great strides in piling on the capital already.
This move to not return money to shareholders (except for a possible, very-small share buyback) is right in line with that kind of thinking.
Foolish bottom line
Also, I'll echo something The Motley Fool's Financials Bureau Chief Matt Koppenheffer said on this surprise move by Citi: Corbat has been CEO for such a short time -- and he sells himself as such the paragon of measured, traditional banking -- that he probably feels he couldn't be seen throwing money around will-nilly when there's still so much work to be done repairing the bank's balance sheet.
And in the end, I think investors ought to applaud this move. Sure, every investor wants more dividend money in his or her pocket, but at what ultimate cost? A big dividend doesn't do anyone any good when there's no bank left around to pay it.
Over at JPMorgan, CEO Jamie Dimon is up to something similar: After a tumultuous 2012 that saw the superbank lose $6 billion in the London Whale trading scandal, Dimon is rumored to be asking the Fed for share buybacks at only half the amount of last year's program.
Dimon is rightly proud and rightly protective of his "fortress balance sheet." Corbat's thinking seems -- intelligently -- along those same lines. Citi investors should be happy.
