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Citigroup Fails Inspection

By Mark Reeth and David Hanson - Mar 27, 2014 at 2:35PM

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For the second time in three years, the Fed tells Citigroup that it isn't up to par and can't increase its dividend or initiate share buybacks. How big of a black eye is this?

During the Fed's annual Comprehensive Capital Analysis and Review process, nicknamed CCAR, banks undergo careful scrutiny to determine how they would fare under the weight of another major financial crisis. The results of these tests determine whether banks will be allowed to raise dividends or initiate share buyback programs, and this year, the only big bank to fail was Citigroup ( C -1.85% ). This is the second time in three years it has failed.

The problem this year wasn't with Citigroup's liquidity. The bank's capital ratios fell well above the required benchmark. The problem was the bank's processes in place around its ability to forecast losses across all of the markets in which Citigroup operates. These processes domestically and internationally did not reach a level that the Fed decided was adequate.

But with shares as cheap as they are today, does this black eye make Citigroup a bank to stay away from, or is now a good time to buy? On today's Stock of the Day, Motley Fool analyst David Hanson says he's definitely not staying away. Despite Citigroup's troubles, it remains the cheapest of the big banks today, and it still trades at a discount to its tangible book value. David thinks this bank will definitely be in a better place five or 10 years down the road.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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