March 8 (Bloomberg) -- Citigroup Inc., the third-biggest U.S. bank, asked the Federal Reserve for permission to buy back $1.2 billion of shares without seeking a dividend increase a year after its previous request was rejected.
The planned repurchases would “offset estimated dilution created by annual incentive compensation grants,” the New York- based company said yesterday in a presentation on its website. The Fed won’t disclose whether it approved the capital plans of the 18 biggest U.S. banks until next week.
Chief Executive Officer Michael Corbat, 52, is seeking to avoid the missteps of predecessor Vikram Pandit, who failed to convince regulators that the lender could boost shareholder rewards and survive an economic slump. Last year’s rebuff helped lead the bank’s directors to conclude that Pandit mismanaged operations, a person familiar with the matter said at the time, and they replaced him with Corbat months later.
“Corbat would lose all credibility if he fails to get the capital plan approved,” Richard Staite, a London-based analyst with Atlantic Equities LLP, said before the bank disclosed its request. “It would show he is not in touch with how regulators view Citigroup.”
The lender’s Tier 1 common ratio, a measure of financial strength, would fall to 8.3 percent in a dire economic scenario, remaining above the 5 percent minimum used in a separate test to weigh the impact of payouts to shareholders, the central bank said yesterday in a report. The estimate excludes Citigroup’s request to buy back stock.
The 8.3 percent was the highest ratio in a severely adverse scenario among the six biggest U.S. banks, according to the Fed report. JPMorgan Chase & Co., the largest lender, would have 6.3 percent while No. 2 Bank of America Corp. would be at 6.8 percent, according to the Fed. Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley would have Tier 1 common ratios of 7 percent, 5.8 percent and 5.7 percent, respectively.
Citigroup climbed 1.6 percent to $45.70 in extended trading yesterday after disclosing details of its capital plan. The shares had advanced 14 percent this year through the close of regular trading, outpacing the 11 percent gain for the 81- company Standard & Poor’s 500 Financials Index.
“This was a very good sign” for Citigroup, said Ralph Cole, a senior vice president of research at Portland, Oregon- based Ferguson Wellman Inc., which manages $3.1 billion, including shares of the lender. “They came through strong in this scenario, so this leads me to believe that what they asked for will get approved.”
The six biggest U.S. banks may return about $41 billion to investors in the next 12 months, the most since 2007, if they pass the annual stress tests, designed to gauge whether the nation’s largest lenders can withstand another economic shock.
Citigroup was the only bank among the largest tested to disclose its request for buybacks or dividends yesterday. Morgan Stanley, the sixth-biggest bank, said in January that it’s seeking Fed approval to buy the remaining 35 percent stake of its brokerage joint venture from Citigroup and isn’t looking for any additional return of capital to shareholders.
Pandit, 56, scrapped Citigroup’s dividend in 2009 after the company received a $45 billion taxpayer bailout to prevent its collapse. He introduced a 1-cent quarterly payout in 2011, which returned about $120 million to shareholders last year, according to an annual filing.
The central bank said yesterday that 17 of the 18 biggest banks, including the top six, could withstand a deep recession. The Fed factored in an economic slump in Asia, where Citigroup has a bigger presence than U.S. competitors.
Citigroup would post pretax losses of $28.6 billion over nine quarters through 2014 as unemployment soared and economic growth plunged, according to the Fed’s report. The bank’s own projection was for a $28.1 billion loss, according to its presentation. The Fed estimated total pretax losses for JPMorgan and Bank of America of $32.3 billion and $51.8 billion, respectively.
Corbat and his executive team estimated that Citigroup’s Tier 1 common ratio wouldn’t fall below 8.4 percent, compared with the Fed’s 8.3 percent prediction, the presentation shows.
While estimates for net losses and capital ratios were similar, others differed. The central bank projected that Citigroup’s revenue would be $44 billion in the most adverse scenario, $3.6 billion more than what Corbat’s team predicted.
The Fed was less sanguine about the performance of Citigroup’s loans, which would produce losses of $54.6 billion, according to the central bank’s report. Citigroup estimated total loan losses of about $45 billion.
The bank’s credit-card portfolio posed the biggest risk, with the Fed projecting write-offs of $23.3 billion, more than any other bank. Citigroup estimated that it would lose $21 billion from credit cards.
Citigroup also was more optimistic than the Fed about the performance of its home-loan portfolio in the most dire economic scenario. The central bank projected that soured mortgages would cost Citigroup $13.3 billion, 33 percent more than the company’s $10 billion estimate. The lender said its trading operations would lose $14.1 billion while the central bank estimated $15.9 billion.
The lender’s submission “underlines management’s commitment to build and sustain robust levels of capital,” the company said in the presentation. “At the core of Citi’s capital assessment framework is a focus on safety, soundness, credibility and confidence.”
John McDonald, an analyst with Sanford C. Bernstein & Co., had predicted that Citigroup wouldn’t request any dividends and would seek a “symbolic” amount of share repurchases. Fred Cannon, a KBW Inc. analyst, had estimated no buybacks and an increase in the quarterly dividend to 5 cents.
“Passing the stress test is critical for Citi this year,” Cannon said. “Corbat is well aware that not asking for significant capital deployment, in terms of dividend increases or share repurchases, is a good way to ensure passage.”
--With assistance from Dakin Campbell in San Francisco and Hugh Son in New York. Editors: Peter Eichenbaum, Dan Reichl