Bank of America, Citigroup -- and Shareholders -- Brace for Stress-Test Results
June 20 2016 - 5:00PM
Dow Jones News
By Christina Rexrode
There is a $24 billion reason why Bank of America Corp. and
Citigroup Inc. shareholders should care about looming bank stress
tests.
That is the additional money combined the two banks
theoretically could have returned to shareholders over the past
three years if their levels of dividends and share buybacks were
similar to those of Wells Fargo & Co., according to Wall Street
Journal calculations. That they weren't is partly due to the annual
stress tests administered by the Federal Reserve. Bank of America
and Citigroup have each stumbled on these in recent years.
For an investor with 1,000 Bank of America shares, that could
have translated to nearly $500 in dividend payments last year
versus an actual $200. A Citigroup investor with the same number of
shares might have gotten more than $1,900 versus $160.
The Fed will release the first round of this year's stress-test
results this Thursday. These will show how capital at 33 banks held
up in severe market and economic conditions. The following week,
banks will find out whether the Fed has approved their
capital-return plans.
To calculate capital returns Bank of America and Citigroup
shareholders have theoretically missed, the Journal examined how
much they would have paid out if they had returned capital at the
same rate as Wells Fargo. For example, Wells Fargo paid out
dividends and bought back stock equal to 75% of its net income last
year. Bank of America was at about 31%, while Citigroup was around
36%.
Over the past three years, the two banks returned a combined $19
billion to shareholders via dividends and buybacks. At Wells
Fargo's payout levels, they would have returned about $43
billion.
The $24 billion difference underscores how the stress tests have
expanded from a wonky exercise into one of the most powerful
instruments regulators can wield. They affect how much a bank can
pay out via dividends and share buybacks, the amount of capital
they must hold, their return on equity, and lending and business
decisions.
Bank of America and Citigroup declined to comment.
Nowhere are these tests more important than at Bank of America,
which has flubbed the exam three times, and Citigroup, which has
failed twice. These banks have lagged behind Wells Fargo and J.P.
Morgan Chase & Co. on metrics affected by the stress tests
directly and indirectly, including dividends, share-price gains and
valuation.
The tests were created in 2009 when the banks were in upheaval
during the financial crisis. The Fed later required banks to seek
its approval as part of the test process before raising dividends
or buying back more stock.
Today, the tests highlight the delicate balancing act facing
banks: to make decisions that try to please both regulators and
shareholders, whose goals -- tamping down risk versus earning
returns -- don't always coincide.
Bank of America CEO Brian Moynihan recently questioned whether
the capital requirements of the stress tests and other regulations
were preventing the bank from making loans. The tests "will make
you very safe," Mr. Moynihan said at a Wall Street Journal
conference last week. "The question is whether it restricts
lending."
During an investor call in April, Citigroup CFO John Gerspach
said the bank had a "very good and fruitful dialogue with our
regulatory brethren" on topics including the stress test. "What's
up to us is to demonstrate that we are making progress," Mr.
Gerspach said.
Bank of America spent more than five years paying its
shareholders a token 1-cent-a-share quarterly dividend, and
Citigroup spent longer than that paying that sum or no dividend at
all. Both banks, which required significant government bailouts
during the crisis, now pay 5 cents a share each quarter.
That remains far below their precrisis peaks, which were 64
cents at Bank of America and, after factoring in a 2011 reverse
stock split, $5.40 at Citigroup. Wells Fargo, by contrast, just
raised its dividend to 38 cents a quarter, and J.P. Morgan is about
to increase its payout to 48 cents. At both banks, the dividend is
higher than it was before the crisis.
The stress-test difficulties at Bank of America and Citigroup
have caused some investors to shy away. The two banks "are still in
the penalty box," said David Katz, president and chief investment
officer at Matrix Asset Advisors, which had $670 million in assets
as of March 31. "At some point the regulators are maybe going to be
a little less punitive, but we definitely would not be banking on
that." Instead, he has opted to invest in Wells Fargo and J.P.
Morgan.
Write to Christina Rexrode at christina.rexrode@wsj.com
(END) Dow Jones Newswires
June 20, 2016 16:45 ET (20:45 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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