Citigroup Exceeds Fed Minimum Capital Level Under Stress Scenario

By Christina Rexrode 

Citigroup Inc. has the capital to keep lending in a severe economic downturn, the Federal Reserve calculated Thursday in the first stage of its annual stress tests.

At the low point of a hypothetical recession, Citigroup's common equity Tier 1 ratio, which is a measure of high-quality capital as a share of risk-weighted assets, was 9.2%, exceeding the 4.5% level the Fed views as a minimum, the central bank estimated. Citigroup, using its own methodology, predicted the capital ratio would fall lower, to 8.5%, making the bank's own predictions more conservative than the Fed's.

Citigroup's Tier 1 leverage ratio, which measures high-quality capital as a share of all assets, was 6.9%, exceeding a 4% minimum. Citigroup predicted this ratio would be at 7%, almost exactly in line with the Fed's calculation.

Both ratios were notably higher than last year, when the Fed calculated that Citigroup would have a common equity Tier 1 ratio of 6.8% and a Tier 1 leverage ratio of 4.6% at the low point of a recession.

Citigroup's projected pre-provision revenue jumped to $43.7 billion, up 50% from last year's exam. Its projected trading and counterparty losses fell 9%, to $16.8 billion.

The stress tests simulate a worldwide recession. The results were under the Fed's "severely adverse" scenario of financial stress, which this year includes a 10% U.S. unemployment rate, significant losses in corporate and commercial real estate lending portfolios, and negative rates on short-term U.S. Treasury securities.

The results will factor into the Fed's decision next week about whether to approve the bank's plan for rewarding shareholders with dividends or potential share buybacks. Banks whose capital ratios dropped close to minimum levels may choose to scale back their dividend or buyback plans before the Fed announces its final decision Wednesday. That day the banks can choose to announce whether they are raising their dividends or buying back more shares, important for enhancing shareholder returns.

Citigroup failed the test twice, in 2012 and 2014, in part because of regulators' concerns about the bank's ability assess potential risk across its global operations. Last year, the bank passed the exam and the Fed gave it permission to raise its dividend for the first time since the financial crisis.

Write to Christina Rexrode at [e-mail]

(END) Dow Jones Newswires

June 23, 2016 18:01 ET (22:01 GMT)

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