BofA's Success Looks a Bit Worse Than Citi's Failure

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We've talked about the fact that Citi "failed" the Fed's stress tests in the sense that its plan to return capital was Too Big, and so it got whacked by markets. Bank of America passed with flying colors, so, tiny yaaaaay, but the Journal puts that in context:

The situation at Citigroup [what with the failing and such] was reminiscent of a similar setback suffered last year by Bank of America Corp. when the Fed denied its request for a dividend increase. CEO Brian Moynihan had earlier hinted raising the dividend was likely. This time around, Bank of America didn't seek a increase of its quarterly dividend, currently one penny.

In fact! BofA seems to have some capital raising in mind:

I'm not going to like do math or anything crazy, but assuming that, but for their optimism/pessimism around capital return/raising, Citi and BofA are exactly the same, what could possibly go wrong, 20bps is $2bn of new capital, which I'm going to guess comes from BofA paying its cash bonuses in things other than cash?*

The banks who passed are going nuts with share buybacks and, again, tiny yaaaaay, and I suppose shareholders like that. Especially since many of them are trading below book so a dollar coming out of them is worth more than a dollar in them.

But it feels sort of silly that BofA's stock went up because it passed the stress test (and plans to dilute shareholders to the tune of billions of dollars of stock), while Citi's went down because it failed the stress test (and so has to downsize its plans to return billions of dollars to shareholders to just return somewhat fewer billions of dollars to shareholders). I know, I know, maybe Citi's buyback was priced in and BofA's nonbuyback was priced in and ... sure, why not. But I also think that there's an element of meaningless milestones: there's a pass/fail binary, and passing is Good and failing is Bad, and so even though Citi and BofA have kind of the same stress test results ex their capital plans, and even though Citi's capital plan is more shareholder-friendly, BofA is up 15% and C is up only 6% since stressday.**

Bank capital is a thing that lends itself to path dependency and meaningless milestones for, like, kind of obvious reasons. (Like: that's what it's about!) And apparently Sheila Bair isn't the only person who thinks that X is too little capital for any value of X. The Times has a good rundown of the usual suspects who have a sad about post-stress-test buybacks, like:

“It’s frankly irresponsible to allow banks to quickly empty their coffers,” said Neil Barofsky, the former inspector general for the Troubled Asset Relief Program. “They should be holding onto this money.”

or

“Why are we letting banks hand out dividend payments and encouraging risky behavior after they passed flimsy tests?” [Stanford prof Anat R. Admati] said. “It’s frankly dangerous, and the Fed should not allow it.”

And some people say the other thing, like "the stress tests were extremely rigorous," and, y'know, file that with what was/wasn't priced into C and BAC stock among the things I don't know about. But, after saying some sensible things about how how return of capital is a good value proposition given that you're better at managing your money than Vikram Pandit is, Felix Salmon says this:

What regulators should be doing, I think, is encouraging the likes of Citi to give back capital to shareholders — just so long as the bank’s capital ratios go up at the same time. In a word, deleveraging. The lesson of the 2008 bailouts is very much that no matter how much capital you inject into banks, they won’t lend it out in the real economy. So let’s allow that capital to leave the banks, return to shareholders, and get invested in the economy some other way. Just so long as when that happens, the big banks shrink commensurately.

And I get it, I do, because I sympathize with the argument that depositors, creditors, shareholders, almost everyone would do better with their money than Citi would. But, like, also, they kind of did that:

This is just a chart of every one of Citi's capital ratios I could find on Bloomberg, because that seemed easier than evaluating which is the "right" one. The point is, they're all up. If the lesson of the 2012 stress tests is that no matter how much banks increase their capital ratios, they'll have to increase them more ... well, I don't know, that doesn't give them much to shoot for.

Citi Rejection Stings Pandit [WSJ]
Questions as Banks Increase Dividends [NYT]
Behind the bank buyback bonanza [Term Sheet]
Bank capital and short-term greediness [Felix Salmon / Reuters]

* TBF a reader points out that BAC doesn't have to raise new capital to increase its ratio; it could just be reducing RWAs to lower the denominator. It does seem that that could be part of its "capital plan," so, sure. That's still kiiiiind of a way to dilute you though. I dunno. I guess if I were a shareholder I'd say that raising capital ratios through any means other than generating income is sort of dilutive, and lowering them through any means other than generating losses is sort of accretive. Meh.

** You could also attribute this to "BofA knew how to conduct stress tests and Citi didn't," and that's sensible: like, you should be evaluated, as a bank executive, on your ability to optimize around your regulators. But I'm not sure that raising capital to bring you to 90bps over the minimum is more impressive than returning capital to bring you 10bps below the minimum. The goal, as in the Series 7 exam, is to just barely pass.

Related

Citi Will Try The Stress Test Again With A $9bn Stock Buyback

More stress tests, bleargh. I guess the news is that Citi "failed", though I can't get all that excited by that because it didn't exactly "fail" in the sense of now it's being forced to raise capital / broken up / burned to the ground. Instead it failed assuming it follows the capital plan it submitted to the Fed, which is clearly a capital-lowering rather than capital-raising plan. I ballpark it at $10bn of share repurchases and dividends,* which is ... well, it's pretty big for Citi. So they can just not do that then. Or not do quite as much of that, which seems to be their plan: In light of the Federal Reserve’s actions, Citi will submit a revised Capital Plan to the Federal Reserve later this year, as required by the applicable regulations. The Federal Reserve advised Citi that it has no objection to our continuing the existing dividend levels on our preferred stock and our common stock, and we plan to do so, subject to approval by the Board of Directors each quarter. The Federal Reserve also advised that it has no objection to Citi redeeming certain series of outstanding trust preferred securities, as Citi proposed in its Capital Plan. We plan to engage further with the Federal Reserve to understand their new stress loss models. We strongly encourage the public release of these models and the associated benchmarks and assumptions. We believe greater transparency in this process will best serve all banking institutions and their shareholders as well as the international regulatory community and market participants, and will encourage a level playing field globally. There are at least two ha! moments in that snotty last paragraph. First there's the fact that the Fed had planned to release the stress test results on Thursday and got gun-jumped by Jamie Dimon. So much for Fed transparency. But also, specifically, as people are all running around suing each other about the Fed maybe kind of encouraging bank CEOs to hide material information from investors, it is odd that the Fed would have the stress test results and sit on them for two days. Imagine the scenario where Jamie Dimon, Vikram Pandit, and the Fed all know that JPM passed and was going to do a largeish buyback, while Citi failed and was going to do a ... I guess somewhat smaller buyback - and they didn't tell anyone from today until Thursday. If you sold JPM to buy C today, wouldn't you be kind of annoyed?**