We are downgrading our recommendation on Citigroup Inc. (C) to Underperform from Neutral based on its failure to pass the Federal Reserve’s most recent stress test.
Investors were widely speculating about the amount of money companies like Citigroup will be allowed by the Fed to return to their shareholders this year. Notably, Citi has failed to significantly enhance shareholder value following the financial crisis and this somewhat weakened its competitive position.
Besides Citi, the three other companies that have failed the stress test this time are Ally Financial Inc., MetLife Inc. (MET) and SunTrust Banks Inc. (STI).
Contrary to Citigroup and the other three failed companies, the other Wall Street bigs such as JPMorgan Chase & Co. (JPM), U.S. Bancorp (USB) and Wells Fargo & Co. (WFC) managed to clear the stress test and increase their dividends and share repurchases.
Though Citigroup could not prove its sturdy capital position after considering its capital plan, the Fed found that even in adverse scenarios, JPMorgan, U.S. Bancorp and Wells Fargo’s capital ratios would be above the regulatory requirements after considering their capital plans.
With the weakness in the economy as a whole and fundamental stress on the banking sector in particular, top-line headwind continued at Citigroup. While the expense outlook is an encouraging one and we believe that investments and efficiency savings will help in garnering a solid market share, volatile equity markets, a low interest environment and a tough regulatory environment remain our major concerns.
However, Citigroup currently retains its Zacks #3 Rank, which translates into a short-term Hold rating.
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