2017 Stress Tests: Citigroup Approved to Increase Dividend and Share Buybacks

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The Federal Reserve announced the results from the second round of this year's stress tests on Wednesday. The news clears the way for Citigroup (NYSE: C) and roughly three dozen other large banks to raise their dividends and buy back more stock.

Citigroup responded immediately, saying that it will indeed increase the amount of capital it returns to shareholders. The bank will double its quarterly dividend to $0.32 per share and add $15.6 billion to its share buyback authority. These planned capital actions total $18.9 billion over the next four quarters.

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"Today marks a significant milestone for Citi and our shareholders," said CEO Michael Corbat.

The Dodd-Frank Act stress tests

Citigroup's showing in the first round of this year's stress tests telescoped today's announcement. The results from the first round, referred to as the Dodd-Frank Act stress test, or DFAST, were published last Thursday. Citigroup demonstrated in the DFAST that it has far more capital than it needs to survive a severe economic downturn akin to the financial crisis.

To pass DFAST, a bank must maintain a common equity tier 1 capital ratio, or CET1 ratio, of 4.5% through the test's nine-quarter time horizon. So long as a bank does so, it will pass. If it comes up short, then it fails. It's a purely quantitative exercise.

In Citigroup's case, the New York-based bank comfortably cleared this mark. It entered the test with a CET1 ratio of 14.9%. This declined by more than 500 basis points to 9.7% at the low point in this year's DFAST, but even then it was still well over the 4.5% regulatory minimum.

The Comprehensive Capital Analysis and Review

The second round of the stress tests, the Comprehensive Capital Analysis and Review (CCAR), goes a step further than the first round, by giving the Fed the authority to veto big bank capital plans.

As the Fed explains:

Although Citigroup has struggled on the CCAR in the past, there were no signs of trouble this year. After factoring in its planned capital actions, its minimum CET1 ratio fell to 8%, which is still well above the 4.5% minimum.

Expectations that Citigroup would pass the 2017 CCAR, and thereby accelerate its capital return program, sent the bank's stock up 1.5% on Wednesday. It was up a further 2.4% in after-hours trading.

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John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.