A tale of two megabanks: BofA vs. CitiMarch 27, 2014: 2:24 PM ET
It might be a stretch to say this is a "best of times, worst of times" scenario in American banking, but more than five years since Wall Street hemorrhaged, some financial institutions are recovering better than others.
Bank of America looked like the A student on Wednesday after the Federal Reserve approved its plan to buy back $4 billion in shares and boost its quarterly dividend to 5 cents.
At the same time, BofA announced a $9 billion settlement with federal housing authorities to resolve four long-standing lawsuits against the bank and its subsidiaries: Countrywide and Merrill Lynch. It also agreed to repurchase mortgage-backed securities it sold to Fannie Mae and Freddie Mac.
Investors welcomed the developments, which underpinned hopes that BofA has moved beyond the 2008 financial crisis and mortgage bust.
Shares of BofA rose early Thursday, before giving back gains in the afternoon as the markets went into negative territory. Still, the stock is up more than 9% so far this year, making it the best performer among the "Big Six" banks.
By contrast, there wasn't much celebrating at Citigroup's headquarters. The Fed rejected the company's request to return capital to shareholders, based on certain "qualitative" shortfalls. Specifically, the Fed said it was troubled by Citi's inability to predict how much it could lose in a severe economic downturn.
Citi CEO Michael Corbat said the bank was "deeply disappointed" by the Fed's decision, but he argued that the bank is one of the "best capitalized financial institutions in the world."
The rejection took investors by surprise. Citi shares were down more than 5% in trading Thursday. The sell-off added to an already poor start to the year for Citi shares, which are now down 9% since January 1.
The setback comes weeks after Citi disclosed that federal authorities are investigating the bank's Mexican subsidiary, Banamex, for potential money laundering violations.
The timing of that announcement probably didn't help Citi's case, especially since it met the "quantitative" threshold needed to win Fed approval of its requested $6.4 billion buyback and 5 cent dividend payment hike.
In fact, BofA and Goldman Sachs (GS) both had to tone down their capital plans after the Fed rejected their initial requests, using the Fed's so-called "mulligan option" to submit again.
Both would have "failed" on a quantitative basis with their original asks, according to Andrew Marquardt, an analyst at Evercore.
The stress tests suggests that BofA has made significant progress in winding down its financial crisis liabilities and rebuilding its balance sheet. The results also point to continued headwinds for Citi, which has been scaling down its global operations since Corbat took over in 2012.
"BofA has been ahead of Citi in the recovery process for the past few years," said Anthony Polini, a banking industry analyst at Raymond James "Citi is still a few steps behind."
But he was quick to add that there is still plenty of "upside potential" in Citi shares, which are priced at a sharp discount compared with BofA.
BofA currently trades at about 12 times next year's earnings estimates, versus just 9.4 for Citi.
Of course, BofA has far outperformed Citi over the past few years. Shares of BofA have gained more than 130% in since bottoming in 2009. Citi is up just 80%.
Polini expects Citi to begin returning excess capital to shareholders next year. He said 2015 could be a "banner year" for share buybacks and dividend hikes in the banking industry.
"This doesn't change the long-term story for Citi," he said of the Fed's decision. "It's a disappointment for investors, but not a deal breaker."