Sweta Killa: One of the five U.S. banking biggies – Citigroup Inc (NYSE:C) – has been hard hit by the rejection of its capital plan by the Fed in the 2014 Comprehensive Capital Analysis and Review (CCAR) stress test. This is the second time in three years that Citigroup has faced the Fed’s rejection for its capital plan.
Citigroup had proposed an increase in its buyback program from $1.2 billion to $6.4 billion shares through the first quarter of next year and a dividend hike of a penny to 5 cents per share. Though the company successfully cleared the first round of the stress test requirements related to capital ratio threshold of 5% last week, the Fed rejected the capital plan on concerns over the reliability of the bank’s capital planning process (read: 3 Financial ETFs to Play the Bank Stress Tests).
This is because the Fed still found number of deficiencies in the company’s risk management and control practices even though it is making sufficient progress in improving these metrics. In particular, the company showed its incompetency to project revenues and losses in an adverse scenario for major parts of its business. Further, a $400 million loan fraud at its Banamex unit in Mexico last month raised doubts over the internal controls of the third largest U.S. bank.
The move was extremely shocking for Citigroup and the broader market including investors and analysts. Disappointed by the Fed’s rejection, two analysts downgraded the stock from Outperform to Market Perform and other analysts are revisiting their outlook. This move suggests bearish sentiment on this big bank and rough trading in the coming days.
In fact, shares of Citigroup tumbled nearly 5.4% on elevated volumes of nearly 4 times than the average daily volume. The plunge represents the biggest drop since November 2012.
Sluggish trading has also been seen in the ETF world, as financial ETFs having the largest allocation to this banking giant suffered a blow following the news. Investors should watch these funds for further weakness in the days ahead and take advantage of the lower price.
PowerShares KBW Bank Fund (NYSE:KBWB)
This fund tracks the KBW Bank Index and has AUM of $164.4 million. Volume is good as it exchanges around 112,000 shares a day while expense ratio came in at 0.35%. The product holds 24 stocks in its basket with the in-focus Citigroup occupying the third position in the basket with nearly 8%.
Large caps dominate the fund at roughly 78% of the total assets, while the portfolio definitely has a value tilt. From a sector look, banks account for 88% share, followed by consumer finance (8%) and investment companies (4%). KBWB has lost about 2.5% in the trailing five-day period.