Is the Citigroup Stress Test Rejection Really a Surprise? Really?

rcwhalen's picture


The capital plans of Citigroup, HSBC and several other large, foreign bank holding companies were rejected by the Federal Reserve yesterday.  Most of the media reports about this significant rebuttal for Michael Corbat, Citi’s chief executive, focus on operational issues, but a more obvious explanation is that the Citi business model is more risky.  Indeed, you cannot really compare Citi to either Wells Fargo, Bank of America or JPMorgan.  Allow me to convey a polite “Duh” to the media and analyst community.

Looking at the most recent Fed Y-9 performance report for Citi, the first thing that should strike you is that Citi’s loss rate is 4x that of the large bank peer group.  Citi’s business model is more focused on subprime than the average for the peer group.  Net losses on average loans and leases were almost 2% for Citi at the end of 2013 vs just 45bp for the large bank peers.  So given this fact, you can understand why the Fed is more critical of Citi’s loss rates and capital plan than with other banks.

Another clue for the media is the composition of Citi’s assets.  Over 20% of Citi’s loan book are in credit cards vs just 2% on average for the large bank peers.  Indeed, the only good large asset peer for Citi is HSBC, which also has a higher loss rate and more of a subprime, consumer focus than do the other 90 banks in the large bank peer group.  

Larry Lindsey noted on CNBC this morning that HSBC never took a dime of bailout money from UK authorities, but the fact remains that the bank’s loss profile is far more aggressive than that of most large banks.  In the extreme stress test scenario posed by the Fed, both Citi and HSBC would likely see the highest loss rates of any large US banking operation.

Another metric to give you a sense of the relative riskiness of the Citi business vs. other banks is loan commitments, which are 2x the average for the large bank peer group. Another way to think of this metric is “loss given default,” because an obligor could draw on the commitment and then file bankruptcy.  Citi has historically had a much higher loss given default than other large banks, in part because of the large credit card book.  There are actually four time series for loan commitments reported by banks on the form Y-9 and Citi is higher than other large banks in every category.

So when you read about Citi’s rejection by the Fed in terms of capital planning, remember that the bank’s business model is significantly different than that of BAC, JPM and especially WFC.  No credible analyst would even compare Citi with these large asset peers. Indeed, going back to the Fed capital stress tests of several years ago, the best domestic peer for Citi in the large bank peer group is Capital One Financial, a business which is mostly subprime credit cards.

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Thu, 03/27/2014 - 12:56 | 4599113 moneybots
moneybots's picture

"Looking at the most recent Fed Y-9 performance report for Citi, the first thing that should strike you is that Citi’s loss rate is 4x that of the large bank peer group.  Citi’s business model is more focused on subprime than the average for the peer group."


Let me guess. This time they will be saying again that it is limited to subprime?

Thu, 03/27/2014 - 10:37 | 4598371 new game
new game's picture

ask me if i care anymore- it will be bailed out no matter wtf anyone thinks or knows. 

Thu, 03/27/2014 - 10:30 | 4598354 elwind45
elwind45's picture

Yield curve not as first aid as advertised

Thu, 03/27/2014 - 10:20 | 4598317 ThroxxOfVron
ThroxxOfVron's picture

Isn't BofA quietly running off it's bad debt with a neo-bad bank sequestration behind the scenes?

Might be C's turn to do a stock split, er I mean a reverse stock split with mega buyback, er I mean a Dr. Jekyll Island and Mr. Hide the Trash at the FED.

Thu, 03/27/2014 - 12:59 | 4599143 moneybots
moneybots's picture

"Isn't BofA quietly running off it's bad debt with a neo-bad bank sequestration behind the scenes?"


Didn't ENRON sequester bad debt in shell companies?

Thu, 03/27/2014 - 10:20 | 4598316 elwind45
elwind45's picture

After many years of "tout est calme" the Fed is auditing its subjects again? I thought it was contained? I thought the glide path was set! Ill effects have been papered over? THE FED KNOWS THE BANKS KEPT THE DIFFERENCE? Now it wants to know how big the difference has gotten? You got alot of extra cash not being reserved and YOU PAY THE FED first since you keep forgetting US in your dealings!

Thu, 03/27/2014 - 10:12 | 4598279 elwind45
elwind45's picture

Making sure everyone is on same page before the PRINCE gets taken out?

Thu, 03/27/2014 - 10:03 | 4598240 Downtoolong
Downtoolong's picture

HSBC never took a dime of bailout money from UK authorities

So what. All the TBTF were bailed out and continue to be so by easy money policies of the Fed and other central banks.

They should all be nationalized if we’re going to keep maintaining those policies and practices. Then at least we would only have to pay the banksters on the GS scale.

Thu, 03/27/2014 - 12:14 | 4598935 11b40
11b40's picture

Not allowing me to upvote your comment, so I will do it this way.  Hell yes....make banking a utility, cut the speculators loose to go gamble with their money & get them out of our pockets.

Thu, 03/27/2014 - 10:25 | 4598333 elwind45
elwind45's picture

HSBC is being explained as NOT being nationalized while the rest has! Its a play on words ending in NOBODY KNOWS NOTHINGZ

Thu, 03/27/2014 - 09:42 | 4598147 rcwhalen
rcwhalen's picture

Boy there's a lot of unhappy campers who were long and wrong Citi yesterday.  Jason on Twitter is especially tormented.  But look, if you don't understand that each of the Zombie dance queens has a different business model, then don't trade the names.  Let's make a little risk exposure list for Jason and the other cry babies

WFC -- Mortgage, Consumer

JPM -- Derivatives, Commercial, Consumer

BAC -- Derivatives, Mortgage, Consumer

C -- Consumer, Commercial, Derivatives


Thu, 03/27/2014 - 10:35 | 4598367 Rainman
Rainman's picture

You forgot to add money laundering to the C business model listed above

Thu, 03/27/2014 - 12:35 | 4599024 waterhorse
waterhorse's picture

and control fraud to all four or is that just a built-in feature?

Thu, 03/27/2014 - 10:01 | 4598228 DeadFred
DeadFred's picture

Jason, like the rest, had in the back of his mind that fundamentals shouldn't be a factor then suddenly they were. WTF? Why'd they change the game and why only for Citi? The Fed has whitewashed the results time and again so what changed this time?

Thu, 03/27/2014 - 10:37 | 4598374 elwind45
elwind45's picture


Thu, 03/27/2014 - 09:31 | 4598113 USisCorrupt
USisCorrupt's picture

What's anything matter anyway anymore? It's all make believe anyway. Where is the PIN? That all I care about anymore.

Thu, 03/27/2014 - 09:17 | 4598075 ebworthen
ebworthen's picture

HSBC survives by laundering drug money, and Citi is being set up for yet another bail out.

Thu, 03/27/2014 - 12:33 | 4599014 waterhorse
waterhorse's picture

Meh, what's another few trillion between "friends?"

Thu, 03/27/2014 - 09:01 | 4598024 rsnoble
rsnoble's picture

JPM.........we own derivatives and paper gold.  You don't!

Thu, 03/27/2014 - 12:33 | 4599012 waterhorse
waterhorse's picture

"That's why I'm richer than you."  Jamie Dimon

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