Citigroup faces higher hurdles

US central bank adds China slump to tests

WASHINGTON

US central bank Federal Reserve changed its annual set of tests for the 30 largest US banks to incorporate the risk of a deeper slump in Asia, where Citigroup Inc has a bigger presence than competitors.

Recessions in the euro area, the U.K. and Japan are features of the Fed’s “severely adverse” scenario in the new test. The main difference from last year is a more substantial slowdown in Asia, including “a sizable weakening of economic activity in China,” the Fed said Friday in a statement.

Citigroup, the third-biggest US bank, employs thousands of people across Asia. Former Chief Executive Officer Vikram Pandit, originally from Nagpur, India, pushed into markets across the continent, making credit-card, personal and corporate loans in countries such as China, India and Singapore.

“Citi has the most obvious gross exposure to a slowdown in Asia,” said David Knutson, a Chicago-based credit analyst with Legal & General Investment Management America. “My expectation is that Citi has gone a long ways over the last six to eight months to educate the Fed on the types of risks they’re taking in international markets.”

Pandit, 55, was pushed out by the board last month, a decision driven in part by the bank’s failure to get its capital plan approved by the Fed after the last stress tests, a person familiar with the matter said in October. Michael Corbat, who succeeded Pandit, said in an Oct. 16 conference call with analysts that submitting a new capital plan to the Fed by Jan. 5 is one of the issues “I’m going to spend time focused on.”

Total Asian assets in the bank’s Citicorp division, which include consumer banking and trading, jumped 33 percent to $356 billion in the three years ended Sept. 30, the company said last month. Credit-card and retail loans also increased 33 percent to $89.3 billion. The unit’s profit was $12.4 billion in that span.

Citigroup must prove to the Fed that these are “pristine” assets that can withstand a downturn in Asia, Knutson said.

“That’s what you want to hear as a regulator, that they didn’t allow themselves to be led down a dark path in the name of growth,” said Knutson, whose firm owns Citigroup debt.

Mark Costiglio, a spokesman for New York-based Citigroup, declined to comment. The central bank started the tests in 2009 to restore confidence in the financial system after the worst crisis since the Great Depression brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc. Regulators have since complemented the reviews with a capital-planning requirement to improve boards’ management of risk and dividend and stock-buyback decisions.

“There will be pain for specific banks” with exposure to Asia, said Walter Young, a director in Deloitte & Touche LLP’s governance, risk and regulatory services division who focuses on stress-testing and is based in Salt Lake City.

Still, most financial firms will fare “generally better than last year,” Young said. Capital levels are higher and banks are “learning how to operate with 8 percent unemployment,” he said.

In the worst of three scenarios, U.S. gross domestic product plunges 6.1 percent in the first quarter of 2013 and the unemployment rate averages as much as 12.1 percent in the second quarter of 2014 — an economic shock on the same scale as last year’s stress test.

The Fed will conduct its own tests on the 19 largest financial firms, including Citigroup, New York-based JPMorgan Chase & Co. (JPM), and Bank of America Corp. (BAC), based in Charlotte, North Carolina. The remaining 11 will test themselves and submit results to the central bank.

The scenarios were developed in consultation with the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp., which will use them for tests of the firms they supervise.

The adverse scenarios weren’t forecasts and were “designed to assess the strength and resilience of financial institutions and their ability to continue to meet the credit needs of households and businesses,” the Fed said yesterday. In the worst scenario, real disposable income contracts for five consecutive quarters, and house prices fall 21 percent from the third quarter of 2012 to the first quarter of 2015.