Cit­i­group faces higher hur­dles

US cen­tral bank adds China slump to tests

The Pak Banker - - Front Page -

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.

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