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Citigroup (C) Pauses Share Buybacks in Q4 Owing to SACCR Rule
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During the Goldman Sachs U.S. Financial Services Conference, Citigroup Inc.’s (C - Free Report) chief financial officer Mark Mason said that the company is pausing share repurchase of its stock for the fourth quarter. The decision has been made in anticipation of the impact of the new capital rule — Standardized Approach for Counterparty Credit Risk (SACCR) — related to derivatives risks.
Nonetheless, management assured that it is making efforts to “create capacity” and mitigate the impact of the rule and will restart share buybacks in first-quarter 2022 at levels similar to third-quarter 2021. In the third quarter, Citigroup returned $4 billion of capital to shareholders in the form of dividends amounting to $1 billion and 43 million common stock repurchases for $3 billion while maintaining strong regulatory capital ratios. With this, through third-quarter 2021, Citigroup has returned around $12 billion of capital through share repurchases and dividends.
The new directive is a complicated one that dictates how banks should match some of the risk-weighted assets (RWA) for which they are supposed to hold capital. A higher tally indicates that banks must hold more capital. This impacts a bank’s return on capital.
Mark Mason noted that the rule, which must be rolled out by all banks by first-quarter 2022, is expected to increase Citigroup's RWA by $60-$65 billion and affect its Common Equity Tier 1 capital ratio by 50-60 basis points.
At the same conference, management noted that fourth-quarter consumer revenues are likely to pick up momentum sequentially but be down in the mid-single digits on a year-over-year basis. Also, Citigroup continues to expect expenses of around $1.2 billion for the fourth quarter related to the company’s impending exit from South Korea’s consumer banking business.
As a result of the new regulation, the company is exploring low-yielding RWAs and other opportunities to reduce its RWA. Also, it remains focused on returning any capital not deployed for accretive investments and will continue doing so as it exits some of its non-strategic markets.
Specifically, in April, Citigroup announced a major strategic action, whereby, the global consumer banking segment will exit 13 markets across Asia and EMEA, including Australia, Bahrain, China, India, Indonesia and Korea. Making progress on this strategy, in third-quarter 2021, the company announced the sale of its Australia consumer business. Further, in November, the bank announced plans to wind down South Korea’s consumer banking business. With such exits, it seeks to focus on investments in several areas like wealth division operations in Singapore, Hong Kong, the UAE and London to stoke growth. Such efforts will likely help augment Citigroup’s profitability and efficiency over the long term.
Currently, the stock is trading at a discount to book value and share buybacks would have been accretive in such a scenario. Hence, the suspension of share buybacks might be a drawback for the company’s upcoming results.
Shares of Citigroup have gained 1.2% in the year-to-date period, underperforming the industry’s rally of 34.7%.
Following the Federal Reserve’s stress test results in July, Citigroup’s stress capital buffer (SCB) requirement was increased from 2.5% to 3%, beginning fourth-quarter 2021, for a four-quarter window. The increase in SCB led to higher capital requirements limiting the bank’s flexibility to deploy capital in share buybacks and dividends. Owing to this, Citigroup kept dividend payments unchanged at the current level of 51 cents per share and refrained from increasing its share repurchase plan then.
This was in stark contrast to other banks like Morgan Stanley (MS - Free Report) , Bank of America Corporation (BAC - Free Report) and Goldman Sachs (GS - Free Report) that hiked dividends.
Morgan Stanley hiked its quarterly dividend by 100% to 70 cents per share in July and increased its buyback authorization to up to $12 billion through Jun 30, 2022. In October, Morgan Stanley projected the new rule to add around $40 billion to its RWA.
In July 2021, Bank of America announced a dividend hike of 17% to 21 cents per share. In October, BAC’s share repurchase plan of $25 billion was also renewed. BAC had adopted the rule earlier and witnessed a decline in its RWA tally.
In July, Goldman Sachs announced a dividend hike of 60% to $2 per share in July 2021. Also, in the third quarter, Goldman Sachs returned $1.70 billion of capital to common shareholders. This included share repurchases worth $1 billion and common stock dividends of $700 million.
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Citigroup (C) Pauses Share Buybacks in Q4 Owing to SACCR Rule
During the Goldman Sachs U.S. Financial Services Conference, Citigroup Inc.’s (C - Free Report) chief financial officer Mark Mason said that the company is pausing share repurchase of its stock for the fourth quarter. The decision has been made in anticipation of the impact of the new capital rule — Standardized Approach for Counterparty Credit Risk (SACCR) — related to derivatives risks.
Nonetheless, management assured that it is making efforts to “create capacity” and mitigate the impact of the rule and will restart share buybacks in first-quarter 2022 at levels similar to third-quarter 2021. In the third quarter, Citigroup returned $4 billion of capital to shareholders in the form of dividends amounting to $1 billion and 43 million common stock repurchases for $3 billion while maintaining strong regulatory capital ratios. With this, through third-quarter 2021, Citigroup has returned around $12 billion of capital through share repurchases and dividends.
The new directive is a complicated one that dictates how banks should match some of the risk-weighted assets (RWA) for which they are supposed to hold capital. A higher tally indicates that banks must hold more capital. This impacts a bank’s return on capital.
Mark Mason noted that the rule, which must be rolled out by all banks by first-quarter 2022, is expected to increase Citigroup's RWA by $60-$65 billion and affect its Common Equity Tier 1 capital ratio by 50-60 basis points.
At the same conference, management noted that fourth-quarter consumer revenues are likely to pick up momentum sequentially but be down in the mid-single digits on a year-over-year basis. Also, Citigroup continues to expect expenses of around $1.2 billion for the fourth quarter related to the company’s impending exit from South Korea’s consumer banking business.
As a result of the new regulation, the company is exploring low-yielding RWAs and other opportunities to reduce its RWA. Also, it remains focused on returning any capital not deployed for accretive investments and will continue doing so as it exits some of its non-strategic markets.
Specifically, in April, Citigroup announced a major strategic action, whereby, the global consumer banking segment will exit 13 markets across Asia and EMEA, including Australia, Bahrain, China, India, Indonesia and Korea. Making progress on this strategy, in third-quarter 2021, the company announced the sale of its Australia consumer business. Further, in November, the bank announced plans to wind down South Korea’s consumer banking business. With such exits, it seeks to focus on investments in several areas like wealth division operations in Singapore, Hong Kong, the UAE and London to stoke growth. Such efforts will likely help augment Citigroup’s profitability and efficiency over the long term.
Currently, the stock is trading at a discount to book value and share buybacks would have been accretive in such a scenario. Hence, the suspension of share buybacks might be a drawback for the company’s upcoming results.
Shares of Citigroup have gained 1.2% in the year-to-date period, underperforming the industry’s rally of 34.7%.
The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Following the Federal Reserve’s stress test results in July, Citigroup’s stress capital buffer (SCB) requirement was increased from 2.5% to 3%, beginning fourth-quarter 2021, for a four-quarter window. The increase in SCB led to higher capital requirements limiting the bank’s flexibility to deploy capital in share buybacks and dividends. Owing to this, Citigroup kept dividend payments unchanged at the current level of 51 cents per share and refrained from increasing its share repurchase plan then.
This was in stark contrast to other banks like Morgan Stanley (MS - Free Report) , Bank of America Corporation (BAC - Free Report) and Goldman Sachs (GS - Free Report) that hiked dividends.
Morgan Stanley hiked its quarterly dividend by 100% to 70 cents per share in July and increased its buyback authorization to up to $12 billion through Jun 30, 2022. In October, Morgan Stanley projected the new rule to add around $40 billion to its RWA.
In July 2021, Bank of America announced a dividend hike of 17% to 21 cents per share. In October, BAC’s share repurchase plan of $25 billion was also renewed. BAC had adopted the rule earlier and witnessed a decline in its RWA tally.
In July, Goldman Sachs announced a dividend hike of 60% to $2 per share in July 2021. Also, in the third quarter, Goldman Sachs returned $1.70 billion of capital to common shareholders. This included share repurchases worth $1 billion and common stock dividends of $700 million.