Summary

  • It is CCAR season again.
  • Citi is expected to be a big winner in this CCAR round.
  • Citi has $45 billion of excess capital to return to shareholders.
  • The capital return story will finally be believed by the markets.
  • There are too many bullish catalysts for investors to ignore.

The Fed’s stress tests results will be announced today.
There is very little doubt about it – the U.S. banking system is extremely well-capitalized, and the stress tests should conclusively demonstrate that. It is also abundantly clear that the large U.S. banks’ risk management and stress testing processes are in a very good shape. Several years of practice and billions of dollars invested in embedding CCAR processes in the BAU business management and forecasting models, pretty much ensure that.

For Mr. Corbat, the infamous 2014 CCAR round was a watershed moment. When he received that infamous wakeup call at 4 A.M. all alone in a Korean hotel room, advising him of Citigroup’s (NYSE:C) CCAR failure, he must have thought his job was on the line. As things calmed down and the ramifications truly sunk in – he understood that the capital return story will be a rather long slog. The mantra often repeated by Corbat and Gerspach since was simply a variation of “we expect to return excess capital over time”. In the interim, Citi gave up on meeting its target of RoTCE of 10% and its share price languished at a substantial discount to tangible book value. I, for one, consistently complained over the modest CCAR asks in 2015 and to a lesser extent in 2016. But granted, Citi had to play it safe facing a combative Fed regulatory framework led by the much feared banking Tzar Mr. Daniel Tarullo.