NEW YORK (AP) — Shares of Citigroup are heading for their worst percentage decline in years after the Fed rejected the bank's capital plan, saying it had failed its post-economic crises "stress test."
The Fed's action would prevent the bank from paying out bigger dividends to shareholders, or buying back more of its own stock that it has already planned to do.
It is the second time in three years that the bank has failed the test. The bank brought in CEO Michael Corbat in 2012, the last time the Fed rejected Citigroup's capital plan, with the mandate of accelerating the banks' turnaround.
The Fed approved 25 banks Wednesday and rejected five, with Citigroup being the largest by far.
The bank's shares were trading down about 6 percent a half hour before the opening bell Thursday.
The annual stress tests were put into place after the global economic crises in which the U.S. Federal Reserves stepped in to stabilize major Wall Street banks to prevent a complete meltdown.
The tests measure the ability of a bank to continue lending in the event of a severe economic rout.
The Fed said Wednesday that it's too hard to predict how some parts of Citigroup's global operation would fare in a sharp economic downturn.
Citigroup had sought authorization to buy back $6.4 billion in stock through the first quarter of 2015, and increase its dividend to 5 cents. The current capital plan authorizes $1.2 billion in share buybacks and a 1 cent dividend.
Industry analysts, like the bank, were caught off guard by the Fed's decision. While most remained confident about Citigroup's operations, analysts with Keefe, Bruyette & Woods, as well as Sanford Bernstein, stripped the bank of its 'outperform' rating.
"While the issues could potentially be remedied fairly quickly, Citi's relationship with regulators may take longer to mend," wrote Steven Chuback and Bill Carcache, analysts with Nomura Equity Research.
Corbat said late Wednesday that the company was "deeply disappointed" by the Fed decision.
"We have not yet made a decision as to when we will resubmit our plan," Corbat said in a printed statement.
Citigroup's stock declined $3.13 to $47.03 in premarket trading.