The Federal Reserve Wednesday rejected Citigroup Inc.'s plans to buy back $6.4 billion of shares and boost its dividends, citing deficiencies in the bank's ability to plan for how stressful situations would hurt its business.
The decision marks the second time in three years that Citigroup has failed to win the Fed's approval for a plan to return money to shareholders, known as the "capital plan," and is a blow for a bank still recovering from the financial crisis.
Returning money to investors through buying back shares is critical for Citigroup in meeting a key target for profitability.
Shares of Citi, the third-largest U.S. bank, fell 4.5 percent to $47.90 in after-hours trading.
Citi was one of five banks whose payout plans were rejected by the Fed Wednesday. Three were the U.S. units of European banks. The fifth, Zions Bancorp, was expected because it was the only bank last week to fail a model run of a simulated crisis similar to the 2007-09 credit meltdown in the first part of the Fed's stress tests.
The Fed said it approved capital plans submitted by the remaining 25 big banks in this year's tests.
Citigroup's chief executive, Michael Corbat, said the bank is "deeply disappointed" by the Fed's decision and that the bank's request for returning additional capital to shareholders was modest.
Last year, the Fed granted Citigroup permission to buy back $1.2 billion worth of shares and said it could continue to pay $120 million a year in dividends, representing a quarterly rate of a penny a share.
This year Citigroup sought to spend more than five times as much buying back shares and to lift its quarterly dividend to 5 cents a share.
The bank earned $13.67 billion last year.
Wednesday, the Fed said that Citigroup has improved its risk management practices in recent years, but the bank cannot determine well enough how its revenue and income would be hurt under stressful scenarios around the world.