Citigroup Inc. (C), the lender that took the most government aid during the financial crisis, will seek approval for a “meaningful” payout to shareholders after failing to meet minimum standards in U.S. stress tests. 
 
 “We still believe that our company has the capacity to return more capital to shareholders,” Chief Executive Officer Vikram Pandit said in an internal memorandum obtained by Bloomberg News. “We will work with the Federal Reserve to formulate a plan that returns meaningful capital while satisfying our regulators.” 
 
 The Fed objected yesterday to Citigroup’s capital plan, which may have included a request for a higher dividend. SunTrust Banks Inc. (STI), Ally Financial Inc. and MetLife Inc. (MET) also fell short in the Fed’s test of how 19 of the nation’s biggest lenders would fare in a severe economic slump. 
 
 The results are a blow to Pandit, who has told investors the New York-based bank is ready to return capital to shareholders after slashing the dividend during the financial crisis. Capital plans submitted for the tests typically involve requests for higher dividends and share buybacks, which the Fed allowed for JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) 
 
 “Investors are going to be disappointed,” said Michael Shemi, a director at Christofferson, Robb & Co., a New York- based investment firm with about $1.5 billion under management, referring to Citigroup. “Citi appears to have been too aggressive with their capital plans.” 
 
 Photographer: Daniel Acker/Bloomberg Citigroup Center in New York. Close Citigroup Center in New York. Close Open Photographer: Daniel Acker/Bloomberg Citigroup Center in New York. 
 
 Shares Decline 
 
 Citigroup fell 3.2 percent to $35.27 at 11:50 a.m. in New York, the biggest drop on the 24-company KBW Bank Index. JPMorgan, which jumped 7 percent yesterday, was up 0.4 percent, and Wells Fargo declined 1 percent. 
 
 Pandit scrapped Citigroup’s dividend in 2009 as part of the company’s $45 billion bailout, which was later repaid. He reinstated a 1-cent payout last year and has been selling riskier assets to rebuild the bank’s strength. The Fed didn’t object to keeping the current quarterly payout, Citigroup said. 
 
 The Fed’s decision “is disappointing, but we remain very optimistic about the long term,” Pandit wrote in his memo. 
 
 The tests may also set back Ally, the Detroit-based auto and home lender rescued by taxpayers, which had planned an initial public offering to repay its bailout. Ally, run by CEO Michael Carpenter, and SunTrust, led by CEO William H. Rogers, said they will submit revised plans. 
 
 Deep Recession 
 
 The Fed is testing to see how the capital of U.S. banks might hold up through a deep recession and a second housing crisis. The scrutiny focused on variables such as trading and counterparty losses and write-offs on credit cards and first- lien mortgages. Most of the 19 banks passed. 
 
 Disclosure of stress-test results in May 2009 boosted confidence in the financial system by giving investors more certainty on the maximum losses firms might sustain, and bank stocks beat the Standard & Poor’s 500 Index in the next 12 months. The KBW Bank Index (BKX) jumped 4.6 percent yesterday after JPMorgan, the biggest U.S. lender, announced it had passed the test and was raising its dividend 20 percent. 
 
 The average estimate of six analysts surveyed by Bloomberg was for Citigroup to increase its payout to 28 cents this year from 3 cents. They projected the bank would buy back about $2.18 billion in shares, or 2.2 percent of the total, after making no repurchases last year. 
 
 Overstated Risks 
 
 Shannon Bell, a spokeswoman for Citigroup, declined to comment on what was in the capital plan. Ally said in an e- mailed statement that the Fed’s analysis overstated some risks and didn’t account for some of the auto and home lender’s financial and management resources. 
 
 Citigroup’s projected Tier 1 common capital ratio fell to 4.9 percent, below the central bank’s minimum requirement of 5 percent, in a test estimating the effects of a severe economic slump, according to data released by the Fed. Citigroup would surpass the threshold if the bank didn’t pursue a dividend increase or share buyback, according to the Fed’s data. 
 
 Citigroup still has more than $200 billion of unwanted assets in the Citi Holdings unit, including more than $100 billion of mortgages, according to a filing. 
 
 “We continue to have the same goals that I mentioned before, which is that this will be the year that we’ll start returning capital,” Pandit told analysts on Jan. 17. 
 
 Federal Aid 
 
 Ally has benefited from $17.2 billion of federal aid, which it needed after losses swelled on subprime home mortgages made by its Residential Capital mortgage subsidiary. A statement e- mailed by Gina Proia, a spokeswoman for Ally, said the Fed’s analysis “dramatically overstates potential contingent mortgage risk, especially with respect to newer vintages of loans.” 
 
 The tests also didn’t give enough credit for “management’s track record” and commitment to addressing the mortgage risks, and doesn’t “adequately contemplate contingent capital that already exists,” according to the statement. 
 
 The U.S. Treasury holds $5.9 billion of preferred shares that must be converted into common equity no later than Dec. 30, 2016, according to the lender’s annual securities filing. 
 
 Ally has considered putting the ResCap unit into bankruptcy, people familiar with the matter have said. Once known as GMAC when it was part of General Motors Co., Ally remains one of the biggest auto lenders and has profited from a recovery in car sales. The U.S. gained a 74 percent stake in the company in return for rescuing Ally in 2008. 
 
 Raising Capital 
 
 “They’ve done a lot less capital-raising than others,” said Kirk Ludtke, an analyst at Stamford, Connecticut-based CRT Capital Group LLC. Ally’s capital plan may include additional contributions to ResCap, he said. 
 
 SunTrust’s Tier 1 common capital ratio would fall to 4.8 percent if the Atlanta-based lender carried out capital plans submitted to the Fed, according to the test results. Capital plans can include dividend payouts, stock repurchases and share sales. Ally’s ratio was estimated at 2.5 percent, regardless of any capital actions it proposed, according to Fed data. 
 
 SunTrust, ranked eighth in the U.S. by deposits, said it would have met Federal Reserve standards without the plan for capital actions that the lender submitted to the regulator. Distributing dividends and share buybacks tend to weaken performance on the tests by draining capital. 
 
 Shares in SunTrust rose 66 cents, or 2.9 percent, to $23.23 at 11:50 a.m. in New York trading after the company said first- quarter earnings will probably beat the average estimate compiled by First Call. 
 
 Housing Loans 
 
 The lender amassed losses amid a housing slump in the nation’s Southeast. After posting profits of more than $1 billion annually before 2008, the company booked a $1.56 billion loss in 2009 as write-offs surged. 
 
 About 27 percent of SunTrust’s residential construction loans and 29 percent of its residential mortgages were concentrated in Florida, which suffered some of the worst mortgage defaults during the financial crisis. 
 
 “I don’t think these stress tests are about who needs more capital,” said Michael Rose, an analyst with Raymond James & Associates Inc. “Clearly it’s about who can return capital. So maybe what they asked for might have been a little aggressive.” 
 
 Rose, who rates the shares “outperform,” said he’d been expecting SunTrust to double its 5-cent quarterly dividend. “It’s not like they failed by a wide margin,” he said, calling the test’s scenario “onerous” and “probably unrealistic.” 
 
 MetLife’s Results 
 
 MetLife’s total risk-based capital ratio would be 6 percent, compared with the minimum acceptable level of 8 percent, the Fed said as part of its review of how companies would withstand a “stress scenario.” 
 
 The insurer had requested approval for $2 billion in share repurchases and an increase of its annual dividend to $1.10 a share from 74 cents, according to a statement from the New York- based company. MetLife, which is overseen by the Fed because of its banking operations, was prevented by the regulator last year from increasing its dividend. 
 
 CEO Steven Kandarian is winding down the banking business and said he expects the firm to have as much as $7 billion of excess capital by the end of this year. Kandarian said he remains “fully committed” to returning funds to shareholders, and that MetLife is on track to stop being a bank holding company by the middle of this year. 
 
 “At the end of the day this is an insurance company,” said Edward Shields, an analyst at Sandler O’Neill & Partners LP. MetLife’s inclusion in the Fed test is “like putting a square peg into a round hole.” 
 
 Shares in MetLife fell 4.5 percent in New York. The stock gained 27 percent this year through yesterday. 
 
 Fifth Third Bancorp (FITB), the Cincinnati-based lender, said the Fed objected to increases in its 8-cent quarterly dividend and some common share buybacks. The government didn’t object to its redemption of as much as $1.4 billion in certain trust-preferred securities. 
 
 To contact the reporters on this story: Donal Griffin in New York at dgriffin10@bloomberg.net; 
 
 To contact the reporter on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net ||||| “It is night and day,” Jason Goldberg, senior analyst at Barclays Capital Inc. in New York, said before the announcement. “In 2009, about half the banks failed the stress test. The industry’s capital position is higher today, and better quality. There is a lot less leverage.” 
 
 JPMorgan Chase & Co. (JPM), in an announcement before the Fed’s release, said it would raise its dividend 20 percent and authorized a $15 billion share repurchase plan after the central bank tested its capital. 
 
 The Fed said an unemployment rate of 13 percent, a 50 percent drop in stock prices and a 21 percent decline in house prices under the stress scenario would produce aggregate losses of $534 billion over nine quarters. 
 
 Even with that blow, the 19 banks would see their tier one common capital ratio -- a measure of bank strength against loss -- fall to 6.3 percent in the fourth quarter of 2013 in the hypothetical scenario, above the 5 percent minimum the Fed required. The ratio was 10.1 percent in the third quarter of last year. 
 
 To contact the reporters on this story: Craig Torres in Washington at ctor To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net;res3@bloomberg.net; 
 
 To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net ||||| Investors in bank stocks are about to get a big cut of the profits again. 
 
 Financial analysts say the nation’s largest banks are ready to begin restoring their dividends in the first half of the year, after a three-year pause to repair their damaged balance sheets. The reversal could put billions of dollars in the pockets of pension funds and retirees who had viewed bank shares as dependable sources of income. 
 
 Clues to how big a payout is in store could come as early as Friday, when JPMorgan Chase announces its 2010 financial performance, the first of many earnings reports to come over the next week from the likes of Bank of America, Citigroup, Goldman Sachs and Wells Fargo. 
 
 If the big banks deliver a second straight year of rising profits, as many analysts expect, the conditions would be in place for regulators to approve dividend increases by as early as March. 
 
 As the financial crisis worsened in 2008 and 2009, all but a handful of financial institutions cut their once-lucrative dividends to just pennies a share, hurting ordinary investors who had come to see them as sources of income. JPMorgan, for example, now has a dividend of 20 cents a share annually, down from $1.52 before the crisis. 
 
 Over all, the financial sector of the Standard & Poor’s 500-stock index paid out $51 billion in dividends in 2007. By 2010, that figure had shrunk to $19 billion. 
 
 “It’s a significant milestone,” said Gerard Cassidy, a veteran bank analyst at RBC Capital Markets. “The return of dividends signals that the banks are back, and the Federal Reserve wants to inspire confidence in the marketplace so that banks lend more.” 
 
 The financial industry has returned to health much faster than expected, helped by an alphabet soup of federal aid programs totaling more than $3 trillion, ultralow interest rates and a surging stock market. 
 
 Banks are expected to record $70 billion in profits in 2010, according to Foresight Analytics, a financial research firm. That would be up from $12.5 billion in 2009 but remains about half the level reached in 2006, before the housing market collapsed and the financial system almost came undone. 
 
 The earnings reports for the fourth quarter of 2010 are also likely to show that corporate and consumer lending is starting to come back while losses on bad loans are continuing to ease. 
 
 Wall Street’s trading businesses are expected to turn in a strong performance because of an increase in deal-making activity late in the year. 
 
 This week the Federal Reserve began another round of so-called stress tests of the nation’s 19 largest banks, evaluating their ability to remain financially healthy in the face of a still-anemic economic recovery and tough new regulations that will cut deeply into revenues. Unlike the first round of tests, the findings this time will not be made public. 
 
 Before approving a dividend increase, regulators must sign off on a bank’s stress test and conclude that the bank can meet the higher capital requirements put in place by new international agreements and the recent overhaul of financial regulations in the United States. They also must have fully repaid any federal bailout funds they accepted at the height of the crisis. 
 
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 While the return of dividends will be welcomed by ordinary investors, it remains a delicate issue for the banks as well as regulators and politicians in Washington, said Chris Kotowski, a bank analyst with Oppenheimer. 
 
 Many voters are still angry about the government-led bailout that rescued banks after the collapse of Lehman Brothers in 2008. More recently, the return of bonuses on Wall Street has stirred outrage. 
 
 “It’s purely a matter of making it palatable to the public,” Mr. Kotowski said. “Banks are fully capable of doing it. But everyone’s afraid of headlines that say just two years after the bailout, the fat cats are getting dividends again.” 
 
 Partly as a result, he said, dividends will probably be restored in stages, and it could be take until the end of 2012 for them to return to historical norms. 
 
 For decades, shares of banks, along with utilities, were the favored choice of retirees and other conservative investors who looked forward to a steady payment each quarter. 
 
 That all changed when the financial crisis struck, forcing Citigroup to cut its dividend as it braced for a wave of huge losses tied to loan defaults. 
 
 Although the federal bailout program did not require banks to lower their dividends in most cases, regulators all but forced many banks into making cuts by insisting that they hold more capital in reserve to cushion against losses. 
 
 By the spring of 2009, several of the largest banks — including JPMorgan, Bank of America and Wells Fargo — cut their dividend to just pennies a share each quarter. 
 
 Just as the banks cut their dividends at different rates over the course of months, the timing of dividend increases will probably also vary widely across the industry. The strongest banks, including JPMorgan, State Street, U.S. Bancorp and Wells Fargo, should be in the first wave this spring, several analysts said. 
 
 For Bank of America and Citigroup, which continue to suffer steep losses on mortgages and consumer loans, the analysts said higher dividends probably would not come until later this year or early next year. 
 
 Several regional lenders, including Fifth Third Bank, KeyCorp, SunTrust and Regions Financial, are barred by regulators from raising their dividends. None of these banks have repaid their bailout money in full. 
 
 In particular, analysts and investors are eagerly anticipating what the chief executive of JPMorgan, Jamie Dimon, will say on the company’s earnings call on Friday, looking for any hint of the bank’s dividend plan. JPMorgan emerged from the financial crisis in far better shape than most of its rivals, and Mr. Dimon has been outspoken about his desire to raise his company’s payout. 
 
 “We’re going to be building up a lot of excess capital,” he said in a CNBC interview on Tuesday. “So, we would like to restart a dividend.” 
 
 Eventually, JPMorgan’s restored dividend could equal $1.50 a share annually, said Michael Scanlon, senior equity analyst with Manulife Asset Management in Boston. That would equal a yield of 3.3 percent based on its closing price of $44.45 on Thursday. 
 
 That would be up from 0.5 percent now. More important, it would catapult the yield on JPMorgan shares to far above the 2.26 percent yield on certificates of deposit, a popular vehicle for investors seeking income. 
 
 “It won’t come right out of the chute at that level,” Mr. Scanlon said. “But it’s definitely the end of a long drought.”
– The Federal Reserve released the results of its latest round of stress tests at the nation's biggest banks, and they're generally being received as good news. Fifteen of the 19 banks passed, which is what outlets such as the Wall Street Journal and Washington Post are highlighting in the the first paragraph. But the AP and Bloomberg opt to focus on the four that failed, and each singles out Citigroup in the opening paragraph. (The three other banks that failed to impress were SunTrust, MetLife, and Ally Financial.) A Barclays Capital analyst sides with the rosier view, especially when the numbers are compared to the dark days of the Lehman collapse: “It is night and day. In 2009, about half the banks failed the stress test. The industry’s capital position is higher today, and better quality. There is a lot less leverage.”