NEW YORK - The snag with Citigroup's decade-long climb back from the financial brink is that it’s largely driven by forces boss Mike Corbat doesn’t control. Changes to the U.S. tax regime show that’s sometimes a good thing.
Tax cuts just left Citi with a big loss, and a bigger opportunity. The $203 billion U.S. lender took an $22 billion charge in the last quarter of 2017 as it wrote down deferred tax assets – credits against future tax bills – and took a hit for deemed repatriation of overseas earnings. That left it deep in the red. But its new corporate tax rate of an effective 25 percent will hike earnings in future. If it had been in effect in the period, the 9.6 percent return on tangible common equity Corbat just reported for the year would have risen to above 10 percent – already beating his target for 2018, and suggesting he can get more ambitious.
Beyond that, the impact of tax cuts gets less clear, but probably still helpful. If consumers and small businesses feel richer, as rival JPMorgan said last week it expects they will, it should benefit a company like Citi that makes roughly one-quarter of its revenue from credit cards. Corbat warned last year that the cost of writing down unrecoverable loans was going to rise a little more than expected – and credit losses on its North American own-brand card business rose 10 percent in the quarter. More cash flow for households may keep that in check, and it might actually encourage more borrowing.
Where Corbat can steer Citi directly, he is doing so. Expenses fell to 58 percent of revenue, compared with 59 percent a year ago. Investment banking was more mixed: revenue from fixed-income trading, where Citi is heavily exposed to flaccid rate and currency movements, plunged by almost one-fifth. Yet the bank is taking more advisory fees. Its share of the overall pot rose a little to 4.8 percent in 2017, according to Thomson Reuters data.
Citi is still a passenger in some important ways – rate setters will decide what happens to the yield on its $1.8 trillion of assets, while regulators must still sign off on future cash returns to shareholders. And of course, some of what’s saved in tax will go to staff and customers, but then that’s the case for other banks too. Citi was for a long time the only big U.S. lender with a market value below the book value of its equity. Whether through its own doing or not, it can now leave that sorry label behind.
CONTEXT NEWS
- Citigroup reported earnings of $1.28 a share for the final three months of 2017, excluding one-off items, compared with analysts’ estimates of around $1.19. The U.S. lender, which has total assets of $1.8 trillion, said revenue increased by 1 percent year on year, to $17.3 billion.
- Citi made a loss of $18.3 billion for the quarter owing to a $22 billion charge related to December’s change in the U.S. tax regime. Of that, $19 billion was caused by a writedown in the value of deferred tax assets – credits that can be used against future tax bills.
- The lender estimates its tax rate will fall from the low-30 percent range to around 25 percent in 2018, and potentially lower than that in future.
(Editing by Tom Buerkle and Martin Langfield)
© Reuters News 2018
Tax cuts just left Citi with a big loss, and a bigger opportunity. The $203 billion U.S. lender took an $22 billion charge in the last quarter of 2017 as it wrote down deferred tax assets – credits against future tax bills – and took a hit for deemed repatriation of overseas earnings. That left it deep in the red. But its new corporate tax rate of an effective 25 percent will hike earnings in future. If it had been in effect in the period, the 9.6 percent return on tangible common equity Corbat just reported for the year would have risen to above 10 percent – already beating his target for 2018, and suggesting he can get more ambitious.
Beyond that, the impact of tax cuts gets less clear, but probably still helpful. If consumers and small businesses feel richer, as rival JPMorgan said last week it expects they will, it should benefit a company like Citi that makes roughly one-quarter of its revenue from credit cards. Corbat warned last year that the cost of writing down unrecoverable loans was going to rise a little more than expected – and credit losses on its North American own-brand card business rose 10 percent in the quarter. More cash flow for households may keep that in check, and it might actually encourage more borrowing.
Where Corbat can steer Citi directly, he is doing so. Expenses fell to 58 percent of revenue, compared with 59 percent a year ago. Investment banking was more mixed: revenue from fixed-income trading, where Citi is heavily exposed to flaccid rate and currency movements, plunged by almost one-fifth. Yet the bank is taking more advisory fees. Its share of the overall pot rose a little to 4.8 percent in 2017, according to Thomson Reuters data.
Citi is still a passenger in some important ways – rate setters will decide what happens to the yield on its $1.8 trillion of assets, while regulators must still sign off on future cash returns to shareholders. And of course, some of what’s saved in tax will go to staff and customers, but then that’s the case for other banks too. Citi was for a long time the only big U.S. lender with a market value below the book value of its equity. Whether through its own doing or not, it can now leave that sorry label behind.
CONTEXT NEWS
- Citigroup reported earnings of $1.28 a share for the final three months of 2017, excluding one-off items, compared with analysts’ estimates of around $1.19. The U.S. lender, which has total assets of $1.8 trillion, said revenue increased by 1 percent year on year, to $17.3 billion.
- Citi made a loss of $18.3 billion for the quarter owing to a $22 billion charge related to December’s change in the U.S. tax regime. Of that, $19 billion was caused by a writedown in the value of deferred tax assets – credits that can be used against future tax bills.
- The lender estimates its tax rate will fall from the low-30 percent range to around 25 percent in 2018, and potentially lower than that in future.
(Editing by Tom Buerkle and Martin Langfield)
© Reuters News 2018
