Citigroup earnings top expectations, excluding $19 billion charge for tax law changes
17 January, 2018, 01:45
Q4 net loss of $18.3B or $7.15 per share includes a $22B or $8.43 per share charge mostly thanks to the revaluation of Citi's (NYSE:C) sizable deferred tax asset following passage of tax reform.
Citigroup also took at one-time, non-cash charge of about $22 billion for the quarter.
But for Citigroup, the fourth-largest USA bank by assets, the loss is just a temporary hiccup.
The tax law also dampened the results of JPMorgan Chase & Co. when it reported last week and is expected to hurt other banks in the fourth quarter as well.
While the law is expected to help Citigroup and other large USA banks over time, it is obscuring this quarter for many with large one-time costs.
The law, signed by President Donald Trump last month, has made fourth-quarter earnings a messy ordeal for big banks. About $19 billion of it arises because United States tax rules allow companies to use past losses to reduce future bills. After reporting massive losses, the banks accumulated these assets, which could then be used to pay future income taxes.
Longer term, the tax changes are expected to create a windfall for Citigroup and other banks by slashing the overall corporate tax rate to 21% from 35%. The additional $3 billion related to the deemed repatriation of unremitted earnings of Citigroup's foreign subsidiaries, the bank said.
But Citigroup and its shareholders appear focused on the long-term potential windfall from the Republican tax bill.
Furthermore, analysts predicted that Citigroup, which said it was expecting to benefit in future quarters from the new law as its tax rate falls from 30% to around 25%, would be unlikely to reap quite as much of a benefit as the other major U.S. banks given the firm earned nearly 50% of its profits from overseas. "Tax reform not only leads to higher net income and increased returns, but also serves to strengthen our capital generation capabilities".
"Tax reform is a clear net positive for Citi and its shareholders", Corbat said in a call with analysts. Analysts' estimates typically exclude special items. Quarterly revenue increased about 1 percent to $17.3 billion.
As of 1620 GMT, shares had nudged ahead 0.56% to $77.27 each.
Based on the tax savings alone, Citigroup expects to generate a return on tangible common equity of 10.5 percent this year, 12 percent next year and 13 percent in 2020, higher than previous forecasts.
Citing the lower tax rates, Ken Leon of CFRA Research raised his profit expectations for the bank. The lowered corporate tax rate, which took effect at the start of the year, cuts the value of this benefit.