Bank DTAs Could Feather Your Nest

Regions Financial (RF) of Birmingham, Ala., reported a $1.2 billion deferred tax asset as of March 31, and an updated figure will have to wait until he company files its second-quarter 10-Q report.

Guggenheim analyst Marty Mosby says that for Regions, "the DTA is another source of improvement in their capital ratios," although "it is not one of the driving force behind it." The analyst says that "for the most part, it is already assumed that it will work its way off."

As DTA valuation allowances wind down, banks of course immediately recognize a benefit to earnings and capital, but in order to incorporate more of the deferred tax valuation allowance into their capital ratios, they have to forecast earnings over the following year, to estimate how much of a tax benefit they will see over that time. "You can look forward and recapture that into your capital ratios," says Mosby.

As of June 30, Regions reported that $336 million in deferred assets were excluded from the company's regulatory Tier 1 capital.

Mosby rates Regions a "Buy," with a price target of $8.50. Please see TheStreet's earnings coverage for more detail on the Birmingham, Ala., lender's second-quarter results.

Another bank which might have the most to gain over the long haul from deferred tax assets is Citigroup (C), which reported "$53 billion of net deferred tax assets at March 31, 2012," also saying that "approximately $11 billion of such assets were includable without limitation in regulatory capital pursuant to risk-based capital guidelines, while approximately $36 billion of such assets exceeded the limitation imposed by these guidelines."

That's quite a bit of disallowed regulatory capital, and Citigroup has been profitable for 10 straight quarters. While a full set of June 30 numbers for deferred tax assets won't be available until Citi files its second-quarter 10-Q, the DTA is a big part of the company's huge amount of excess capital that can eventually be returned to investors, according to Atlantic Equities analyst Richard Staite.

Staite rates Citigroup "Overweight," with a price target of $44, and said on July 17 after the company announced its second-quarter results that "we continue to believe the bank is undervalued at 0.5x [tangible book value] on the basis there is significant capital tied up in Citi Holdings and the deferred tax asset (DTA) that can be returned to shareholders albeit spread over a number of years."

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