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Citigroup's Tax Benefit, at $55 Billion and Rising, Raises Questions and Causes Concerns

Instead of continuing to criticize the bank, Mayo has turned his focus to how Citigroup can unlock the value of the DTA. Hypotheses floated during his January call were the sale or partial flotation of Banamex, Citigroup's highly prized Mexican unit.

"They've given no indication of that; this is just us trying to figure out what might be some appreciated assets," Mayo said. Citigroup has considered the sale of Banamex in the past, according to 2009 reports by The Wall Street Journal and Reuters that cited unnamed sources.

Citigroup bulls would be happiest if the bank could make use of its DTA through earnings, and Credit Suisse analyst Moshe Orenbuch argued in a note following Tuesday's presentation by Gerspach that Citi "is better positioned to utilize its DTA in 2013."

The analyst says improved earnings in Citigroup's U.S. credit card business and "a drawdown of loan-loss reserves on the North America mortgage portfolio in Citi Holdings (leading to improved earnings) would likely be the largest drivers of a future reduction."

Another way Citigroup could accelerate profits to capture the DTA more quickly would be through an acquisition. On the January conference call with Mayo, Willens pointed to General Motors'( GM ) 2010 acquisition of Americredit as a potential template.

"Making acquisitions of companies with pretty good streams of taxable income going forward is a tremendous way to utilize DTAs and there are very few impediments in the tax law to prevent that from happening," Willens said.

Despite the tax benefits, a Citigroup acquisition would be a big surprise. The bank has been shrinking ever since the crisis, and most bullish theses focus on cost cuts and capital returns to shareholders. Also, banking regulators might look dimly on Citigroup making an acquisition.

Still, Citigroup watchers do not appear to rule out the idea of an acquisition entirely. Credit Suisse polled attendees at its conference about what they'd like to see the bank do with its excess capital, and it included acquisitions as a possible option. Analyst Orenbuch said during the conference that 60% of respondents voted for a share buyback and 30% wanted to see a dividend increase. He didn't say how many wanted to see the bank make an acquisition.

-- Written by Dan Freed in New York

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
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