Freeing Tied-Up Capital
The other two priorities outlined in the presentation include winding down Citi Holdings and utilizing the massive
$55 billion deferred tax asset
(DTA) before it expires.
About a quarter of the company's capital supports Citi Holdings, the "bad bank," which has been in wind-down mode since 2008.
Meanwhile, the bank also needs to set aside $40 billion in tangible equity to support its DTA, which cannot be counted for as regulatory capital under Basel III capital rules.
"About a third of capital is not available to generate returns that you expect and deserve," Corbat said. "We are fighting with one hand tied behind our back."
Corbat said that the bank will continue to wind down Citi Holdings, which now is mainly made up of U.S. mortgage loans. The unit signed a deal to sell $1.5 billion in mortgages, but Corbat warned that the wind-down will be gradual.
"Despite improvement in housing prices, we still don't believe sale of large scale mortgages is possible at prices that is acceptable," he said. We have no desire to sell these assets at a sizeable liquidity discount."
Citi has been cautious about the recovery in housing unlike its banking peers and has yet to release any of its $8.5 billion in mortgage loan loss reserves, which will be key to reducing losses at Citi Holdings.
Unless Citi materially increases its earnings, it will be unable to utilize the DTA and free tied-up capital for an increased return to shareholders.
Analysts have largely viewed Citi's new CEO favorably, with many anticipating higher returns from Corbat's restructuring efforts.
However, while Corbat may be scoring a few points with shareholders as he sets ambitious return targets, the real test might be how the bank performs on its
annual stress test
, the results of which will be announced by the Federal Reserve on Thursday.
-- Written by Shanthi Bharatwaj in New York.
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