President Donald Trump's tax cuts aren't all good for banking behemoth Citigroup Inc. (C) - Get Report : The company faces a $20 billion hit from writing off saved-up tax credits that will lose value if the corporate rate is cut to 20%.
Citigroup CFO John Gerspach disclosed the figure Wednesday on a conference call with investors. Late last year, following Trump's surprise victory, Gerspach estimated the bank might have to write off $12 billion, but that figure was based on a projected corporate tax rate of 25% and didn't include $3 billion to $4 billion of potential write-offs due to changes in international tax policy.
Gerspach noted that the tax legislation is still in flux and many details are still unknown.
A big write-off would be an embarrassment for the bank's management, given that executives led by CEO Michael Corbat have pitched investors for years on the enormous value of its $45 billion of tax credits accumulated during the financial crisis of 2008.
The bank lost so much money during the crisis that it accumulated massive "net operating losses" that theoretically could have been used to offset taxes on new profit. The problem is that Citigroup over the past eight years has failed to generate sufficient profit to use up the tax credits. If the corporate tax rate is cut to 20%, the New York bank's chances of using up the credits before they expire would drop dramatically.
Gerspach noted that most of the tax assets weren't included in regulatory capital -- the extra assets a bank must keep on hand to protect depositors and prevent the need for a bailout. Therefore, the write-off is expected to cut regulatory capital by just $4 billion, which shouldn't be significant enough to affect the size of planned dividends and share purchases, he said.
Separately, the CFO said that this year's unusually calm bond markets have prevailed into the current quarter, sending trading revenue down from the prior year's quarter by a percentage in the "high teens." On Tuesday, rivals JPMorgan Chase & Co. (JPM) - Get Report and Bank of America Corp. (BAC) - Get Report projected fourth-quarter declines of 15%.
Gerspach said that Citigroup might be hit harder than its rivals because its trading business is more heavily weighted toward bonds and foreign exchange, a business that has been especially sluggish.
The disclosure of the potential tax-credit write-off brings the outspoken analyst Mike Mayo, who now works for Wells Fargo & Co. (WFC) - Get Report , closer to vindication in his contention as early as 2009 that the bank's refusal to write off the deferred tax assets -- even then -- represented aggressive accounting practices that should have been abandoned in the wake of the post-financial-crisis clean-up.
Citigroup executives, even dating back to former CEO Vikram Pandit, had adamantly insisted there was no need to write down the DTAs, arguing in a presentation as recently as September 2016 that a central pillar of the bank's strategy to improve profitability involved "consistently utilizing the deferred tax assets."
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