Bank DTAs Could Feather Your Nest

NEW YORK ( TheStreet) -- Deferred tax assets can be a silver lining for some patient long-term bank stock investors.

Many bank holding companies that saw the worst of the banking crisis beginning in 2008 have large amounts of deferred tax assets (DTA), and depending on the banks' ability to show sustained profits, the realization of the DTA can add a boost to the bottom line.

Sterling Financial ( STSA) of Spokane, Wash., saw its second-quarter bottom line boosted by a $288.8 million release of its entire deferred tax assets valuation allowance. The company reported second-quarter earnings of $320.9 million, or $5.13 a share.

Synovus Financial ( SNV) of Columbus, Ga., had $802 million in deferred tax assets as of June 30, and said on July 24 that it expects "to reverse substantially all of the $800 million DTA valuation allowance once we have demonstrated a sustainable return to profitability, perhaps at the point we have significantly improved credit quality and experienced consecutive profitable quarters with a forecast of sufficient continued profitability."

The company also said that the DTA valuation allowance "could be reversed as a single event or over a period of time," depending on earnings and credit quality forecasts. This could be a very significant even for Synovus's investors.

After 12 quarters of consecutive net losses, Synovus returned to profitability during the third quarter of last year. During the second quarter of 2012, the company reported net income of $75.4 million, boosted by a tax benefit of $2.2 million. After paying dividends on preferred shares held by the government for $967.9 million in bailout assistance received through the Troubled Assets Relief Program, or TARP, second-quarter net income available to common shareholders was $46.2 million, or six cents a share.

Synovus is a difficult example for investors looking to milk DTA releases, as the company's coming repayment of TARP complicates matters, but the bank's management has made some candid remarks on the timing of DTA release.

During Synovus's second-quarter earnings call, CEL Kessel Stelling said that the timing of the recapture of deferred tax assets is uncertain and that "key to the DTA reversal is our full review on earnings, and that includes the revenue side of the equation." Stelling also said that the DTA recapture is "likely a 2013 event," as is the TARP repayment.

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."

Under CEO Vikram Pandit's "good bank/bad bank" strategy, the company has placed non-core assets that are being sold-off or wound-down within Citi Holdings.

Staite said "given that Citigroup has $151bn of tangible common equity but only needs $88bn to run Citicorp it shows that there is a further $63bn that is currently trapped within Citi Holdings and the DTA."

"This is capital that should be available to be returned to shareholders at some point assuming the group can utilize the DTA and that the $10bn of loan loss reserves within Holdings is sufficient to cover losses," Staite said, adding that the "timing of the capital return is highly debatable and clearly the Fed took a cautious view early this year. "

"Nevertheless," he said, "the fact that the Basel III ratio has reached 7.9%, the same as JP Morgan bodes well for the start of a capital return in 2013."


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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