Citi Shrinks Tax Bill With Crisis Leftovers

NEW YORK ( TheStreet) -- Citigroup ( C) is slowly working down its DTA, which continues to represent a tremendous long-term boon for investors.

DTA stands for deferred tax assets, which are tax benefits left over from the tremendous mortgage losses the company took at the height of the credit crisis. As of Sept. 30, Citi reported $44.5 billion in DTA in excess of the amount allowed to be included in the company's Basel III Tier 1 common capital.

In order to "recapture" the DTA, the company needs to show profits, as it has been doing for 15 consecutive quarters.

Citigroup on Tuesday said during the third quarter, it "utilized approximately $500 million of deferred tax assets," which lowered its total income tax bill for the quarter by nearly 50% to $1.08 billion. The DTA recapture made a big difference in Citi's bottom-line earnings of $3.227 billion, or a dollar a share.

Please see TheStreet's earnings coverage for much more detail on Citigroup's third-quarter results.

Why was Citigroup's DTA recapture so small, relative to the entire DTA of $44.5 billion that is not included in regulatory capital?

"What matters is your cash earnings in the North American operations, because you are talking about deferred taxes in the United States," according to Guggenheim analyst Marty Mosby. "If you are earning money in Asia, Europe or South America, you have to pay taxes according to the national rates in those countries," he says.

Citigroup reported that of its third-quarter net income of $3.361 billion, excluding credit and debit valuation adjustments, $1.55 billion came from its operations in North America.

The company years ago placed distressed mortgage loans and other non-core assets within its Citi Holdings subsidiary. "Citi holdings' earnings drag, which had been about 500 million per quarter, was pulling down north American profitability," Mosby says, adding "now that Citi Holdings lost only 100 million, Citigroup was able to recognize more of the operating earnings in the North America operations."

Citigroup CEO John Gerspach said during the company's third-quarter media conference call on Tuesday that the company recaptured in earnings $1.8 billion of DTA during the first three quarters of 2013. So investors can expect Citigroup to continue a modest pace of DTA recapture, although the pace may begin to accelerate as Citi Holdings continues to wind down.

The DTA disallowed from regulatory capital will also decline as Citigroup's total regulatory capital continues to rise. This can eventually support a significant increase in the company's return of capital to investors, through dividends and share buybacks.

Citi's disallowed DTA declined by $843 million during the third quarter -- considerably more than the $500 million DTA utilized in earnings -- as the company's Basel III Tier 1 common capital grew by $4.544 billion to $121.691 billion.

Citigroup's shares were down 0.8% to $49.23, with investors showing some disappointment with weak revenue trends. But the shares appear to be a bargain, especially when considering how quickly the company's capital is growing.

The shares closed at $49.60 Monday and traded for 9.0 times the consensus 2013 earnings estimate of $5.51, among analyst polled by Thomson Reuters. That's one of the lowest forward P/E ratios for actively traded U.S. bank stocks.

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


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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.