Citi Tumbles After CFO Warns Of $20 Billion Charge If Senate Tax Bill Passes

Citi stock tumbled, closing at session lows after the bank's CFO John Gerspach  confirmed that the trading woes plaguing other banks would impact it as well, previewing Q4 trading as down "in the high teens." The percentage decline in trading revenue from a year earlier is largely driven by the bank’s fixed-income unit, Gerspach said on Wednesday at an investor conference in New York.

He added that G10 rates- and G10 currencies-trading have been challenged in quarter, although the woes were offset by Citi’s co-brand credit-card deal with Costco Wholesale Corp. which has been a bigger success than expected.

However the bigger surprise was the Gerspach's disclosure that he expects the bank to take a noncash earnings charge of about $20 billion, or 10% of shareholder equity, if the Senate’s version of the tax reform bill is enacted.  He explaine that the hit to profit would result in part from writing down deferred tax assets in the period the bill is signed.  The number is far greater than what the company had provisioned, and analysts had expected previously expected a writedown of around $12 billion.

Which is odd since the entire tax law was written with banks pardon corporations in mind.

Confused why the deferred tax asset could suddenly vaporize? Doug Kass has written a useful primer on the topic:

As the largest "owner" of deferred tax assets generated during the past financial crisis, Citigroup is the most vulnerable bank to the likely introduction of lower corporate tax rates.

 

Deferred tax assets accumulate when losses pile up and those "benefits" can't be utilized. A reduction in the effective corporate tax rate and the lower value of unused foreign tax credits likely will result in a one-time hit at Citigroup of about $12 billion to $13 billion in the form of a write-off of deferred tax assets held.

 

Keefe Bruyette estimates that writedowns also would be seen at Bank of America  (BAC) ($6.6 billion), Wells Fargo (WFC)  ($4 billion) and Goldman Sachs (GS)($1.6 billion). That is because the bank's deferred tax asset account will have to be written down - it is not as valuable as in the previous (higher) tax regime.

As Cass concludes, "I have long expressed the view that investors looking at Citi's share price relative to book value was misplaced in its calculation. When I have mentioned this possible hit to Citigroup's book value in my appearances in the business media, I usually got a dazed stare! This issue has been ignored by many -- but it will be no longer."

he was right, and now that the CFO has confirmed Kass' concerns, the stock closed at session lows, dragging other money-center banks down with it.

Comments

Chris88 Dec 6, 2017 6:04 PM Permalink

This is only news to the idiots who have no understanding of accounting.  You mean the value of a DTA declines if tax rates go down?  No fucking way!

Disgruntled Goat Dec 6, 2017 5:51 PM Permalink

Tough shit ..... if you recall that during the "crisis", tax laws were changed to benefit all financial institutions, and allowed them to refile previous years retroactively, amounting to huge cash payouts from the IRS to these institutions .... so fuck these guys they want it both ways at all times and they want to be shielded from loss by the government at all times .... too fucking bad ... cut salaries snd bonuses

Pasadena Phil Dec 6, 2017 5:15 PM Permalink

Banks have been juicing their earnings by depleting their loan loss and other reserves and now Citi discovers that they have insufficient reserves to absorb a deferred tax hit.This is just a balance sheet paper loss. No cash involved. With FASB and GAAP no longer enforcing standardized accounting, why don't we all agree to abandon the accrual accounting method and stick to cash reporting. Aren't cash earnings a better indicator of financial health than earnings based on balance sheet manipulation? Maybe we need to ask the question better: "Spare me the jibberish. How much REAL money did you make last year?"

Feel it Reel it Dec 6, 2017 4:57 PM Permalink

Interesting, Where I live in SWFL Citi over the past 10 years was buying premium land and putting branch banks everywhere like a 7-11.....I always thought how/why the heck are they building these banks during the Foreclosure crisis....Citi needs to sell that premium land they own....Maybe that was the plan all along....

all-priced-in Dec 6, 2017 4:45 PM Permalink

If say in 2008 -2009 you had a $200 billion dollar loss for tax purposes.

You value this loss on your balance sheet - book it as an asset - because in the future you plan to use it to ofset taxes by reducing taxable income.

It is a tax loss carry forward.

If you estimate your tax rate will be 30% this asset would be $60 billion. (200*.3)

If after the law changes your future tax rate is expected to be lower -say 20% - the value of this deferred tax asset will only be worth $40 billion (200*.2)

So you must right it down and that reduces income in the year the law changes by $20 billion.

hooligan2009 all-priced-in Dec 6, 2017 5:15 PM Permalink

yep..and, assuming that any future earnings could be offset against that 200 billion loss, it would in any event take quite a while for citi to pay a dime in taxes - thus confirming the mantra "socialize bank losses, keep bank profits"citi's PE is 14.5 with a market cap of 200 billion (same as your loss assumption) - so earnings are 14 billion bucks (200/14.5) - using whatever tax minimized non-GAAP goes for earnings these days.it would take citi 14.5 years (assuming no earnings growth) to make 200 billion - only then ould int be impacted by taxes.the statement that it is a non-tax charge is somewhat misleading.actally, citi paid 6.4 billion of income tax on 21.5 billion of income in the year to 31 dec 2016, so my theory is all bollocks anyway - still citi's revenue to 31 dec 2016 was 62.6 billion and its assets were 1.8 trillion..makes it a gross margin of around 0.75% and a net margin of 0.5%.funnily enough (as in what a joke) it had retained earnings of 146.5 billion and 21.7 billion of "goodwill"!!!!!

In reply to by all-priced-in

GUS100CORRINA lasvegaspersona Dec 6, 2017 4:22 PM Permalink

Citi Tumbles After CFO Warns Of $20 Billion Charge If Senate Tax Bill PassesMy response: GOOD!! Citi SHOULD GO DOWN because they were bailed out by the Taxpayer and they are a bank influenced heavily by MUSLIMS.In fact, all the TBTF institutions need to be trimmed down a bit and be once again put under rhe control of the Glass–Steagall act which POTUS BILL CLINTON "ILLEGALLY" eliminated during the 90s.

In reply to by lasvegaspersona

AGuy GUS100CORRINA Dec 6, 2017 4:50 PM Permalink

"Citi SHOULD GO DOWN because they were bailed out by the Taxpayer"

Citi is not going down\bankrupt. Its will just be forced to pay up deferred taxes. So the gov't gets to spend more money.

As I stated all along, its a tax hike not a tax cut, in a obozocare like fashion: "You can keep your doctor & save $1500 a year!" "You can keep more of your income". Sorry I am falling for it.

In reply to by GUS100CORRINA

Augustus AGuy Dec 6, 2017 11:18 PM Permalink

"Citi is not going down\bankrupt. Its will just be forced to pay up deferred taxes. So the gov't gets to spend more money." That is not how the accounting workis.Citi had massive losses in the meltdown.  Those losses can be carried back against previous profits and carried foreward to apply against future profits.  When applied against future profits the past losses reduce taxable income and taxes then payable.  So they estimate how much they expect to save and create an asset on the balance sheet.  A past loss became an asset and increased Book Value.  Neat trick.Lower tax rate gives lower future taxes and less value to that carry forward of past losses.  Adjust the value of that Carry forward value (redduce or write off) and the Book Value declines.  In this case of this company the lower tax rate will not actually have much value until quite a few years out as they were not actually paying taxes anyway.  All profits were sheltered for several more years.

In reply to by AGuy