NEW YORK (Reuters Breakingviews) - A $20 billion accounting loss can be a good thing, when the company in question is Citigroup. The mega-lender’s woes during last decade’s financial crisis helped make “writedown” a household word. Now the $200 billion colossus may take another whopping great hit. This time the potential loss, sparked by planned U.S. tax cuts, is actually pretty helpful.
In theory, investors ought to be up in arms about Uncle Sam forcing such a big writedown on a private company. The potential loss that finance chief John Gerspach laid out at a conference on Wednesday afternoon is a third more than Citi is expected to earn next year.
As much as $17 billion of the writedown would stem from recalculating the value of so-called deferred tax assets, while the rest comes from repatriating overseas earnings. At the current 35 percent rate, Citi’s stash of credits it can use against future tax bills is worth $43 billion, but at the 20 percent that U.S. lawmakers are now proposing, it would fall to just $26 billion.
The pain would actually do the bank and its shareholders a favor. That’s because Citi has used just $9 billion of its deferred tax assets since the end of 2010. The greater its earnings, the more tax it can claim back – but the problem is that Citi’s North American operations account for less than half of its global total. This year the bank may only be able to use $1.5 billion of its balance-sheet goodies.
Having Congress dissolve a large chunk of deferred tax assets would have two distinct advantages. It would lop $17 billion or so off Citi’s common and tangible common equity – the denominators in the all-important return on equity numbers it reports to investors. That would have increased the annualized return in the first nine months of this year by around three-quarters of a percentage point, to 8 percent and 9 percent respectively.
Citi would also still be able to keep its pledge to return up to $60 billion to shareholders by the end of 2020. That’s because the amount banks are allowed to hand back is pegged to a third measure of capital: Tier 1 common equity. Some $27 billion of Citi’s tax assets don’t count towards that. So Gerspach reckons all but $4 billion of the writedown can be allocated to this disallowed portion, leaving the pot for shareholders virtually untouched. It’s one time that Citi can cheer losing billions.
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