Citigroup Shows Optimism Peers Lack With Lower Tax Rates Ahead

(Bloomberg) -- Citigroup Inc. envisions years of tax-reform benefits ahead, even as competitors warned that their rewards may soon start fading away.

Last month’s Republican-led legislation cut Citigroup’s effective threshold to about 25 percent in 2018 and company executives said it will go even lower from there, leading the bank to boost its forecast for profitability. That contrasts with JPMorgan Chase & Co., which said last week that its lower rate is likely to start climbing in coming years.

“This combination of higher earnings before tax, continued capital return and the impact of tax reform is expected to drive a significant improvement” in return on tangible common equity, or ROTCE, a key measure of profitability, Chief Financial Officer John Gerspach said Tuesday after the company posted fourth-quarter earnings.

The bank’s effective tax rate dropped from about 30 percent, the New York-based company said. Later years should show even more benefit, with the rate dropping to 24 percent or lower over the next 24 months, according to Gerspach.

Citigroup didn’t immediately detail why it thinks its tax rate will continue drifting lower. JPMorgan blamed the phase-out of “certain business credits” in explaining why its rate will gradually increase in coming years.

Citigroup’s tax gains are big enough that the bank took the rare step of lifting its forecast for ROTCE, boosting the projection to 13 percent in 2020 from an earlier projection of 11 percent.

Citigroup and its rivals have spent weeks reviewing their finances and briefing investors on what’s to come after Republicans enacted a plan in December that’s particularly lucrative for the industry. Banks have long paid some of corporate America’s highest effective tax rates, which means they benefit more when rates are reduced.

Banks face competing demands for a share of the gains -- potentially raising pay for staff, cutting prices for customers or plowing more into the pockets of shareholders. Wells Fargo & Co. executives said last week they’ll boost donations to a philanthropic foundation, while JPMorgan leaders said they’re working on a plan to share the tax savings. Citigroup only called out the cash coming investors’ way, and executives later confirmed that they haven’t announced plans to give employees a raise.

Citigroup will stick to a multiyear plan to pay out at least $60 billion in capital to shareholders, even after booking a larger-than-forecast charge of $22 billion to adjust to the new regime. Executives had braced investors last month for a $20 billion hit.  

JPMorgan CFO Marianne Lake said the bank’s first use of the extra cash would be to invest in the business, and then employees. Only after those two options are considered will the firm look to return more capital to shareholders, Lake said. Competition among lenders may push more of the benefit to clients, she added.

“It is true that we operate in competitive and transparent markets, and this means that ultimately you could expect some of the benefit for the industry will be passed through to our customers over time,” Lake said.

Citigroup took a bigger up-front hit from the changes because it had been sitting on a massive pile of deferred-tax assets -- a form of IOU that cuts tax bills. Citigroup had accrued them by suffering losses during the financial crisis, then long touted them as a way to burnish future payouts to investors. But the tax overhaul wiped out almost half their value.

Here’s a summary of Citigroup’s fourth-quarter performance:

• Profit at Citigroup’s consumer-banking unit rose 9 percent from a year earlier to $1.34 billion, helped by strength in the bank’s foreign operations. Revenue in the Citi-branded cards business advanced 1 percent. Earnings at the institutional-clients group, which houses the investment bank and the global payments business, fell 7 percent to $2.2 billion.
• The quarterly results swung to a loss of $18.3 billion, or $7.15 a share, from profit of $3.57 billion, or $1.14, a year earlier. Adjusted earnings per share, which excluded the impact of the tax-related charge and an 8-cent benefit from other one-time items, were $1.20. Twenty-two analysts surveyed by Bloomberg had average adjusted estimate of $1.19.
• Revenue rose 1 percent to $17.3 billion, while expenses were roughly flat at $10.1 billion.
• Trading revenue declined 19 percent, in line with the “high-teens” drop predicted by Gerspach in early December. Performance suffered from a $130 million loss in equity derivatives related to a “single-client event,” the bank said, without naming the customer. Excluding that, trading would have slid 16 percent. Investment-banking revenue rose 10 percent to $1.24 billion.

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net.

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Steve Dickson, David Scheer

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