C Citigroup Inc

Quarterly earnings are erased but stock rises as investors expect measure to be boon

By Christina Rexrode 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 17, 2018).

The tax law wiped out Citigroup Inc.'s fourth-quarter earnings and then some, with the bank taking a $22 billion charge that caused it to post a loss of $18.3 billion -- its biggest loss ever for a single quarter.

Investors looked past the immediate results to the near-term future, when they expect the tax law will boost earnings for Citigroup and other banks. Shares rose 0.4% to $77.11 on a day when the market was down.

Citigroup Chief Executive Michael Corbat and Chief Financial Officer John Gerspach were upbeat in calls with analysts and reporters, saying the tax changes will bolster their future profits and buoy their clients, echoing the sentiment last week of JPMorgan Chase & Co. CEO James Dimon.

Specifically, Citigroup increased one of its key profitability goals in response to the tax changes and said it was still on track to return capital to shareholders according to a plan it laid out in July.

Underneath the $22 billion tax charge, Citigroup turned in results that beat analysts' expectations with higher revenue, more lending and flat expenses.

Without the tax charge, the bank would have made $1.28 a share, beating the $1.19 expected by analysts polled by Thomson Reuters. With the tax charge, the loss amounted to $7.15 a share for the fourth quarter alone and wiped out nearly six quarters of profit.

Mr. Gerspach brushed off the tax-related loss as a temporary bump in the road. "It's something we think we can quickly overcome and it's not a headwind that causes us to alter any of our existing plans," Mr. Gerspach said. The short-term pain, he said, is "a pretty good trade-off."

Until now, the biggest quarterly loss at Citigroup was in the depths of the financial crisis at the end of 2008. But that loss had a different tone: The bank lost $17.3 billion as it took huge write-downs on subprime mortgage securities and bad loans.

This time, the New York bank's loss comes from an accounting maneuver forced by a favorable piece of legislation in Washington. Citigroup already had warned Wall Street about the looming loss, saying last month that it expected to take a hit of about $20 billion to profit this quarter.

The quarterly loss also is something of a cleansing for Citigroup. The main reason for the tax charge is that the new tax law forced the bank to write down the value of its huge pile of deferred-tax assets. Those assets are essentially past losses that Citigroup racked up during the financial crisis and which it can use to defray future tax bills. The tax law, which slashes the corporate tax rate to 21% from 35%, made those assets less valuable.

But the deferred-tax assets also have been a shadow over Citigroup's results for nearly the past decade, stoking investor uncertainty. Mr. Corbat, who became CEO in 2012, has made working through them a priority, though the progress had been slow. At the end of the third quarter, they were about $45 billion, compared with a peak of about $55 billion. Mr. Gerspach said Tuesday that he expected the amount would fall to about $23 billion.

The tax law also damped the results of JPMorgan when it reported last week and is expected to hurt other banks in the fourth quarter as well. But Citigroup's bigger pile of deferred-tax assets means it will be more deeply affected than the other banks, and its tax-related charges are expected to be among the largest of any U.S. company this quarter.

About $3 billion of the $22 billion charge came from the newly enacted, one-time charge on U.S. companies' overseas earnings. Citigroup is more focused on overseas markets than some of its peers.

Aside from the tax noise, 2017 was a relatively quiet year for Citigroup, missing some of the stumbles and scandals that had plagued it in the past.

Mr. Corbat is focused on returning more capital to shareholders and improving profitability metrics such as return on equity. While there was no profit in the fourth quarter because of the tax charge, on an adjusted basis, Citigroup said return on equity came in at 6.5%.

Revenue rose to $17.26 billion from $17.01 billion a year earlier. In trading, revenue fell 19% to $2.9 billion from $3.6 billion a year ago. That was in line with what Mr. Gerspach predicted last month.

Equities-trading revenue fell 23%. The bank said it could lose as much as $370 million on a single client. JPMorgan confirmed last week that it had suffered a loss as high as $273 million on a margin loan to Steinhoff International Holdings NV, a South African retail company dealing with an accounting scandal. Mr. Gerspach declined to comment in response to repeated questions about whether the Citigroup loss also came from Steinhoff.

"There was a margin loan and some derivatives associated with it," Mr. Gerspach said. "We needed to seize the margin and that caused a credit event....It's pretty simple." Profit at the institutional bank, which includes trading and investment banking, fell 7%.

Quarterly profit at the consumer bank rose 9%, driven by the Asia business. Citigroup has been investing heavily in its credit card unit, including new rewards programs and marketing. Revenue from Citigroup-branded cards in North America increased 1% over the year.

Write to Christina Rexrode at christina.rexrode@wsj.com

(END) Dow Jones Newswires

January 17, 2018 02:47 ET (07:47 GMT)

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