Citi posts strong earnings, despite taking $22 billion hit from tax reform

Citigroup released fourth-quarter results Tuesday, beating the expectations of Wall Street analysts with adjusted earnings of $US1.28 a share.

Analysts were expecting the bank to report adjusted earnings – which don’t include short-term impacts of the new tax law – of $US1.19 a share.

It’s expected to be a noisy quarter for bank earnings in general, thanks in part to the tax law, which has caused many banks to book losses on repatriated cash and deferred tax assets that declined in value.

Overall, Citi lost $US18.3 billion, or $US7.15 a share, for the quarter. That included a one-time, noncash charge of $US22 billion, or $US8.43 a share, on account of the new tax law.

CEO Michael Corbat nonetheless praised the tax law’s long-term potential for the company.

“While our fourth-quarter results reflected the impact of a significant noncash charge due to tax reform, the impact on our regulatory capital was much less significant,” Corbat said. “Tax reform does not change our capital-return goals as we remain committed to returning at least $US60 billion of capital in the current and next two CCAR cycles, subject to regulatory approval. Tax reform not only leads to higher net income and increased returns but also serves to strengthen our capital-generation capabilities going forward.”

Here are the other highlights:

  • Revenue of $US17.3 billion, beating analyst estimates of $US17.25 billion
  • Adjust net income of $US3.7 billion
  • Returned $US6.3 billion of capital to common shareholders in the fourth quarter and $US17.1 billion in full-year 2017
  • Global Consumer Bank revenue increased 6% to $US8.4 billion
  • Revenue from the Institutional Client Group, which includes the investment bank, decreased 1% to $US8.1 billion, on account of a decline in markets revenue
  • Fixed-income trading, which struggled most of the year, fell 18% to $US2.4 billion
  • Equities trading fell 23% to $US530 million, though the firm said that was distorted by “an episodic loss in derivatives of approximately $US130 million, related to a single client event.”
  • That one client is most likely Steinhoff International, a South African retailer whose accounting scandal already sliced $US273 million off of JPMorgan’s earnings and is expected to similarly erode trading results at most of the big banks.
  • Investment-banking revenue increased 10% to $US1.2 billion thanks to gains across debt and equity underwriting and mergers and acquisitions.

A giant tax hit

Why did Citi suffer such a huge loss related to the new tax law?

At least in the short term, the bank was expected to be the most affected by the new law, which lowered the corporate tax rate and introduced measures designed to encourage companies to bring overseas profits back to the US. In December before the tax bill was passed, the firm estimated it would most likely cost the firm $US20 billion in the fourth quarter.

That’s because of the massive losses Citi suffered during the financial crisis. The new tax law requires the firm to write down the value of its enormous cache of deferred tax assets, generated during that period of losses.

The bank had to chop the value of its tax assets by $US19 billion. The bank had to book another $US3 billion loss on repatriated earnings from its overseas subsidiaries.

Last week, JPMorgan reported a net $US2.4 billion loss related to the tax law. Like Corbat, CEO Jamie Dimon also touted the law’s long-term benefits.

The Steinhoff scandal wipes out $US130 million

Like JPMorgan, Citigroup was involved in a margin loan to an entity controlled by Christo Wiese, the former chairman of Steinhoff International, whose stock has been ravaged by an accounting scandal.

That’s the likely culprit of the $US130 million wipeout in Citi’s equities-trading revenue attributed to a single client.

Citi, along with HSBC, Goldman Sachs, and Nomura, initially arranged the $US1.8 billion loan, backed by some 628 million shares of Steinhoff’s now-crippled stock. Those banks subsequently sold off parts of the loan to other banks.

JPMorgan reported a $US273 million hit to its fourth-quarter earnings from the deal, and other banks are expected to have more exposure.

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