Citigroup reports $18 billion loss on one-time tax charge

Trump's new law forces banks to take one-time hits on earnings held abroad and changes the treatment of deferred tax assets

Net income rose to $4.49bn in the second quarter from $3.87 billion a year earlier for the third-biggest US lender. AP

Citigroup posted an US$18 billion quarterly loss on Tuesday because of charges related to a new US tax law, but its adjusted earnings beat Wall Street expectations and management signaled that the bank may soon lift financial performance targets.

The law, signed by president Donald Trump last month, has made fourth-quarter earnings a messy ordeal for big banks. It forces them to take one-time hits on earnings held abroad and changes the treatment of deferred tax assets, both of which affect Citigroup in particular.

However, banks and other large US corporations expect to benefit greatly from lower taxes and other provisions in the new law over the long term.

Citigroup, the fourth-largest US lender, stands to gain less than peers because it already earns about half of its profits in lower-tax countries abroad. Even so, it expects its tax rate to fall to about 25 per cent this year from 30 per cent in 2017. That could save the bank billions of dollars over the next few years.

The changes will not only boost Citigroup's profits, but allow the bank to generate higher returns and generate more capital, chief executive Michael Corbat said. The new law might also stimulate economic growth because it incentivises companies to invest in their businesses and has led to wage hikes that could help consumers, he said.

"Tax reform is a clear net positive for Citi and its shareholders," Corbat said on a conference call with analysts.

Management is now examining financial performance targets set before the tax law changes to see whether they should be lifted, chief financial officer John Gerspach said on a separate call with journalists.

Based on the tax savings alone, Citigroup expects to generate a return on tangible common equity of 10.5 per cent this year, 12 per cent next year and 13 per cent in 2020, higher than previous forecasts. That metric is closely watched by Wall Street as a gauge of how much profit a bank can generate from shareholder money.

Executives also expect inflation to boost Citigroup's net interest income as the US Federal Reserve continues to lift rates this year. For every 25 basis points the Fed lifts rates, Citi should generate another $80 million of revenue, Gerspach said.

Citigroup shares rose 0.4 per cent to $77.12 in morning trading.

Lagging competitors in growth and not earning its cost of capital, Citigroup's valuation has not kept up with rivals like JPMorgan Chase and Bank of America Corp. Investors and analysts have been pushing Citigroup to prove it can grow revenue and profits as a second act to shrinking and returning capital.

The bank already plans to return at least $60bn worth of capital to investors through stock buy-backs and dividends, a target executives reiterated on Tuesday.

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Excluding the tax issues, which led to $22bn in charges, its fourth-quarter earnings were boosted by growth in consumer banking, especially in Asia and Mexico.

Its adjusted net income rose 4 per cent to $3.7bn, or $1.28 per share, compared with analysts' average estimate of $1.19 per share, according to Thomson Reuters I/B/E/S.

Total revenue rose 1.4 per cent to $17.26bn and was slightly better than estimates of $17.22bn.

Citigroup's institutional business, which includes investment banking and trading, fell 1 per cent due to weakness in trading that has also affected Wall Street peers.

Bond trading revenue fell 18 per cent due to ongoing weakness in volatility, while equity markets revenue was down 23 per cent because of $130m worth of losses on a derivatives trade with one client.

The client is troubled South African furniture retailer Steinhoff International, a source familiar with the matter told Reuters. Other lenders, including JPMorgan Chase, also have exposure to Steinhoff, which has been embroiled in an accounting scandal.

In reports on Tuesday morning, several analysts said Citi's results were modestly ahead of Wall Street's best guess and that they were more focused on whether the bank would lift performance targets.

"Results could prove 'good enough' this quarter," Instinet analyst Steven Chubak wrote in a note to clients.

Citigroup's results follow JPMorgan and Wells Fargo last week. Bank of America and Goldman Sachs plan to report fourth-quarter results on Wednesday, with Morgan Stanley expected to report on Thursday.