Citigroup Inc Is Hiding Great Returns. Are You Missing Out?

Citigroup has had a tough go of things in 2014, but investors are likely missing out on the reality it is performing at a level much higher than first glance would indicate.

Patrick Morris
Patrick Morris
Apr 7, 2014 at 1:52PM

Citigroup (NYSE:C) has been subject to much attention in 2014, but there's one thing investors are likely missing about the bank that could mean big things for it in coming years.

At first glance, Citigroup surpassed only Bank of America in 2013 when it came to delivering returns to its shareholders:

Source: Company Investor Relations.

Yet it turns out Citigroup has a staggering $53 billion in deferred tax assets (DTA), which both drags down what it reports its current returns as, but can also be used to benefit the bank in the future. And while wonky accounting isn't the most enthralling thing, it could in fact mean big things for the bank in coming years.

What are these things?
In short, as a result of the losses Citigroup has had in the past, the deferred tax asset is what Citigroup can utilize to lower the taxes it pays in the future. In 2013, it had a net income of $19.5 billion before taxes, but it utilized $2.5 billion of its deferred tax assets, which allowed it to reduce its taxable income to $17 billion. 

And while there are limits to how long the bank has before these benefits expire, the firm noted in its most recent annual report, "[a]lthough realization is not assured, Citi believes that the realization of the recognized net DTAs of $52.8 billion at December 31, 2013 is more likely than not," which is always good to know.

The underlying problem
Although the releasing of the DTAs will reduce Citi's tax burden in the future -- which is undoubtedly a good thing for shareholders as that is money that will be directed from the governments pockets into their own -- it actually hurts the bank in the short term.

Since the DTA is an asset, all numbers Citigroup reports surrounding its profitability have to take that into consideration. Yet the problem is the massive asset doesn't earn a dime unless it's utilized. Those are instead assets that just sit on its books until the days they are used to take away the tax burden.

At a recent conference the CFO of Citigroup, John Gerspach noted: 

Today we carry roughly $40 billion of book equity above the amount necessary to support our operating businesses. And we earn no return on this $40 billion of equity. However, as we utilize the DTA over time, it becomes a significant source of regulatory capital and therefore a meaningful driver of capital available to be returned to shareholders.

Source: Company Investor Relations.

As shown in the chart to the right, Citigroup notes its return on tangible common equity jumps by nearly 3% when the equity it's required to hold to support the deferred tax assets is excluded from the calculation.

Related Articles

All of this is to say, the results at Citigroup are even better than first glance would indicate.

The Foolish bottom line
Rightly so, having to rely on quirky accounting metrics to boost income can always create a touch of apprehension among shareholders. But the reality is with Citigroup, deferred tax assets provide not only an ability to bring more income to its bottom line in the future, but they also disguise the true power of its earnings potential. And both of these could mean big things for the bank in the future.