Short-term pain. Long-term gain.
Big banks are taking huge hits to their profits because of the corporate tax cut.
Citigroup posted a whopping $18.3 billion quarterly loss on Tuesday, after it took a one-time charge of $22 billion because of the tax cut. And its stock went up. Here's why.
Citigroup, like other financial firms, had to adjust the value of so-called deferred tax assets because the corporate tax rate is going down.
Banks sometimes carry certain tax deductions and other credits forward, and use them as a cushion to lower their future tax bill. Those cushions are worth less now that corporate taxes have been cut. JPMorgan Chase took a similar $2.4 billion hit when it reported results last week. But it's mainly an accounting issue. It doesn't really reflect the overall health of the company.
Still, the change in the value of those deferred assets will cost Citigroup $19 billion. The remaining $3 billion charge comes from bringing earnings from foreign subsidiaries back to the United States. That change is also a provision of the new tax law.
The numbers are huge, but Wall Street isn't concerned. Citigroup had a decent quarter if you exclude the writedowns.
Net profit rose 4% from a year ago to $3.7 billion. And earnings per share rose 12% and topped analyst forecasts. That's the main reason Citigroup stock climbed almost 1%.
And the one-time tax hit is in the rear view mirror. The new tax rate should give Citigroup's profit a big boost.
Chief financial officer John Gerspach told analysts that its effective tax rate should fall to about 25% this year. It had been in the low 30s, he said.
JPMorgan Chase, Wells Fargo and PNC have also said their corporate tax rates will fall this year and beyond.
Investors hope banks will share some of those savings with shareholders.
Citigroup CEO Michael Corbat said the company still plans to return at least $60 billion to investors through dividends and stock buybacks during the next few years. But he hinted that there could be even more to come.
"We feel confident about our ability to generate capital going forward," Corbat said. "If anything, that ability has been enhanced by tax reform."
It's not clear whether Citigroup will give its employees some of the windfall, as some other companies have. An analyst asked Corbat during a conference call whether Citigroup had announced wage increases or bonuses.
The cryptic response: "As of yet, we have not."
It's a curious answer considering that Citigroup just announced plans to bridge the small gap in pay between male and female workers following pressure from an activist shareholder.
What's more, other banks have already announced salary increases or bonuses, including Bank of America and Fifth Third.