What About Citigroup and BofA's Billions in Deferred Tax Assets?

Citigroup (C) has been losing tens of billions of dollars over the past two years as the financial crisis has unfolded. If one considers the government capital that Citi has not paid back, the bank is clearly the weakest of the four largest legacy banking behemoths in the U.S. Earnings results this year demonstrate that its raw earnings power is no match for the likes of JPMorgan Chase (JPM) or Wells Fargo (WFC). Moreover, its capital base has been impaired, causing the bank to have to sell assets, reducing its earnings power further still.

Unless something miraculous happens over the next few years, Citigroup is not going back to the glory days of $20 billion yearly net income. That’s why its mountainous $38 billion deferred tax asset is a problem.

Reuters explains:

Citigroup has a roughly $38 billion deferred tax asset, which essentially represents expected cash flow from future tax benefits. Accounting expert Robert Willens said on a conference call late last month that he expects the bank to write the asset down by about $10 billion in the fourth quarter. That would represent about 7 percent of the bank’s net worth as measured by the reported value of the company’s shareholder equity.

What is going on here is a result of the fact that companies keep two sets of books – one for the taxman and one for public statements. On the tax books, they pay more taxes upfront than we see in its public accounts (I know it sounds dodgy but I am sure a tax accountant can explain). By deferring the tax liability, companies reduce the net present value of the tax charges. Everybody wins except the taxman, right?

Well, not exactly. If Citigroup cannot make enough taxable income in future periods to cover these deferred tax assets, they are going to have to take a charge and write down the asset immediately. That is what Robert Willens is pointing to. If he is right, Citigroup would have $10 billion less capital as soon as Jan.1, 2010. And given they are perhaps the least well-capitalized of the 'stress test 19' - except GMAC - that’s a problem. It would certainly constrain their lending capacity.

But, of course, Citi officials have already come out to put any fears to rest.

"We are comfortable with the valuation," Kelly said, adding that the bank looks at its deferred tax asset at the end of each quarter. About $16 billion of the deferred tax asset must be realized by around 2016, and the rest has a much longer time frame, Kelly added.

Whew. For a second there, I was starting to think Citi needed another bailout.

By the way, Bank of America (BAC) has a similar problem. They have a huge net operating loss (NOL) carry-forward from their acquisitions of Merrill Lynch and Countrywide Financial. If BofA cannot make enough taxable income to use all of their NOLs which are now assets on their balance sheet, they too will have to take a ‘valuation allowance’ a.k.a a hit to earnings. The deferred tax assets at BofA (incl. NOLs) was $19.6 billion according to their 3Q 10-Q filing. See the note below (Click to enlarge).

As you would suspect,

The Corporation has concluded that no valuation allowance is required.

Source: Bank of America SEC filings – BofA website

Author's disclosure: None

Comments

[Ice D:]

Did you happen to short BofA yesterday before writing this up?

Nov 12 05:54 AM

[bartenis:]

"On the tax books, they pay fewer taxes upfront than we see in its public accounts (I know it sounds dodgy but I am sure a tax accountant can explain).... By deferring the tax liability, companies reduce the net present value of the tax charges. the tax books, they pay fewer taxes upfront than we see in its public accounts (I know it sounds dodgy but I am sure a tax accountant can explain). By deferring the tax liability, companies reduce the net present value of the tax charges."

That is wrong.

When you pay more tax than you show on your P and L, you show a deferred tax asset. When you pay less tax than you show on your P and L, you show a deferred tax liability.

In Citi's case, the deferred tax asset--not a deferred tax liability-- means they have already paid out the tax and hope to recover it.

It's hard to say what the recovery prospects are without knowing what Citi did in the first place. They might have bypassed the P and L completely and taken a direct uplift to their equity on some NOLs and and recorded it the uplift as a deferred tax asset.

The writer needs to do some specific research on Citi before publishing such unfounded innuendo.

He does raise a key issue though, to his credit.

Nov 12 09:08 AM

[bbro:]

Bank of America has 5.7 bil deferred tax assets...Also did you know there is probably 5 billion in gains if they sold Blackrock.....The author
needs to focus on the correct numbers...Tangible common equity +
loan loss reserve + annual preprovison earnings - non performing assets - fair value gap found on P.82 on this quarters 10-q......Also
did you know the fair value of the company is 30 dollars a share Check page 207 in the 10-q......

Nov 12 09:28 AM

[Warm_Paw:]

Having two sets of books IS DODGY!
It's an example of how complacent the regulating authorities are.
The book for the taxman is closer to true value than the bright shiny and deluded book handed to the investor.
It's called fraud in the criminal courts but hey, Wall Street writes their own rules. They're BIGGER than the Govt.
Citi's cooked - not just it's books. I'm sure what is being reported by Citi has been adjusted with the suspension of FASB rules so the situation is most likely worse than the rosy picture they're painting.
And with all the CFO's and CEO's declaring they're comfortable with their present situation, what else are they going to say?
"Oh My God!!!! We're going to Crash and Burn!"
They're trying to sucker the unsuspecting public into purchasing their worthless shares?
Recall these execs owning massive amounts of shares in disturbing compensation packages? The warm fuzzy feeling comes from knowing their compensation for driving three large US banks into the ground has less of an intrinsic value than Bathroom tissue.

Nov 12 10:57 AM

[DonFurio:]

First of all, when the gov't sells the common equity it owns (it has a big profit right now by the way), the amount of pref stock C will own the gov't is around 22 Bil which should be easily paid back.

Companies have always had two sets of books, I can't believe you guys are making a big deal about it. This is pretty basic accounting.

It's only 2009 the company has over 5 years to use it up, it would be ridiculous to start writing that down now. I feel like some analysts out there are trying to justify their sell opinion and / or some short sellers are trying to knock the stock down.


On Nov 12 10:57 AM Warm_Paw wrote:

> Having two sets of books IS DODGY!
> It's an example of how complacent the regulating authorities are.
>
> The book for the taxman is closer to true value than the bright shiny
> and deluded book handed to the investor.
> It's called fraud in the criminal courts but hey, Wall Street writes
> their own rules. They're BIGGER than the Govt.
> Citi's cooked - not just it's books. I'm sure what is being reported
> by Citi has been adjusted with the suspension of FASB rules so the
> situation is most likely worse than the rosy picture they're painting.
>
> And with all the CFO's and CEO's declaring they're comfortable with
> their present situation, what else are they going to say?
> "Oh My God!!!! We're going to Crash and Burn!"
> They're trying to sucker the unsuspecting public into purchasing
> their worthless shares?
> Recall these execs owning massive amounts of shares in disturbing
> compensation packages? The warm fuzzy feeling comes from knowing
> their compensation for driving three large US banks into the ground
> has less of an intrinsic value than Bathroom tissue.

Nov 12 11:23 AM

[bbro:]

Rule Number 1 in Internet reading watch out for Italicized words...


On Nov 12 10:57 AM Warm_Paw wrote:

> Having two sets of books IS DODGY!
> It's an example of how complacent the regulating authorities are.
>
> The book for the taxman is closer to true value than the bright shiny
> and deluded book handed to the investor.
> It's called fraud in the criminal courts but hey, Wall Street writes
> their own rules. They're BIGGER than the Govt.
> Citi's cooked - not just it's books. I'm sure what is being reported
> by Citi has been adjusted with the suspension of FASB rules so the
> situation is most likely worse than the rosy picture they're painting.
>
> And with all the CFO's and CEO's declaring they're comfortable with
> their present situation, what else are they going to say?
> "Oh My God!!!! We're going to Crash and Burn!"
> They're trying to sucker the unsuspecting public into purchasing
> their worthless shares?
> Recall these execs owning massive amounts of shares in disturbing
> compensation packages? The warm fuzzy feeling comes from knowing
> their compensation for driving three large US banks into the ground
> has less of an intrinsic value than Bathroom tissue.

Nov 12 01:11 PM

[countrybanker:]

Quarterly, each public corporation must make a decision whether they can support the position that the tax asset is realizable via use from future profits.They cannot just be sold. Unless of course, you get an unconstituti0nal ruling from Paulson who provided a ruling to WFC that they could use Wachovia, though statutes, regs and rulings were clear to the opposite. Ask Senator Grassley if you question this
post.

Nov 12 10:33 PM

[BIG-MONEY:]

WHERE ARE THE REGULATORS. I have been posting for years that Citibank is a FRAUD AND FULL OF LIES. CITIBANK HAS BEEN COOKING THE BOOKS FOR YEARS. The CEO's have been signing a FALSE QUARTERLY REPORT FOR YEARS. The Fed gave Madoff 150 YEARS IN THE FEDERAL PEN for a $65 billion dollar Fraud. The FRAUD AT CITIBANK IS WELL OVER ONE TRILLION DOLLARS and the Fed has so far let the CEO's walk with Billions of dollars in donations to their foundations. THE FED MUST COME IN AND CLAW BACK ALL THOSE DONATIONS AND STRIP THE NAME OF THESE FRAUDSTERS OF THE BUILDINGS AND METS FIELD. THE FED MUST CAN ALL THE CITIBANK CEO'S AND PUT THEM WITH THE SNAKE AND MADOFF IN THE PEN. CITIBANK is pathetic. CITIBANK HAS BEEN NATIONALIZED and all share holders will be wiped out.

Nov 12 10:39 PM

[wcinvest:]

BAC will end up having turned a profit in 2009 , 2008, 2007, 2006, 2005,2004, 2003 etc. If they can make modest profits in a fairly severe recession on an annual basis while only having realized less then half of the eventual cost saves from the Merrill and Countrywide acquisitions, they will certainly use their tax credits by 2028! Realistically, the tax credits will be used up before Obama's first term ends.

This past quarter BAC only suffered a modest loss instead of a modest profit because their debt was marked up -- which is obviously a good thing overall -- and they paid an extortion payment of 400+ million to the government to get out of a contract that they never signed and in my estimation clearly didn't benefit from. If the government was concerned with BAC's solvency or earnings power going forward, they should never have played matchmaker and ok'd the Merrill deal. BAC's earnings in Q1 this year were overstated due to an accounting quirk but they were understated in Q3 by a similar amount.

Maybe BAC hesitated on agreeing to the assets to be covered under that tentative wrap agreement since they realized the government and especially Congress was screwing them and scapegoating a company that didn't have much at all to do with the subprime residential mortgage crisis besides trying to clean part of it up by buying Countrywide..

Simply put they should not be put in the same group as Citigroup. Citigroup had problems when the economy was sound while BAC clearly didn't. If BAC wasn't unfairly forced to raise capital via the stress tests, folks would realize that Lewis made two acquisitions that would have very significantly on an EPS basis boosted profits going forwarded. Instead, the improved EPS will be more modest because of substantial dilution and increased regulation...a good portion of which is actually fair.

BAC's biggest mistake was trusting government officials and regulators. Why won't regulators acknowledge that BAC was actually right when they said they would be do *much better* then the government projected even under the more severe stress scenario. Acknowledge your mistake by letting them pay back at least half of TARP. While the recession has technically ended... they unemployment rate pretty much reached the severe stress scenario but BAC is still on track for a profit in 2009.

Roubini was wrong. He stated the big banks -- plural -- would implode by now. They haven't. He has been proven wrong so far and not just because the banks raised capital after the stress tests.

The government's stupid stress tests didn't acknowledge that BAC is a money making machine capable of burning through a good deal of bad loans.

Nov 12 11:49 PM

[bbro:]

very good....


On Nov 12 11:49 PM wcinvest wrote:

> BAC will end up having turned a profit in 2009 , 2008, 2007, 2006,
> 2005,2004, 2003 etc. If they can make modest profits in a fairly
> severe recession on an annual basis while only having realized less
> then half of the eventual cost saves from the Merrill and Countrywide
> acquisitions, they will certainly use their tax credits by 2028!
> Realistically, the tax credits will be used up before Obama's first
> term ends.
>
> This past quarter BAC only suffered a modest loss instead of a modest
> profit because their debt was marked up -- which is obviously a good
> thing overall -- and they paid an extortion payment of 400+ million
> to the government to get out of a contract that they never signed
> and in my estimation clearly didn't benefit from. If the government
> was concerned with BAC's solvency or earnings power going forward,
> they should never have played matchmaker and ok'd the Merrill deal.
> BAC's earnings in Q1 this year were overstated due to an accounting
> quirk but they were understated in Q3 by a similar amount.
>
> Maybe BAC hesitated on agreeing to the assets to be covered under
> that tentative wrap agreement since they realized the government
> and especially Congress was screwing them and scapegoating a company
> that didn't have much at all to do with the subprime residential
> mortgage crisis besides trying to clean part of it up by buying Countrywide..
>
>
> Simply put they should not be put in the same group as Citigroup.
> Citigroup had problems when the economy was sound while BAC clearly
> didn't. If BAC wasn't unfairly forced to raise capital via the stress
> tests, folks would realize that Lewis made two acquisitions that
> would have very significantly on an EPS basis boosted profits going
> forwarded. Instead, the improved EPS will be more modest because
> of substantial dilution and increased regulation...a good portion
> of which is actually fair.
>
> BAC's biggest mistake was trusting government officials and regulators.
> Why won't regulators acknowledge that BAC was actually right when
> they said they would be do *much better* then the government projected
> even under the more severe stress scenario. Acknowledge your mistake
> by letting them pay back at least half of TARP. While the recession
> has technically ended... they unemployment rate pretty much reached
> the severe stress scenario but BAC is still on track for a profit
> in 2009.
>
> Roubini was wrong. He stated the big banks -- plural -- would implode
> by now. They haven't. He has been proven wrong so far and not just
> because the banks raised capital after the stress tests.
>
> The government's stupid stress tests didn't acknowledge that BAC
> is a money making machine capable of burning through a good deal
> of bad loans.

Nov 13 04:49 AM