John Gerspach, the CFO of the New York-based banking behemoth Citigroup (NYSE: C) announced last week that the 4Q17 revenue will be down by a “high-teens” percentage, compared with last year. Further, if the tax reform bill goes through successfully, Gerspach expects the net earnings of the bank will decline considerably due to a one-time non-cash charge of $20 billion taken due to a write-down of deferred tax assets.
As explained below, the one-time charge is not a thing to worry about in the medium-term and will not affect the bank’s plan to return $60 billion to investors in the months ahead. Still, the negative Q4 outlook is expected to keep the stock of Citigroup bearish in the short-term.
According to Gerspach, the $20 billion charge will result from writing down the value of deferred tax assets, in addition to the impact of changes to the rules related to the repatriation of profits earned in other countries to the US.
Of the $20 billion charge, nearly $17 billion write-down will be due to a recalculation of the value of deferred assets. The remaining $3 billion write-down will be due to the repatriation of earnings outside the US. Currently, the corporate tax rate in the US is 35%. On this basis, Citigroup has $43 billion worth of credits it can use for future tax bills.
If the tax rate falls to 20%, then the credits would decline to just $26 billion. Since 2010, Citigroup has used only $9 billion of its deferred tax assets. However, Citigroup’s North American operations represent only 50% of the bank’s earnings. Thus, the bank will be able to use only about $1.5 billion of its credits this year.
Further, the bank’s trading division is also facing headwinds due to low volatility in the market, compared to last year. Thus, trading revenues are expected to decline in the fourth quarter. Last year, during this period, the market was volatile due to the developments related to the US election. The bank also expects revenues from Citi-branded credit cards to remain flat on a y-o-y basis. That has put pressure on the marketing division. In order to realize higher revenues from the credit card division, the bank is offering a 21-month interest-free time period to its clients on balances transferred from other cards.
Despite the above-discussed issues, the bank is confident of returning $60 billion to investors through 2020. Further, Citigroup clarified that the lower tax rate would offset the loss of deferred tax assets.
Technically, the stock is facing resistance at 76. Further, the moving average of the oscillator is in the negative region. Thus, we anticipate a continuation of the current decline.
Trading a put option will be prudent at this point in time. However, the option should remain active for one week. Further, the entry should be made only when the stock trades near $76 in the US equity market.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
