Citigroup Inc. (NYSE:C) analysts and investors are contraction their focus on the bank’s massive Deferred Tax Asset (DTA), which is increasing in spite of three successive years of profits. Citigroup must produce enough profits to make use of the credits earlier than they expire because the DTA reveals losses and other deductions that get transformed to tax credits, a matter that is a source anxiety among some followers of the stock.
John Gerspach, CFO Citigroup when asked about the issue on Tuesday after he noted that out of bank’s $151 billion, $40 billion is in tangible common equity must be used to support the DTA and so cannot be tot up for regulatory function under the rules known as Basel III.
Neither can the $40 billion be used to generate a return. Citigroup earned a 10.7% return on its remaining $111 billion in tangible common equity in 2012, so if it could have earned that return on the other $40 billion, it could have improved earnings by $4.28 billion.
According to an independent tax consultant, Robert Willens, the DTA has increase to $55 billion, up from $38 billion and $50 billion in 2009 and 2010 respectively.
All the analysts and investors who are following Citigroup are more and more concerned to this view. Mike Mayo CLSA analyst began advising Citigroup in October for the first time in years after the board’s ouster of CEO Vikram Pandit.
Even he had been one of an outspoken critic of Citigroup’s decisions, he even advise them not to take a valuation allowance, in a January conference call where he called that “water under the bridge.”
Moshe Orenbuch Credit Suisse analyst, argued in a note, if the bank could make use of its DTA through earnings then Citigroup bulls would be happiest, and said that Citi “is better positioned to utilize its DTA in 2013.