Citigroup had a static quarter despite tax whack

Citigroup’s quarterly report, out on Tuesday, followed the playbook set by giant rival JPMorgan last week: a searing tax-related smack which investors shrug off, so long as long-term advantages from the new Tax Cuts and Jobs Act are confirmed.

Nothing to see here

Citi profits also outpaced Wall St forecasts—if the one-time $19bn impairment from revised tax benefits is overlooked. These had to change because a tax break designed to avoid double taxation is no longer available to Citi. It is also bringing money onshore in the wake of new rules that allow cash stashed overseas to be repatriated at a less punishing rate. But the pay-off in Citi’s case cost it another $3bn in Q4. All in, Citi’s $22bn taxation hit dragged earnings per share $7.15 into the red. On an adjusted basis, the result was a $1.28 EPS rise, well above $1.19 widely expected.

Stolid quarter

Knock-on effects from hastily retooled tax arrangements included a dent to the group’s closely watched regulatory capital. But tax impacts only equated to 40 basis points of the reduction. The rest of the slide in its key Common Equity Tier 1 ratio—to 12.3% vs. 13%—was linked to non-tax effects. That helps explain why Citigroup’s optimistic share price surge of almost 3% in pre-opening business translated to a gain of just a few cents at the time of writing. Citigroup had after all a quarter much in keeping with the rest of rather stolid year in big banking. The bank’s Institutional Clients Group, comprising investment banking and trading fell 1%, as persistent low volatility across market again took its toll. With rivals seeing similar softness however, investors look to differentiate less on the basis of trading revenues.

Equity trading perks up

Citi didn’t miss out on firmer equity markets over the quarter which also buffered JPMorgan’s stock trading business. Like JPM, Citi saw a reported decline in bond and stock markets. The latter decline, however, was due to a single client’s losses. The client is likely to be the same one that JPMorgan was exposed to, beleaguered South African retailer Steinhoff. The group’s collapse resulted in JPM’s equity revenue sliding in Q4 as well.

Expenses lowered

Some of the support for Citi’s earnings came from a $400m reduction in operating expenses, helping edge underlying profits up 4% on the year. Investors seemed to reassess that win later though, regardless of its Global Consumer Banking business revenue rising 5.6%. The division accounted for half of Citi’s total revenue, helping offset weak market and leaving a slightly better than expected total of $17.26bn.

The overall better tone of the quarter and year helped Citi dump its ‘also ran’ tag among the U.S. bulge-bracket. That is reflected in Citi shares’ almost 30% rise over a year, in line with larger rival JPMorgan. Because Citi earns half its profits overseas where tax is already lower than in the States, hoped for advantages from revamped tax laws are commonly forecast to be lower. But a fair quarter will do its stock no harm. Nor will the 5 percentage point reduction it expects to its tax rate. This should enable the bank to keep matching the unspectacular pace of rivals’ improving returns.