Citigroup positive on lower tax rates ahead

Bloomberg

Citigroup Inc. envisions years of tax-reform benefits ahead, even as competitors warned that their rewards may soon start fading away.
Last month’s Republican-led legislation cut Citigroup’s effective threshold to about 25 percent in 2018 and company executives said it will go even lower from there, leading the bank to boost its forecast for profitability. That contrasts with JPMorgan Chase & Co., which said last week that its lower rate is likely to start climbing in coming years.
“This combination of higher earnings before tax, continued capital return and the impact of tax reform is expected to drive a significant improvement” in return on tangible common equity, or ROTCE, a key measure of profitability, Chief Financial Officer John Gerspach said after the company posted fourth-quarter earnings.
The bank’s effective tax rate dropped from about 30 percent, the New York-based company said. Later years should show even more benefit, with the rate dropping to 24 percent or lower over the next 24 months, according to Gerspach.
Citigroup didn’t immediately detail why it thinks its tax
rate will continue drifting lower. JPMorgan blamed the phase-out of “certain business credits” in explaining why its rate will gradually increase in coming years.
Citigroup’s tax gains are big enough that the bank took the rare step of lifting its forecast for ROTCE, boosting the projection to 13 percent in 2020 from an earlier projection of 11 percent.
Citigroup and its rivals have spent weeks reviewing their finances and briefing investors on what’s to come after Republicans enacted a plan in December that’s particularly lucrative for the industry. Banks have long paid some of corporate America’s highest effective tax rates, which means they benefit more when rates are reduced.
Banks face competing demands for a share of the gains — potentially raising pay for staff, cutting prices for customers or plowing more into the pockets of shareholders. Wells Fargo & Co. executives said last week they’ll boost donations to a philanthropic foundation, while JPMorgan leaders said they’re working on a plan to share the tax savings. Citigroup only called out the cash coming investors’ way, and executives later confirmed that they haven’t announced plans to give employees a raise.
Citigroup will stick to a multiyear plan to pay out at least $60 billion in capital to shareholders, even after booking a larger-than-forecast charge of $22 billion to adjust to the new regime. Executives had braced investors last month for a $20 billion hit.