Vikram Pandit can breathe a small sigh of relief. The Citigroup boss presided over both a dismal set of earnings at the end of 2011 and a poor showing on the Federal Reserve’s stress test last month. But the megabank tapped into the broader market improvement to stage a comeback, earning $2.9-billion (U.S.) in the first quarter. That’s a good sign the bank is back on track to be able to return up to $12-billion a year to shareholders.
Such lucre would come from three sources. First, there are dividends. Assuming Citi is allowed to pay out a third of annual earnings, it could translate into some $5-billion a year, based on the consensus estimate of analysts for 2014.
The next pot is $25-billion or so of capital tied up at Citi Holdings, which contains some $200-billion of assets the bank is offloading. Finally, Citi has about $50-billion of deferred tax assets created by crisis losses. The more profit it cranks out, the more it can use these assets to offset future tax bills, freeing up still more capital. Tot it up, assume it takes 10 years to tap into the tax benefits and Citi Holdings and that’s at least $120-billion that could flow back to shareholders.
Getting there will take time. It’s far from clear how sustainable the first-quarter earnings are, especially the threefold jump in fixed-income trading in rising markets. Even then, Citi only managed to eke out a 6.5 per cent return on equity. That jumps to almost 9 per cent after stripping out the accounting hit on its own liabilities – and almost 12 per cent if losses at Citi Holdings are excluded, putting Mr. Pandit’s bank in line with JPMorgan and Wells Fargo. That’s not bad, but wouldn’t necessarily unleash waves of tax assets.
What’s more, with $100-billion of pre-2007 mortgages on its books, much of the capital in Citi Holdings will be needed for some time. Citi and its shareholders can find some solace in these latest results. But it’s still a long slog ahead.