Citibank Q4 2009 Writedown?

DFN: Last of the major financial institutions (JPM, WFC, BAC, GS, Pru, Met, AIG) to make a major move. Government still has a significant stake and there’s plenty of doubt about its future.

Citigroup shares close down 5% after report on Q4 writedown
Reuters Published: Friday, October 30, 2009
http://www.financialpost.com/story.html?id=2164400

NEW YORK — Citigroup Inc shares tumbled on Friday after accounting expert Robert Willens said the bank was likely to have a US$10-billion fourth-quarter charge on its deferred tax assets.

A US$10-billion charge would amount to about 10% of Citigroup’s tangible equity and about 25% of its US$38-billion in deferred tax assets, CLSA analyst Mike Mayo said on the conference call, which he hosted.

"We have no idea how any analyst could have arrived at this estimate," Citigroup spokesman Stephen Cohen said.

Citigroup shares closed down 5.1% at US$4.09.

On a separate conference call hosted by Morgan Stanley, accounting expert Tony Catanach said the bank appears to have real strategies to prevent it from taking a hit on its deferred tax assets.

On CLSA’s conference call, Mr. Willens said: "I would be surprised if in year end, we didn’t find that a valuation allowance would be taken here," noting that he had expected such a step to happen at the end of last year.

Mr. Willens, formerly an accounting analyst at Lehman Brothers, now publishes "The Willens Report."

Deferred tax assets arise because companies keep two sets of books: one for taxes and one for reporting to investors. Income in these two books may be different at different times.

If a company has a loss on the income it reports to investors, but cannot record the loss for tax purposes until the future, it records a deferred tax asset, which reflects the future cash flow from paying lower taxes.

But if a company is unlikely to generate enough taxable income in the future, it must essentially write down the deferred tax asset, which it does by creating a "valuation allowance" on its balance sheet. That valuation allowance cuts into income reported to investors and can hit a portion of a bank’s regulatory capital, as well. Citigroup has a plan for harvesting its deferred tax assets and the plan is detailed and flexible enough that it seems like the bank can execute it, Mr. Catanach said. "It sounds doable, it really sounds doable," he added.

After generating more than a year of losses, many banks have substantial deferred tax assets.

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