Why New Tax Law Cost Citigroup, GM $29 Billion
January 16 2018 - 3:22PM
Dow Jones News
By Michael Rapoport
Two of America's biggest companies -- Citigroup Inc. and General
Motors Co. -- announced a combined $29 billion charge against
earnings Tuesday due to the new tax law.
Similar issues will likely ensnare other firms in coming days,
even if the numbers aren't as big.
Citigroup took a $19 billion charge to write down so-called
deferred tax assets, akin to IOUs that can be used to pay future
tax bills, when it announced fourth-quarter earnings Tuesday. That
accounted for the lion's share of $22 billion in charges it
recorded because of the tax overhaul enacted last month.
GM said at a conference Tuesday that it would take a charge of
about $7 billion for the same reason when it reports its
fourth-quarter results Feb. 6.
The primary reason for the charges is something that will
benefit the companies in the long run: The tax law's reduction in
the U.S. corporate tax rate to 21% from the old 35% rate.
Deferred tax assets are past tax credits and deductions that
companies can hold on to and use to defray future tax bills. But
when the tax rate declines, companies' tax bills shrink.
Many of those credits and deductions become less valuable. This
is because it will require a lot more profit to use them up and
that will likely occur over a longer period than originally
thought.
In that case, companies must write down their deferred tax
assets, leading to charges against earnings.
Such assets often result from past losses. Citigroup and GM
racked up lots of those in the financial crisis and now have big
piles of deferred tax assets. Citigroup had $45.5 billion as of
Sept. 30; GM had $30.1 billion.
Still, the companies emphasized that the lower tax rate will
ultimately help them. "On balance, tax reform is a clear net
positive for Citi and its shareholders," Michael Corbat,
Citigroup's chief executive, said during the bank's earnings
conference call.
The charges from deferred tax assets have other effects on a
company's finances beyond the immediate hit to profit: They cut
into a company's book value -- its net worth. That can prove
troubling to investors, although the pain can be assuaged by the
thought that the lower tax rate will lead to more profit for
shareholders in the future.
For banks, there is an added concern: a reduction in book value
can also cut into measures of regulatory capital, or the buffers
they are required to hold to absorb losses. If that falls too low,
regulators could curb a bank's dividend payouts or share
buybacks.
Citigroup said Tuesday that its charge on deferred tax assets
and other effects from tax reform sliced $6 billion off one
important capital measure known as its Tier 1 common equity. Even
so, the bank stressed that it still well exceeds regulatory
benchmarks and is committed to continuing with plans to return
capital to shareholders.
The bank also said that it was taking a $3 billion, one-time
charge related to profits held overseas.
Citigroup and GM may be among the biggest examples of the
short-term pain brought about by the new tax law, but they won't be
the only ones. Other companies reporting fourth-quarter results in
coming weeks also are expected to take write-downs.
For instance, Bank of America Corp., which reports earnings
Wednesday, has already said it expects a $3 billion charge.
American International Group Inc. said in November that it could
see a reduction of about $7 billion in the value of its deferred
tax assets from a lowering of the tax rate. The company, which had
$20.7 billion in deferred tax assets as of the end of 2016, reports
fourth-quarter earnings Feb. 8. An AIG spokeswoman declined to
comment further Tuesday.
Conversely, companies that have net deferred tax liabilities, or
taxes payable in the future, may record gains. That is because
those liabilities will now be worth less as well. Wells Fargo &
Co., which was in that position, had a gain of $3.9 billion when it
reported earnings last Friday.
Write to Michael Rapoport at Michael.Rapoport@wsj.com
(END) Dow Jones Newswires
January 16, 2018 15:07 ET (20:07 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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