Citigroup says lower taxes, job cuts will boost profitability

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Citigroup has found a path to higher profits: tax cuts and job cuts.

The bank on Wednesday raised its forecasts for profitability and expense reductions, facing down skeptics who have doubted the firm can achieve its financial targets. The shares rose the most in the 24-company KBW Bank Index.

Citigroup's return on tangible common equity, a key measure of profitability, will reach at least 13.5 percent by 2020, up from a previous estimate of 11 percent, according to a presentation by Chief Financial Officer John Gerspach, who plans to retire in March. Annual efficiency savings will be roughly $2.8 billion in that period, compared with the previous forecast of about $2.5 billion, Gerspach said.

"The fact that Citigroup is reaffirming, and in some cases increasing targets, is a positive," Brian Kleinhanzl, an analyst at Keefe Bruyette & Woods, said in a note to clients. "We thought that recent management changes may be a precursor to a larger guide down on targets, but that has not been the case thus far."

The shares climbed 2.7 percent to $71.30 at 9:31 a.m. in New York, the biggest intraday increase since July 16. They dropped 6.7 percent this year through Tuesday.

Part of the improved outlook comes from U.S. tax reforms and "additional benefits of investments," Gerspach said. The bank said it's already achieved about a third of the previous cost-cut target, after trimming its staffing level by 3,000 and reducing paper transactions by 10 percent, according to the presentation. It will further "optimize headcount" and move resources to lower-cost service centers, the company said.

Banks were among the top beneficiaries when Republicans slashed corporate taxes in December to stoke the U.S. economy. Twenty-three firms deemed most important by the Federal Reserve saved, on average, $388 million each in the first half of this year, based on declines in their reported tax rates. Over the same period, members of the group said they collectively eliminated 3,200 jobs.

Gerspach, 65, said third-quarter fixed-income and equity-trading revenue is expected to be flat to "slightly higher" compared with a year ago. Investment-banking revenue will probably be "somewhat lower," he said, citing deals that will close in the fourth quarter.

The firm maintained its outlook for the efficiency ratio — a measure of costs per dollar of revenue — and said it is on track to pare that figure to 57 percent for the full year. That measure increased slightly to 58 percent in the second quarter, compared with 57.9 percent in the first three months of the year. Analysts have questioned how realistic that target is, because the first half often yields the most revenue for U.S. banks. That makes it harder to improve the ratio as the year progresses.

Bloomberg News