When Citigroup CEO Michael Corbat suggested on Tuesday that the bank’s capital cushion would rebound from the fourth-quarter blow delivered by tax reform, his reassurances raised two questions.
How would it do that and maintain investor payouts? Moreover, will other banks be able to have it both ways, too?
Citi's common equity Tier 1 capital ratio dropped to 12.3%, compared with 13% in the third quarter and 12.6% in the fourth quarter of 2016. The ratio declined because the new tax law generated a one-time reduction of $6 billion in common equity Tier 1.
The contributors to the reduction were share buybacks, dividend payments and the bank's widely anticipated (and widely covered) $22 billion charge in the fourth quarter to write down the value of its deferred tax assets and other effects of the tax law.
Still, higher dividends and stock buybacks are said to be on the way. Citi estimates that its returns on tangible common equity should improve from 9.6% in the fourth quarter to 10.5% in 2018 and at least 13% in 2020.
“Tax reform not only leads to higher net income and increased returns, but also serves to strengthen our capital-generation capabilities going forward,” Corbat said during a Tuesday conference call.
The guidance that Citi provided on Tuesday was an improvement from earlier guidance delivered during the New York company’s annual investor day on July 25.
JPMorgan Chase and Wells Fargo, which issued quarterly results Friday, did not offer forward-looking estimates on returns.
However, Citi’s forecast of higher capital returns to shareholders is a situation that should repeat itself at most other banks, said Marty Mosby, an analyst at Vining Sparks. In fact, tax reform really won’t be the driver of higher dividends and share buybacks.
“What you really have is that excess capital was accumulated from the financial crisis and regulators were trying to ensure safety and soundness,” Mosby said. But after the most recent stress tests and capital plans, regulators have granted some companies more latitude in rewarding investors, he said.
Still, Corbat and Citi’s chief financial officer, John Gerspach, both told investors on Tuesday that tax reform is a critical piece of the capital-return puzzle because it will boost business and improve efficiency in the process.
“We believe [tax reform] will greatly benefit Citi shareholders,” Corbat said. “We feel confident about our ability to generate capital going forward. If anything, that ability has been enhanced by tax reform.”
Citi estimated that its effective tax rate will drop from 26% in the fourth quarter to 25.1% this year and 24% in 2020. It was 30% in 2016.
Although he did not provide specifics, Corbat said that Citi will dedicate the “vast majority” of its capital returns to stock-buyback programs, although the bank also will raise its dividend.
Citigroup’s goal is that “from a current yield perspective, the dividend remains competitive amongst our peers,” he said.
Citi did not provide updated guidance on estimated levels of share buybacks or dividend increases. Corbat reiterated comments the company made last year that Citi expects to return an aggregate of at least $60 billion to shareholders over the next three years.
Senior leaders at JPMorgan, Wells and PNC all said Friday that returning capital to shareholders — through higher dividend payments, expanded stock buyback programs or both — would be a top priority in 2018. Many, including Bank of America and Wells Fargo, also have approved employee raises and bonuses. Wells unveiled a plan to increase charitable donations, too. JPMorgan officials have said they plan to announce more detailed plans soon.
For now, Citi has not announced plans for wage increases or donations to charity. Gerspach referred to using the tax windfall for possible “additional investments, deploying additional capital for some clients, business expansion, etc.” But he did not offer specifics.