John Gerspach, Chief Financial Officer (CFO) at CitigroupC , foresees a decline in the company’s trading revenues by high teens in the fourth quarter. Also, Trump’s tax reform move is likely to affect its earnings by a solid $20 million as a one-time charge, after it is enforced as law.
He also expects credit card revenues to remain flat in the fourth quarter because of pressure from the recent marketing costs.
Shares of Citigroup closed 1.4% lower yesterday, reflecting investors’ reaction on Gerspach’s subdued comments for the upcoming results during an investor conference held by Goldman Sachs.
However, the CFO seemed hopeful about return on tangible common equity, expecting it to rise in 2019 and 2020 due to lower taxes that will result in higher income.
Let’s take a look at the factors impacting the key components:
Lower Trading Revenues
Per Gerspach, the low level of volatility in the fourth quarter, particularly compared to last year when market was reacting actively to the U.S. election, has taken a toll on Citigroup’s trading revenues.
Fixed income and foreign exchange segments, on which the company is depends significantly, are likely to have been affected the most. He also said that the local markets performed better when compared with the group of 10 developed countries.
Impact of Tax Bill
Citigroup would be forced to discard $20 million saved-up tax credits once the tax bill gets implemented.
During its Investor Day in July 2017, the company estimated an impact of $15 billion on assumptions of corporate taxes being brought down to 25% and one-time repatriation of overseas earnings.
However, as the Senate bill proposes a tax rate of 20%, around $16 million of deferred tax assets will have to be written down. Further, taxes on repatriating foreign income could amount to about $4 billion.
Gerspach expects this move to be positive for the banks in the long term. He said, “Lower tax rates and changes in taxation of income earned overseas are expected to ultimately yield higher returns.”
Credit Card Revenues
Gerspach also said that he expects revenues from Citi-branded credit cards in North America to be relatively flat on a year-over-year basis. Pressure has been put on the revenues due to the company’s extensive marketing strategy.
Citigroup countered its peers by giving a 21 months interest free time period to its customers on balances that are transferred from other cards. Thus, higher promotional balances are likely to be at play in fourth-quarter results.
Outlook Provided by Other Major Banks
Among the other banks present at the conference, executives of JPMorgan Chase JPM and Bank of America BAC expressed concerns over lower volatility across capital markets that might hurt banks’ trading revenues in 2017. However, both the banks predicted top-line growth for the fourth quarter. (Read more: Banks Appear Unlikely to Benefit From Trading Turnaround )
Another Wall Street Biggie, Wells Fargo & Company WFC expects growth in commercial lending when it reports fourth-quarter results. However, mortgage income is likely to remain marginally affected by seasonality. (Read more: Wells Fargo CEO Looks Optimistic About Q4 C&I Loans Scenario )
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