Exactly how well capitalized is Citigroup (C)?
That’s a question that the Financial Times raised on September 7. The answer, the paper reported, depends on not so much on who’s counting the beans, but on who’s deciding what beans count.
At issue is something called deferred tax assets. A deferred tax asset basically is a loss in the past that can be used in the future to offset taxes. And Citigroup, after pretax losses of more than $60 billion in 2008 and 2009, has a lot of deferred tax assets on its books. About $50 billion of them.
Current accounting rules say a bank can count its deferred tax assets as capital (Hey, don’t ask me how losses can be capital, but that’s what the rules say)—if the bank is confident that will earn $99 billion in taxable income in the next two decades.
And that’s the issue.
Citigroup says, No sweat. The bank points out that it had annual pre-tax profits of $20 annually from 2002-2006.
Some accountants, Wall Street analysts, and even the Securities & Exchange Commission (SEC) aren’t so sure. They say projections are fine and dandy but that Citigroup ought to be creating reserves against the possibility that, in the current global financial uncertainty, the bank won’t record the necessary level of profits. The SEC asked the bank to explain its treatment of deferred tax assets last year. And, as is SEC policy, the agency isn’t talking about whether it still has questions or is satisfied.
The question comes at a very awkward time for Citigroup.
The biggest U.S. banks are finally seeing their need to add new reserves to capital against bad loans decline. If bad loans decline enough, banks will go from having to take money out of earnings to put into reserves to taking money out of reserves and adding it to earnings. The switch will have a dramatic effect on bank profits and losses and that effect is being felt right now and should accelerate in the rest of 2010.
Any autumn rally in bank stocks will be based at least partly on this shift in reserves.
I think you can count on that shift adding to assets at big banks such as JPMorgan Chase (JPM) and Bank of America (BAC).
At Citigroup you can probably count on that shift—but it’s not quite as certain as with other big banks. And that makes Citigroup just a little bit more of a gamble.
WDC, Seagate, stay away…..
Spinning hard drives are going the way of the dodo bird. Solid-state drives are the future, and Seagate and WDC are woefully behind here. Sometimes, the market is right and stocks go down for a good reason rather than irrationalism.
Hi OJ- no, I’m not jealous of Ed. Not to worry. I like to make my own mistakes; but you are right- Ed has siome ideas that I follow up, at least check out. [You may have noticed over the months that I have always supported Ed’s, and everyone else’s, right [?] to post on this comment area.] But thx for your concern, and for upholding the standards of decorum- and correct spilling- on Jim’s site.
cjxland,
People ask Ed questions because this is a forum and he responds with his thoughts and ideas. If you are jealous that people ask him questions that is your problem. Oh and if you are going to be a smart a__ please learn to spell. Thought not thot!
I thot Ed opened his own website and took all his followers with him? Maybe some followers didn’t get the news?
Java12jac:
Me again. Your friend Ed has spoken highly of Western Digital (WDC) – he said he even doubled his position in it on July 24th. It too is an “industrial” stock. They design, manufacture and sell hard drives for computers and other electronic devices. On April 5, 2010 the share price was $47.44. I bought it on Sept. 3rd at $24.24. It was at $26.00 earlier today. In the 9/13 issue of Forbes columnist Ken Fisher says: “this doggy stock is about to have its day. (The shares) are now cheap at 60% of annual revenue and 5 times estimated earnings for 2011.” Looks like a good bet to me.
Java12jac:
I hope you bought Cummins (CMI) when Jim recommended it on April 20 – and then again on May 5th? It is an industrial stock. I bought it on May 6th at $67.35. On July 8th Jim recommended it a third time and set a target price of $80.00 by March 2011. It was at $82.00 yesterday, Sept. 8, 2010. 63-year-old CEO Tim Solso aims to double sales and triple profits by 2014. It’s time for an update from Mr. Jubak.
Jim,
Do you really think the US government will allow another big bank do go down?
BTW, with a possible power shift in Congress and Senate, what do you think will be the short-term market response?
Ed
Is there any industrial stocks you like right now? Looking at CAT, ITW and EMR.
jamba,
I would call STD tempting at $12. At under $10, it’s a steal.
Ed,
With all the questions again about European banks do you think that STD would be a good pickup if they drop under $10?