Mike Corbat is entangled in a banking Catch-22. The chief executive of Citigroup aced the living will and stress tests. He also has fashioned an efficient operation, evidenced by the mega bank's latest results. Returns remain subpar, however. Improving on them requires leaning on tax breaks. And to do that will depend on finding more profit in tough times.
There's no mistaking the work Corbat has done patching up Citi's relationship with regulators, strained by a $45-billion taxpayer bailout during the financial crisis. That was followed by two failures of the Federal Reserve's annual exam on how the bank would perform in a hypothetical calamity.
Last year, Citi passed with ease after Corbat invested $180 million to upgrade the bank's processes. He even staked his job on the grades. This week, Citi was the only one of the eight largest US banks to get a thumbs-up from both the Fed and the Federal Deposit Insurance Corp for its plan to dissolve in an orderly manner in a crisis.
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Its big impediment is a legacy of the crisis: tax breaks from all the losses Citi suffered. The bank currently has around $30 billion of capital tied up in these deferred tax assets. The only way to get rid of them is to earn money that can be applied against them.
Had Citi been completely free of its deferred tax assets, annualised return on equity for the three months to March would have been around 7.5 per cent - and for 2015 just shy of a theoretical 10 per cent cost of capital.
With earnings so low, however, offloading the deferred tax assets is a slow and painful process. Citi reduced the stockpile by almost $7 billion last year. With industry revenue in a rut because of low interest rates, volatile markets and nervous chief executives, there's little sign of improvement. And therein lies the catch.
