Analysts and Citigroup Quarrel over $50 Billion of Deferred Taxes (NYSE: C)

Citigroup (NYSE: C) is at odds with a number of market analysts and some accounting experts who contend that the New York-based bank should set aside funds to cover $50 billion worth of deferred taxes, a move that would weaken the company’s balance sheet and diminish its capital buffer.

The deferred tax assets, which are the result of certain U.S. tax regulations, made more than 33% of Citigroup’s tangible equity, a measure of a bank’s financial strength. If the bank were to shed its deferred tax assets, its financial situation would look much more league than at its present state, a move that some market analysts have called for. Citigroup has rebuked calls for it to set aside capital reserves for its DTAs saying that the company will earn enough money in future quarters to justify keeping those assets on the books.

Under U.S. accounting rules, Citigroup must be certain that it will earn more than $99 billion in taxable income during the next two decades in order to avoid making provisions for the deferred tax assets. The bank had made annual pre-tax profits of more than $20 billion between 2002 and 2006, but lost $60 billion in 2008 and 2009. Now, analysts question whether or not Citigruop will be able to return to those profitably levels.

Mike Mayo, an analyst for CLSA, has been at the forefront of calling for Citigroup to set-aside reserves for its deferred tax assets. In a recent research note to investors, he wrote,  “Why should auditors, investors, regulators and others rely on Citigroup’s projections . . . to justify the use of their DTAs?”

Mayo was joined by Lynn Turner, a former chief accountant for the U.S. Securities and Exchange Commission. She was quoted in a recent financial times article saying that the position Citigroup is taking “defies imagination and logic.” She added, “Instead of talking about making money, what Citi ought to do is to reserve for at least part of the DTAs and reap the benefit of reducing the reserves once it actually makes money.”

Not all analysts are teaming up against Citigroup though. Rochdale Securities analyst Richard Bove took the side of Citigroup saying that he didn’t believe Citi’s accounts were “out of order due to a misstatement of its DTAs”.

In 2009, the U.S. Securities and Exchange Commission investigated Citigroup’s deferred tax assets and asked the bank to explain its treatment of the assets, but the regulatory agency has not commented on whether or not it continues to pursue the matter.

Shares of Citigroup, Inc (NYSE: C) traded up 0.77% on Friday, ending the week at $3.91. Over the weekend, shares traded down $0.01 or about 0.26%, during off-hours trading. The bank has a 52-week range of $3.11 to $5.07 and a market cap of $113.3 billion.

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