Tuesday, September 7, 2010

CitiGroup and Its Magical US$50 Billion in Deferred Tax Assets


While many in the Developed West are liable to ascribe magical powers to those from the East, the Hindu Fakir, a guru at an Ashram, a bank in Bahrain, there is magic aplenty - particularly of the accounting sort- all over the world.

Today we look at one of the USA's major banks with US$50 billion worth of  DTAs (roughly one-third its capital).  Under accounting standards, Citi has to earn some US$99 billion in taxable income over the next 20 years to fully utilize the DTAs.

Like me I'm sure you're thinking surely there must be an "Islamic" equivalent.  Perhaps a Deferred Zakat Asset.  I'll be watching my favorite financial institutions in Bahrain and Kuwait to see if this shows up in their financials.

In response to a comment from Chapter 11, I'd note that of Citi's US$50 billion in tax credits, approximately US$31.5 billion are disallowed from computation of regulatory capital.  See Note #4 on page 36 of its 2Q10 10-Q.

2 comments:

Chapter 11 said...

You've got to give 'credit' (pun intended) for this type of creativity. It seems to be human nature to take pride in creating rules of law and governance, and greater pride still in figuring out ways of circumventing the same.

Would these 'assets' contribute towards capital adequacy ratios? My question here being 'are banks even less capitalized than we already know?' or does Basel X.0 take all this hocus pocus into consideration.

Abu 'Arqala said...

C11

The good folks at Citi are in a quandry. The music stopped and there weren't enough chairs.

Roughly US$31.5 billion of the DTCs are disallowed from inclusion in regulatory capital. Note 4 page 36. http://www.citigroup.com/citi/fin/data/q1002c.pdf?ieNocache=43

Basel III is supposed to tighten capital standards, but banks have been howling mightily that stricter capital standards will lead to all sorts of bad things happening.

The latest are the German Banks unhappy over the proposed disallowance of "participations" as capital.