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Where Citigroup Stands with Its Profitability Goals

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Citigroup’s progress on profitability

Citigroup (C) has made substantial progress toward achieving its profitability goals set out three years ago. In the near to medium term, the company expects to achieve a firm-wide ROTCE (return on common equity) of 10% and in the “mid-teens” in the longer term. Citigroup believes that its current strategy in the consumer and corporate business would lead to the achievement of these levels of ROTCE in a “new normal environment,” which would be better than current market conditions.

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Major issues

In a presentation at the RBC Capital Markets Conference, Citigroup’s CFO, John Gerspach, pointed out the major issues the company faces in achieving its profitability goals. One big challenge to achieving its return objectives will be the heavy capital burdens related to high levels of DTA (deferred tax assets). Currently, the gap between regulatory capital and TCE (tangible common equity) is ~$31 billion. This is the amount of capital that is disallowed to be utilized for regulatory purposes in order to support DTA, and this leads to underutilization of capital and low return to shareholders.

In 2015, the company reported ROTCE of 9.2%, whereas its return on regulatory capital was 11.3%. This capital disallowance related to DTA is more than 200 basis points.

Regulatory and TCE capital

In order to achieve its ROTCE targets and be able to utilize DTA, the company needs to merge its regulatory and TCE capital. The company would then be able to use up its free capital to enhance shareholder returns and achieve its ROTCE goals. Further, the company will also focus on winding down its non-core business Citi Holdings in order to free up capital.

Citigroup has a weight of 0.35% in the Financial Select Sector SPDR ETF (XLF). Wells Fargo (WFC), J.P. Morgan (JPM), and Bank of America (BAC) have weights of ~8.7%, ~8.1%, and 5.8%, respectively.

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