The six largest US banks could see annual profit jump by an average of 14 percent if President Donald Trump delivers on his promise to cut corporate taxes. The lenders, which stand to benefit more than other industries because they typically have fewer deductions, could save a combined $12 billion a year, according to data compiled by Bloomberg. Trump has called for cutting the corporate tax rate to 15 percent from 35 percent.
While investors have focused on Trump’s campaign pledge to relax bank regulations, tax cuts could happen faster and their impact could be greater. The effective federal tax rate for the biggest banks averaged 28 percent for the three years ending in 2015, data compiled by Bloomberg show, twice the 14 percent rate paid by all large companies.
Wells Fargo & Co.’s savings in 2015 would have been $3.8 billion had the tax rate been 15 percent and existing deductions were disallowed. The San Francisco-based bank is poised to reap the biggest benefit because its earnings are overwhelmingly in the US and taxed at the 35 percent rate. The savings could boost Wells Fargo’s earnings by 16 percent. JPMorgan Chase & Co., the nation’s largest lender, would save about $3 billion a year and see net income go up by 14 percent.
Citigroup Inc. would save less because more of its earnings are outside the U.S. Bank of America Corp. currently pays a lower effective tax rate in the U.S. and would benefit less if existing deductions no longer applied. Goldman Sachs and Morgan Stanley would see profit jump at rates similar to Wells Fargo and JPMorgan, even though the dollar amount of their savings is smaller. Spokesmen for all six banks declined to comment.
Taxes have been high on lobbyists’ agendas as well. The Financial Services Roundtable, which brings together chief executive officers of the biggest banks, listed “fixing a broken tax system” on top of its 2017 wish list published last week. Leaders of the Securities Industry and Financial Markets Association talked more about potential tax reform than regulatory changes in its state-of-the-industry meeting in December.
Trump’s campaign pledge to lower corporate taxes goes further than a plan put forward by House Republicans last year that would cut the rate to 20 percent.
Trump said last week that he was working with House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell on potential tax measures. Ryan was an author of what’s known as the House blueprint, which also calls for eliminating companies’ ability to deduct the interest they pay on deposits and other debt. Although the House plan exempts financial firms, KBW’s Cannon says there’s a risk banks will be included if Republicans decide they need to raise revenue to counter other cuts to keep tax revenue neutral.
While the cost of borrowing has been low since 2008, interest expenses can be much higher. Banks incorporate net-interest income — interest earned on assets less interest paid on deposits and other debt — in their revenue calculations. Revenue would balloon if interest expenses were excluded from this calculation.
For that reason, it’s hard to imagine lawmakers eliminating the deduction, said Alan Cole, an economist at the Tax Foundation, a nonprofit organization analyzing tax policy.
It “would be too disruptive,” he said.
In 2006, JPMorgan’s income before taxes was $20 billion. If interest expenses were excluded, it would have almost tripled to $58 billion.
For some large banks, a rate cut would mean a one-time loss because of a reduction in the value of their deferred-tax assets. Those are benefits that build up because losses are recognized earlier in public company accounting than they can be in tax returns. Citigroup and Bank of America, which had the largest losses in the financial crisis, still have large amounts of such benefits that they can’t fully use in a lower tax-rate environment. Citigroup has estimated its hit would be about $12 billion. KBW’s estimate for Bank of America’s upfront loss is $4 billion, and about $1 billion each for Goldman Sachs and Morgan Stanley.
While those writedowns could wipe out the potential benefit from a lower tax rate, the elimination of deferred-tax assets would bring reported profits for some banks closer to what analysts and investors already look at, according to KBW’s Cannon.
They generally ignore the impact of deferred-tax assets on earnings, adjusting reported figures to understand the true nature of a firm’s profitability. Writedowns on deferred-tax assets would be considered cosmetic, while the benefit from lower tax bills will be seen as concrete and permanent.