The reaction to the US Tax Cuts and Jobs Act announced in December was pretty much universally positive among bank CEOs reporting results in January, but the effects varied a lot – mostly due to the fact that levels of historic deferred tax assets (DTAs) are far from equal.
At Goldman Sachs, CFO Marty Chavez said there was “clearly the potential for increased business activity” resulting from more mergers and acquisitions, more financing and more economic growth in general.
After a long period of speculation, the announcement of the reform brought clarity, and Chavez said that dialogue had increased with clients as a result.
He noted that the firm operated with a higher tax rate than some peers – it had got more US-centric over time rather than less, largely because of its presence in wealth management, which he reckoned was now about 98% US-focused after the firm sold its European business in 2013.
Bank of America Merrill Lynch (BAML) CEO Brian Moynihan reckoned that the reforms would be positive for clients, but he told analysts that he didn’t envisage running the company any differently with a lower effective tax rate.
He certainly wasn’t going to be diverted from his mantra of responsible growth, which made a few appearances throughout the call.
Moynihan thought it was too early to tell whether it would affect loan growth, but felt on balance that it would probably be good in the long term, not least because clients repatriating funds might be expected to invest part of them in real estate, which would be good for a firm such as BAML.
Ultimately, though, the differentiator for BAML and peers would be more about the reform’s effects on the general economy rather than any particular tax rate.
BAML’s status as a national champion that is embedded deeply in the fabric of the US economy made the question of how to respond to the tax reform interesting to analysts quizzing Moynihan.
In the wake of an open letter in January from Larry Fink, CEO of BlackRock, exhorting businesses everywhere to focus on their social impact rather than simply maximizing profits, they wondered whether Moynihan might feel under more pressure to do so now that tax reforms would be lightening the burden in the future. He didn’t think so, or at least not in addition to the way in which the bank already focused on its social impact.
Citi CEO Mike Corbat was firmly fixed on the benefit to the firm and its shareholders in his initial remarks, although he noted that it was also a great opportunity to advise clients on how to optimize their models to fit the new regime. He thought the macro environment was as positive as it had been in many years, and that the tax reforms could “change sentiment from optimism to confidence”.
An increase in take-home pay would help customers increase spending or debt repayments: all in all, it was “a clear net positive for Citi and its shareholders”.
Marianne Lake, CFO at JPMorgan, also considered the reforms as a step forward and “a big win for the economy”. The house view at JPMorgan is that they could add some 20-30 basis points of growth to the US economy in 2018 and 2019.
However, Lake took pains to remind analysts that the operative word when it came to the "deemed repatriation of foreign earnings" - a measure in the reforms that sees liquid assets held overseas by US companies subject to a one-off charge of 15.5% - was “deemed”. She wanted the analysts to think of those earnings as the bricks and mortar of the overseas businesses, often needed to meet local requirements. She didn’t think the bank would be remitting anything significant in the end.
She acknowledged, also, that some of the benefit would be competed away between the banks as they sought to pass on a lower cost of credit to customers, but if that allowed them to grow their businesses then there was a positive feedback loop for those banks too.
A matter such as US tax reform was never going to pass without comment from JPMorgan CEO Jamie Dimon, who tends to lurk in the background of his bank’s results calls like a grumpy uncle at a Thanksgiving dinner, occasionally piping up with a tirade against clueless politicians or rickety US infrastructure.
This time around he was a little more subdued than he has been in the past on the topic of bitcoin, for instance, but seized the opportunity to point out that the US tax rate had historically stayed at 40% while it had fallen to 20% elsewhere, driving “brains and capital” overseas.
He didn’t know what the effect on capital markets might be, but took a moment to praise his people in characteristically Trump-like terms.
“We have fabulous people in sales and trading, fabulous research, great technological capability. In the last five years we dealt with Dodd-Frank, Mifid, all these rules and regulations, SEPs – what are the other ones called in Europe? We’ve done OK. I look at it all as a big positive.”
Biggest write-down for Citi
Goldman reported a charge of $4.4 billion, of which $1.1 billion was due to the revaluation of DTAs and $3.3 billion on the repatriation of foreign earnings. At Morgan Stanley, the DTA charge was in the order of $1 billion. BAML saw an impact of $2.9 billion, with a charge of $950 million relating to renewable energy investments offset by tax benefits relating to the same, and the net $2.9 billion relating to DTA revaluations.
JPMorgan reported a net $2.4 billion charge, made up of the impact of repatriation of overseas earnings and adjustments to tax-oriented investments such as affordable housing and energy, but also offset partly by a revaluation of the firm’s deferred tax liabilities rather than assets as at other firms.
Citi took the biggest whack of all – unsurprisingly, given its historic DTAs – with a charge of $22 billion that included a $19 billion DTA revaluation and $3 billion relating to repatriation. The bank had said that it would expect to use about $2 billion of DTAs each year, and the revaluation made that more like $1.3 billion to $1.4 billion now, according to CFO John Gerspach.
However, losing that DTA use while getting some 900bp of benefit in the bank’s effective tax rate was, in his view, “a pretty good trade-off”.
At the time of writing, UBS was the only one of the big European names to have reported its full-year results, but a few others had already flagged up tax impacts to the market. Deutsche Bank, which reports on February 2, said that it estimated a €1.5 billion charge relating to DTAs, which would take it to a small after-tax loss for the year.
Credit Suisse, meanwhile, expected to write down some SFr2.3 billion of DTAs, and also noted that it would be affected by another portion of the tax reforms – the introduction of the base erosion and anti-abuse tax (Beat), which is designed to limit how multinationals might move earnings to jurisdictions with even lower tax rates and was mostly downplayed as untroubling in the US bank results calls.
It is much more troubling for the non-US banks, however. The measure threatens to open up a stark difference in treatment between US domestic banks and their foreign counterparts, largely because it captures payments made from their US entities to their non-US operations. A bank funding its US business through an intercompany loan, for example, could now find that intercompany interest payments related to that loan are taxed under Beat.
Barclays said that it thought it might see a £1 billion net reduction in DTAs after a separate £300 million increase due to an unrelated revaluation of US branch DTAs. It also warned that Beat could “significantly reduce the benefit” of the reduction in tax rates, but it wasn’t able to estimate the impact now.
UBS CFO Kirt Gardner told analysts that it had seen a SFr2.9 billion DTA write-down. He said that was in line with the bank’s guidance, which had been for a SFr200 million reduction for each percentage point of tax rate decrease.
He offered the clearest indication relating to Beat, however, saying that it could increase UBS’s tax liability in 2018 by up to SFr60 million, but the bank was exploring ways to mitigate that.