Big banks just received the first installment
of benefits corporate America will reap from the new federal tax law. The haul:
more than $2.5 billion.
latest gain came Tuesday when Goldman Sachs Group Inc. GS -0.15%reported
first-quarter profit that rose 26% from a year earlier. This was aided by a lower corporate tax rate that boosted
earnings by about $232 million.
Overall, the combined earnings of Goldman and
the four major national banks—JPMorgan JPM -0.79% Chase
& Co., Wells Fargo WFC -0.16% &
Co., Citigroup Inc and Bank of America Corp. BAC -1.57% —increased
by more than $2.5 billion in the quarter because of the lower corporate rates under
the tax-overhaul law enacted in December, according to an analysis of the
banks’ results by The Wall Street Journal.
That amount is only a modest-size chunk of the banks’ total first-quarter
earnings—less than 10% of their combined net income applicable to common
shareholders. But it comprises a major chunk of their year-over-year earnings
Without the tax savings resulting from the
new lower corporate tax rate, Wells Fargo’s earnings would have declined from a
year ago instead of increasing, and much of the year-over-year growth at
Citigroup and Bank of America would be gone. Losing the tax bump would have cut
the earnings growth of JPMorgan to 28% from 35%; for Goldman, growth would have
shrunk by at least a quarter.
The $2.5 billion
gain isn’t the entire story. For one thing, other provisions of the tax law
prompted some of the same banks and many other companies to take big charges
against their earnings in the fourth quarter. From that perspective, the
first-quarter boosts merely help even things out.
Still, the new data suggests investors may
have to look below the surface of companies’ announced results to get a true
sense of how their operations are performing.
get excited about the growth of earnings of these companies, they need to look
at the sources of that growth,” said Ravi Gomatam, an analyst at Zion Research
Group, an accounting and tax research firm. “A good portion of that growth is
likely to be from taxes.”
The big banks
acknowledge the reduction in the corporate tax rate, to 21% from the previous
35%, played a role in their first-quarter earnings growth. But they also
maintain their operations are solid and growing.
Bank of America’s earnings growth was
“driven not only by tax reform but also operating leverage and continued strong
asset quality,” Chief Financial Officer Paul Donofrio said Monday on
the bank’s first-quarter earnings call.
Michael Corbat, Citigroup’s chief executive,
said Friday that “a lower tax rate” was a contributing factor to the bank’s results along
with “strong business performance.”
JPMorgan’s CFO, acknowledged the “tailwind” of the tax overhaul, but
said the bank’s results also benefited from “broad-based strength.”
analysis calculated what each bank’s results for the latest first quarter would
have been if the effective tax rate from last year’s first quarter was still in
Each bank’s tax rate has declined
dramatically since then. Wells Fargo, for instance, had an 18.8% effective
tax rate in the latest first quarter, down from 27.5% in the year-ago quarter.
Applying a 27.5% effective tax rate to the latest quarter’s pretax income would
have shaved about $636 million off earnings, cutting Wells Fargo’s
diluted earnings per share to 99 cents from the actual $1.12. (Wells’
first-quarter 2017 earnings were $1.03 per diluted share.)
Citigroup, which had
a 23.7% effective tax rate this quarter, would have seen about $452
million cut off its first-quarter earnings if its year-ago 31.1% effective tax
rate had been in effect. That would have eliminated most of its
roughly $530 million in net-income growth from a year ago.
The tax overhaul added about $798 million to Bank of America’s net-income
growth. At JPMorgan, it added about $470 million
to its earnings.
Some banks made it
easier than others to assess their results without the impact of tax reform.
While all four banks disclosed the figures for their current and year-ago
pretax income, excluding the effect of taxes altogether, Bank of America
highlighted them in the headline of its press release, noting that its pretax
income had risen 15%, even as its diluted EPS rose 38%.
In reality, the
impact of the tax overhaul isn’t quite as straightforward. Other tax-law
provisions cut into companies’ earnings, like charges for revaluing deferred
tax assets and repatriating foreign profits, and some
companies could face additional taxes because of the law’s new limit on
the deductibility of companies’ interest payments.
Mr. Gomatam notes
not all companies will see the kind of tax-rate reductions the big banks did,
and some tax savings could go to a company’s customers or employees rather than
profits. Investors “need to see that all of the tax savings are falling to the
Investors may have
looked through the numbers and realized that much of the banks’ earnings growth
came from a tax cut, not from operations. Since announcing earnings, Wells
Fargo shares have fallen 4%, JPMorgan’s have slipped 2.8% and Citigroup’s have
Click here for the original article from The Wall Street