VOL. 42 | NO. 2 | Friday, January 12, 2018
Bank execs sing praises of new tax law as windfall looms
NEW YORK (AP) — Two of the nation's biggest banks — JPMorgan Chase and Wells Fargo — indicated Friday that they expect to see significant future benefits from the recently enacted GOP tax bill, through both lower taxes and increased business.
The comments came as the two companies reported their quarterly results, which were both heavily impacted by the change in tax laws, but in different ways. JPMorgan Chase took a $2.4 billion charge tied to the tax bill, while Wells Fargo had a $3.35 billion benefit.
Bank executives and their lobbyists in Washington were big promoters of a corporate tax cut. Banks are among the highest-taxed industries, largely because they operate here in the U.S., and have regularly paid effective tax rates of 30 percent or more. JPMorgan CEO Jamie Dimon and other company executives for years said a lower tax rate would not only be good for JPMorgan, but ultimately good for the country as well.
"The modernization of the U. S. tax code is a significant step forward for the company and a big win for the economy," said Marianne Lake, JPMorgan Chase's chief financial officer, in a conference call with investors.
JPMorgan executives say they expect to pass along some of the benefits, currently in unnamed ways, to consumers, its employees and its shareholders. The bank already raised its minimum wage to $15 an hour before the tax bill passed, but further wage increases could be on the table. Wells Fargo announced shortly after the bill was passed it would raise its minimum wage to $15 an hour as well. Wells Fargo CEO Timothy Sloan said he estimates 70,000 employees at Wells Fargo will benefit during a conference call with investors.
The tax department of JPMorgan has been "working around the clock for many months leading up to the passage" of the tax bill, Lake said, calling the bill "extraordinarily complicated." Lake and executives at other banks are still assessing the law's full impact, however.
But before JPMorgan can benefit from the new tax law, it had to take a significant one-time charge.
Like many banks after the 2008 financial crisis, JPMorgan had billions of dollars of what are known as tax-deferred assets on its balance sheet. These are basically credits it could have used to pay future income taxes. These credits built up after the big Wall Street banks took billions of dollars in losses from bad mortgages and other toxic assets.
Because the new tax bill lowered the corporate tax rate to 21 percent, the value of those tax-deferred assets had to be written down. The $2.4 billion one-time charge covers the change in value of those assets. Other banks, like Bank of America, Citigroup and Goldman Sachs are expected to take similar actions as they report their results over the next couple of weeks.
JPMorgan now expects its effective corporate tax rate to be roughly 20 percent. In comparison, JPMorgan paid an effective tax rate of 28.4 percent in 2016 and a tax rate of 31.9 percent in 2017. The change will save JPMorgan billions of dollars over the coming years. The bank paid $9.8 billion in income taxes in 2016.
Wells Fargo is unique in that it had deferred tax liabilities, not assets, on its balance sheet, basically income taxes it may owe in the future. Wells Fargo some of its $7 billion of deferred tax liabilities and recorded a $3.35 billion gain. Wells Fargo now expects its effective annual tax rate to be around 19 percent.
JPMorgan said Friday it earned $4.23 billion in the fourth quarter, or $1.07 a share, down from $6.73 billion, or $1.71 a share, in the same period a year earlier. Excluding the $2.4 billion charge, the bank would have earned $6.7 billion, or $1.76 a share, which beat analysts' forecasts of $1.69 a share.
Outside of the tax bill, JPMorgan's results were positively impacted by rising interest rates. Being able to charge customers more to borrow helped boost the bank's net interest income by 11 percent to $13.03 billion."
But other parts of JPMorgan's businesses, most notably its trading desks, did not fare as well in the quarter. JPMorgan's trading division reported revenue of $4.4 billion in the quarter, down 22 percent from a year earlier.
Wells Fargo said it earned $6.15 billion in the fourth quarter, or $1.16 per share, versus $5.27 billion, or 96 cents per share, in the same period a year ago. Analysts polled by FactSet had expected Wells Fargo to report a profit of $1.23 a share.
Wells continues to try to shake off the fallout from its 2016 sales practices scandal, and a subsequent scandal in mid-2017 where the bank sold car insurance policies to customers who didn't need it.
While profits in the consumer banking division rose to $3.67 billion compared to $2.73 billion in the same period a year ago, much of that growth was tied to the tax gain that Wells Fargo recorded this quarter. Consumer loans fell to $956.8 billion from $967.6 billion a year earlier, notable in a period when higher economic growth and higher consumer confidence should have translated into more loans issued to consumers. The bank's net interest margin also did not improve in the quarter, despite the Federal Reserve raising interest rates four times in the last year.
Shares of JPMorgan rose 1.7 percent to $112.67. Shares of Wells Fargo fell less than 1 percent to $62.55.