‘Messy’ quarter for banks

Analysts say lenders need to book multibillion-dollar charges will muddle fourth-quarter results

NEW YORK: US bank executives and investors expect a long-term boost from the new federal tax code, but the biggest lenders will first need to book multibillion-dollar charges that will muddle fourth-quarter results.

Banks will adjust deferred tax assets and liabilities to account for a lower corporate rate, and also take charges related to other tax changes. But analysts said the overall benefit from lower taxes would make up for any short-term hit.

Citigroup Inc could report a quarterly loss of more than US$15bil and Goldman Sachs Group Inc would likely have lost about US$3bil, based on analyst estimates and recent profit warnings.

JPMorgan Chase & Co, which reports first on Friday morning, could show a 35% plunge in net income from a year earlier.

Bank of America Corp, which reports the following Wednesday, could show a 50% drop. “It is no doubt going to be a messy quarter,” said Jason Goldberg, bank stock analyst at Barclays.

Citigroup is expected to take a US$20bil charge, largely because its losses during the 2007-2009 financial crisis will offset future taxes less now that the corporate tax rate has been cut to 21% from 35%.

Goldman is expected to take a US$5bil charge, mostly due to a new repatriation tax on income kept outside of the United States.

Meanwhile, banks with deferred tax liabilities will be able to write those down thanks to the lower tax rates.

In an extreme case, Wells Fargo & Co is expected to report a US$2.5bil boost to its bottom line largely because it will owe less tax in the future on income from a set of businesses including mortgage servicing.

But most analysts and institutional investors brush aside big one-time items, viewing them as accounting charges that reveal little about underlying financial performance or future profits.

Instead, they are confident that big banks will be largely better off from paying a lower tax rate. Still, just how much each bank will benefit will vary based on where they earn their income.

Bank of America could earn US$4.5bil, or 19%, more in 2019 than it would have without the lower rates, said Keefe, Bruyette & Woods analyst Brian Kleinhanzl. That would more than cover an expected US$3bil fourth-quarter charge.

But Citigroup might get a profit pickup in 2019 of only US$1.7bil, or 11%, Kleinhanzl said. That would be far less than the US$19.7bil he expects in total fourth-quarter charges.

Bank of America earns about 90% of its income in the United States, according to estimates by analyst Richard Ramsden of Goldman Sachs. Citigroup, meanwhile, has been getting only about 50% of its earnings at home, so it will not benefit as much from lower US tax rates.

Analysts plan to push executives in conference calls for clues about whether investors will benefit as much as they hope.

Banks could provide a boon by putting more money toward stock buybacks and dividends. But there is worry they will be too quick to shift those dollars towards trying to beat competitors with lower prices on loans and better services for customers.

“Banks benefit from a lower corporate tax rate, but what will they do with the extra money?” said Barclays’ Goldberg. — Reuters

Banks benefit from a lower corporate tax rate but what will they do with the extra money? Jason Goldberg