US bank gains from tax law start with red ink

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 multi-billion-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 will make up for any short-term hit.

Citigroup Inc could report a quarterly loss of more than US$15 billion (RM59.9 billion) and Goldman Sachs Group Inc will likely have lost about US$3 billion, 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$20 billion 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$5 billion 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$2.5 billion 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. – Reuters