Banks set to profit from tax cuts and rate hikes
WASHINGTON: With US President Donald Trump signing into law the $1.5 trillion Republican tax bill just days before the holidays, U.S. corporations could see an earnings boost between 7% to 10% from a 40% cut in the corporate tax rate. While corporations across the country would stand to benefit, financial firms are expected to be among the biggest winners as they pay some of the highest effective tax rates in the U.S. Factoring in added revenues from higher interest rates, U.S. banks will be ringing in the new year with lots to look forward to.
At price-to-earnings ratios (P/E Ratio) of 15.7 and 17.8, respectively, both Wells Fargo and PNC are trading below the financial sector average multiple of 18.48 times earnings. The average for all sectors is 26.9, according to industry valuation data from CSI Market. At a rate of 27.5%, the financial sector pays the highest effective tax rate of all major S&P sectors, according to media. With the corporate tax rate being cut from 35% to 21%, U.S. banks will likely see an average 13% increase in their earnings per share (EPS). Strategists at Goldman Sachs expect Wells Fargo and PNC to rake in the largest gains with boosts in earnings of as much as 17% and 15%, respectively. Big banks with business overseas will also see benefits from becoming more competitive relative to international rivals in countries with lower corporate tax rates.
If the tax bill indirectly helps boost the rest of the economy, then banks could also benefit from increased borrowing by businesses wanting to increase investment. Higher interest rates, as per the Fed's current tightening plan, will also push banks' profit margins higher as the spread between the rates they pay on deposit and the rates they earn on lending were pushed lower during the last recession.