Banks set to profit from tax cuts and rate hikes

The Pak Banker - - FRONT PAGE - -AP

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.

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