Big banks reporting billions in losses
Write-downs assist tax law compliance
NEW YORK — Big U.S. banks have been reporting billions of dollars in paper losses this month as they come into compliance with the new tax law.
While the losses are massive, they were largely expected, and bank executives say the new tax law will be good for banks and the economy in the long run.
The biggest loser so far has been Citigroup, which on Tuesday reported an $18 billion loss. The actual write-downs were even larger than that, more than $22 billion just in the quarter.
The charges that these banks are taking fall into two categories.
The lion’s share is tied to what’s known as deferred tax assets. During the financial crisis nearly a decade ago, banks racked up billions of dollars in losses. These losses, under U.S. tax law, can be converted into credits to be used to lower future tax bills.
Citigroup, JPMorgan and other banks had assigned a value to these assets when the top U.S. corporate income tax rate was 35 percent. But the Trump tax law lowered the top rate to 21 percent this year, and so the value of those deferred tax assets had to be adjusted.
Citi’s exposure to these deferred tax assets is abnormally large — more than $45 billion before Tuesday’s write-down — and is a byproduct of the financial crisis. Citi was the nation’s largest bank at the time, holding billions of dollars in mortgages and other complicated assets, and came dangerously close to failing.
In comparison, other banks’ deferred tax assets seem small. JPMorgan Chase reported a $2.4 billion paper loss tied into these assets. Goldman Sachs and Bank of America are also expected to announce singledigit billion dollar losses when they report today. The smallest of the six major U.S. banks, Morgan Stanley, which reports its results on Thursday, is expected to book a $1.3 billion charge.
The other component of this week’s write-downs is repatriation of foreign earnings. Some major Wall Street banks have foreign subsidiaries where they have been holding profits abroad in hopes of getting a better tax rate on those earnings.
The Trump tax bill provided exactly that. The new law is giving a one-time break to companies with “accumulated foreign profits” by taxing those earnings at just 15.5 percent.
Most major U.S. banks do the vast majority of their business at home, with the exception of two: Citigroup and Goldman Sachs. Citigroup in particular has substantial business in Latin America and Asia.
When the tax law was enacted, Goldman estimated it would have to take a $5 billion charge in the latest quarter, two-thirds of which related to repatriated foreign earnings, the rest to deferred tax assets. Citi said Tuesday that it was booking a $3 billion charge related to its foreign earnings.
Despite the short-term pain, banks expect the law to be ultimately good for them. Most U.S. banks had tax rates of around 30 percent and are now expecting effective tax rates of roughly 20 percent. Most are expected to pass at least a portion of their new profits along to shareholders in the form of stock buybacks and higher dividends. It is still early to see how much will go to consumers and businesses, although a few banks have announced wage increases for their lowest-paid employees.