Banks are big winners in Trump’s tax overhaul
In the long term, rich benefits will be spurred by new corporate rate
WASHINGTON — The nation’s banks are finding a lot to love about the Trump administration’s tax cuts.
The $1.5 trillion tax overhaul signed into law late last year provided deep and lasting tax cuts to all types of businesses, but financial institutions are among the biggest winners so far, reaping benefits from a lower corporate rate and more preferable tax treatment for so-called pass-through companies, which includes many small banks.
While some of the biggest banks are reporting fourth-quarter earnings hits stemming from the new tax law, they see rich benefits over the long term, including effective tax rates that are even lower than the new 21 percent corporate rate.
Citigroup said Tuesday that it would take a onetime $22 billion hit from the tax law, largely related to the bank’s tax-deferred assets, which now must be recalibrated to reflect the lower corporate rate. In a news release, Citigroup chief executive Michael Corbat said the law nevertheless “not only leads to higher net income and increased returns, but also serves to strengthen our capital generation capabilities going forward.”
$7 billion boost
JPMorgan Chase, the nation’s largest bank, and Wells Fargo both said Friday that they expect the new law to reduce their effective tax rates next year to 19 percent, a cut of nearly one-third from what they paid in 2016. The reduction will give the banks a combined boost of more than $7 billion in 2018 alone. PNC Financial said Friday that it expected its effective tax rate to fall even further next year, to 17 percent.
“The good news is that tax reform has produced both current and future benefits for our shareholders,” PNC’s president and chief executive Bill Demchak told analysts Friday. He said the bank’s preference would be to divert the tax savings “toward dividend” — which is to say, to return a higher dividend to shareholders.
More than 70 financial institutions have announced they will raise wages or offer bonuses to employees in the wake of the tax law’s passage, including big firms such as Bank of America and community banks such as Bank of the Ozarks. All told, those institutions account for about half of the companies that have promised raises or bonuses since President Donald Trump signed the bill into law, according to a running list tallied by Americans for Tax Reform, a low-tax advocacy group.
Rolling back regulations
The payouts to workers reflect a small slice of the windfall that banks large and small are in line to receive. The law includes a reduction in the corporate rate to 21 percent from a high of 35 percent last year, as well as a 20 percent deduction for income from pass-through companies. One-third of all community banks are organized as pass-throughs, according to the Independent Community Bankers of America, which represents those firms and was among the groups pushing for a lower passthrough rate.
Analysts projected the financial industry would reap some of the largest benefits from that reduction given that banks typically paid much higher effective tax rates in the past than many other industries, like manufacturing.
The boon for banks comes as the industry begins to regain some of its swagger in the wake of the financial crisis and as it seeks to roll back some of the post-crisis regulations put in place by the Obama administration under the 2010 Dodd-Frank law.