Trump tax bails out Wall Street banks

Institutions will be able to write off financial penalties from the market crash of 2008

Republican tax cuts are saving the day for Wall Street banks.

The sweeping tax overhaul means billions of dollars in profit will materialize from thin air for the industry, allowing executives the luxury of planning to increase dividends and stock repurchases, invest more in technology and even do some good by extending credit to low-income borrowers. That’s all taking away attention from what probably would’ve been the focus of analysts and investors: Lousy trading results.

As the nation’s five biggest banks began posting results in recent days, shareholders focused on comments about who will get the windfall from the tax cuts President Donald Trump signed into law last month. The lower rates may boost annual profits at the five firms by more than $10 billion, based on what they paid in taxes over the past three years. Morgan Stanley will weigh in Thursday.

Bank of America and Citigroup were quick to emphasize that rewarding investors is most important. The “vast majority” of the benefits will go toward returning capital to shareholders, Bank of America Chief Executive Officer Brian Moynihan said Wednesday. Citigroup’s Michael Corbat said the lower rate would help the firm

make good on a pledge to pay out $60 billion over several years despite a massive writedown of deferred-tax assets.

Only Goldman Sachs Group broke from the pack, saying the short-term hit to its capital from taxation of retained foreign earnings meant it would slow buybacks in the first half of this year.

The lion’s share of the charge-offs 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 from soured mortgages and other toxic assets. These losses, under U.S. tax law, can be converted into credits to be used to lower their tax bills in the future.

The tax overhaul also helped many of the banks’ businesses.

Asset management revenue climbed at JPMorgan and Goldman Sachs as funds benefited from U.S. stock indexes hitting records, while investment banking fees topped estimates and executives said clients are increasingly discussing deals.

And then there were the trading units. Analysts expected a collective 22 percent drop in fixed-income trading and a 4 percent slide in equities at the four Wall Street firms that have reported results so far.

The group fell short on both sides, as debt-trading clients remained inactive and firms were hit by losses on margin loans related to embattled South African retailer Steinhoff International Holdings NV.

Goldman Sachs posted the biggest quarterly drop in trading revenue, at 34 percent, driven by the worst quarter in bond trading since the financial crisis.

Only Bank of America posted trading results that beat estimates — with an 8.8 percent decline.

Traders are beset by placid markets and tight credit spreads, a recipe for inaction from hedge funds and other institutional clients.

Goldman Sachs indicated conditions got better after the new year, but JPMorgan’s Lake said she hasn’t seen a dramatic shift — worrisome, because the first quarter tends to be the most active trading period of the year.