U.S. tax cuts benefit some of Canada’s big banks
Corporate tax cuts in the United States have saved some of Canada’s big banks hundreds of millions of dollars in the first full year since they were introduced.
Bank of Montreal’s chief financial officer, Tom Flynn, told the Financial Post last week that the contribution from lower U.S. taxes had been “in the zone” of US$100 million in incremental income for its fiscal 2018, which ended Oct. 31, 2018, as well as “a little under” US$30 million for the bank’s first quarter of 2019, which covered the three months ended Jan. 31.
Toronto-Dominion Bank, meanwhile, had forecast an approximately US$240-million annual benefit last year because of U.S. tax reform. “Basically, you can think of it as having enhanced our earnings by about $60 million a quarter in U.S. dollars,” said Riaz Ahmed, TD’s chief financial officer.
The exact effect of the cuts, which kicked in at the start of 2018 and lowered the corporate rate to 21 per cent from 35 per cent, can be hard to pin down because of how the lenders report their financial results. The fiscal years for the Big Five banks end at the end of October, and the tax rate was lowered in January 2018, meaning the first fiscal quarter of last year only included one month affected by the cut.
Also muddying the waters somewhat is that the banks first had to book one-time charges because of accounting assets that lost value when the tax rate was lowered.
However, with those charges now behind them, Canadian banks are set to enjoy the ongoing effect of the lower corporate rate.
“The tax cuts that they saw in the U.S. are adding to the bottom line if you exclude those impairments, those writedowns, that they took on their deferred tax assets in Q1 of last year,” said Robert Colangelo, senior vice-president of Canadian banks at ratings agency DBRS. “They ’re definitely benefiting from those reforms.”
He pointed to the lower effective tax rates that the banks have been reporting in their financial results.
Royal Bank of Canada, for instance, said its effective income tax rate fell to 19.5 per cent for the first quarter of its fiscal 2019, down from the 25.6 per cent effective tax rate for the first quarter of 2018, which had been affected by a $178-million charge.
RBC’s effective rate for Q1 2019 was also lower than the 21.5-per-cent rate reported for the first quarter of 2017 and 22.6 per cent for the first quarter of 2016.
“The first quarter of 2018 was adversely impacted by the U.S. Tax Reform, which resulted in the writedown of net deferred tax assets,” the bank said in its financial results. “However, this was more than offset during 2018 by the ongoing lower corporate tax rate.”
A spokesperson for the bank provided a “high-level” estimate to the Post that showed RBC’s taxreform-related savings for its fiscal 2018, pre-charge, would be around $273 million.
Canadian Imperial Bank of Commerce did not experience a “material benefit” from the U.S. tax cut, a spokesperson said in an email.
Bank of Nova Scotia did not provide a response. The bank, however, has focused more on Latin America and less on the U.S.
The lower tax rate south of border comes as Canada’s banks have been seeing earnings from their international businesses grow at rates outpacing those of their operations in Canada, where they have faced tighter mortgage rules and a slowing economy.
Flynn noted that BMO’s U.S. segment, even when subtracting the impact of tax reform and a credit recovery, had still grown by about 25 per cent.
While there is still growth to be had in Canada, the banks may have more substantial opportunities abroad.
“Certainly, the U.S. and international businesses will contribute more to the bottom line going forward than they have in the past,” Colangelo said.