More banks warn of US tax reform charges

Deutsche Bank has warned that it will record its third consecutive annual loss in 2017 because of a €1.5 billion hit from US tax reforms and a 22% fall in trading and financing revenues in the fourth quarter.

Germany’s biggest lender, which had hoped to return to a full- year profit after pretax losses of almost € 7 billion in total for the two previous years, said on Friday that it would instead make a “small full- year, after- tax loss” for 2017.

The warning, which wiped 4% off Deutsche’s shares in late trading, came hours after Morgan Stanley joined a chorus of companies detailing one- off hits from the US tax reforms.

Morgan Stanley said its fourth-quarter earnings would be weakened by a $1.25-billion charge, largely because its deferred tax assets (DTAs), which can be offset against future tax bills, are worth less because of sweeping changes to the US tax code signed into law by President Donald Trump a few days before Christmas.

Deutsche said a change in the value of its DTAs were the main reason it will make a loss for 2017, instead of the €1.3-billion profit after tax expected by analysts the bank polled on Jan 3.

In a stock market statement, the bank stressed that pre-tax income, which excludes the impact of the tax changes, would be “positive” for the full year, but said it would make a pre-tax loss for the fourth quarter.

Revenues for trading and financing fell 22% in the fourth quarter, Deutsche said, because of “low volatility in financial markets and low levels of client activity in key businesses.”

The fourth- quarter results will also be weighed down by litigation and restructuring costs, which Deutsche put at about €500 million, and a loss on the sale of the bank’s Polish private and commercial bank.

Deutsche announces fullyear results on Feb. 2 and had been hoping for a profit to show the success of a five-year restructuring plan announced in 2015 that promised to make it less risky and more efficient.

Meanwhile, Morgan Stanley said in a filing that the tax reforms would lead to a gross charge of about $1.4 billion for the period, primarily because of the recalculation of deferred tax assets. The net hit would be about $ 1.25 billion, the bank said.

But like many other big US companies, Morgan Stanley will be happy to trade a shortterm hit for a much bigger gain over the longer term.

The permanent shift from an effective tax rate in the low- 30s to one in the low-20s could add hundreds of basis points to returns on equity. That would allow bigger payouts to shareholders while pushing up pay for top employees, many of whom have packages linked to ROE.

Already, several banks have announced minimum-wage rises, one-time bonuses and charitable contributions as a result of the changes. Analysts at Credit Suisse have added an average 8% to estimates of earnings per share for the big US banks in 2018.