One promise Donald Trump had during his campaign trail was to be more forgiving on corporate and personal income taxes if he won. Trump’s pro-business views resulted in stock markets trading higher in new all-time-high territory. Trump made his plan a reality when he signed off on the new tax reform bill on December 22.
Initially, all sectors were intended to benefit from President Trump’s tax reform plan, which would result in more companies being able to retain more money for reinvestment opportunities and to return capital to investors. However, Trump’s tax plan is negatively impacting the banking sector, costing large Wall Street banks billions of dollars in write-downs.
Just a few days after the new tax law was signed by President Trump, U.S. banks started to report revenue declines for the fourth quarter. JPMorgan Chase & Co. (NYSE:JPM) reported a one-time tax-related charge of $2.4 billion and its competitor, Bank of America Corp (NYSE:BAC), reported a similar tax-related charge of $2.9 billion.
If President Trump signed a tax bill that is intended to lower taxes, why are banks reporting large write-downs?
There are two reasons why large Wall Street banks are writing down billions. The first reason has to do with deferred tax assets (DTA). DTAs are simply past losses that banks carry forward to use against taxes in the future. With the tax reform lowering the corporate tax rate, these DTAs are now worth much less, resulting in write-downs.
The second reason is because of charges related to foreign operations for banks. The new tax bill requires companies to pay repatriation taxes on their foreign earnings so there is more revenue earned for America. This part of the new tax law accounts for approximately two-thirds of the entire write-down for the banks.
Below are specific examples of how fourth-quarter earnings were negatively impacted due to Trump’s tax reform.
Goldman Sachs Reported a $2.1-Billion Loss for the Fourth Quarter
Over the past six years, Goldman Sachs Group Inc (NYSE:GS) has not reported a quarterly loss in its earnings, until now. GS reported fourth-quarter earnings on January 17 with a loss of $2.1 billion. This would compare to a gain of $2.2 billion in the same period a year ago.
The tax loss came from a write-down of $4.4 billion because of the new tax bill. This large write-down didn’t come as a total surprise; Goldman Sachs came out a few days after the tax bill was signed and said it estimated that there will be a $5.0-billion write-down in the fourth quarter. The Goldman Sachs revenue decline resulted in GS stock trading lower by three percent.
Bank of America’s Profit Slashed by 50%
Over the past five years, shares of BAC have risen by nearly 300% and the executives have been managing the company much more efficiently, compared to the past. For instance, the bank continues to grow its loan book, which is great for long-term earnings. In addition, BAC has been reducing its cost by reducing its headcount in a number of branches in its network.
However, even with great management, there was no hiding from Trump’s tax reform bill. BAC reported a one-time tax write-down of $2.9 billion. This resulted in Bank of America’s profit declining and its fourth-quarter earnings dropping by 50.2% compared to the same quarter from the previous year.
Citigroup’s Quarterly Results Contained an $18.3-Billion Loss
Citigroup Inc (NYSE:C) reported its fourth-quarter earnings on January 16, with a net loss of $18.3 billion or $7.15 per diluted share. These numbers would compare to a net income gain of $3.6 billion, or $1.14 per share, from the fourth quarter of 2016.
The reason once again for the major change in earnings is because of the new tax bill; Citi recorded a $22.0-billion write down. From the $22.0 billion, approximately $19.0 billion was the result of deferred tax assets and the remaining $3.0 billion was due to earnings generated from foreign bank-owned entities.
Citigroup is the bank with the largest write-down because of the new tax bill. Investors didn’t trade the stock one way or the other on the release of earnings; the shares ended the trading day flat.
Year-Over-Year Fourth-Quarter Results for JPM Are Down by 37%
JPM reported a net income of $4.2 billion, or $1.07 per share, in the fourth quarter of 2017. Even with positive income, JPMorgan’s profit declined; it was down 37% from the fourth quarter of 2016, which was $6.7 billion, or $1.71 per share. In the quarter, JPM reported a write-down of $2.4 billion due to recent changes in the tax bill.
Conclusion: Trump’s Tax Reform
The new Trump tax reform plan was meant to benefit investors and companies. Just weeks into the new tax bill, it is costing all parties involved billions of dollars.
Losing billions in tax reform costs is concerning to the banking sector because it is still fragile from the financial crisis of 2008. These write-downs could have been used to make the companies stronger in the sector for the future. Investors were looking forward to receiving capital returns through dividend growth and share buybacks (this could not be delayed).
Looking forward, it’s possible that investors and banks will look at new business strategies to manage through Trump’s tax reform.
“America’s bank profits take a hit from tax reform,” The Economist, January 4, 2018.
“Goldman Sachs is Wall Street’s big loser,” CNN Money, January 17, 2018.
“Goldman Sachs reports quarterly loss on U.S. tax reform charge,” The Daily Star, January 18, 2018.
“BoA profits drop due to US tax reform hit,” Daily Sun, January 18, 2018.
“Citigroup reports net loss in Q4 due to tax reform,” Housing Wire, January 16, 2018.
“JPMorgan Chase 4Q results fall 37 per cent, due to tax charge,” Financial Post, January 12, 2018.