Garnet Capital Advisors Blog

Bank shares celebrated when Donald Trump was sworn into office just one year ago on the assumption that he would make good on his promise of lower tax rates for corporations and easing of the recent crushing regulatory environment. Now that this has come to pass with the new Tax Cuts and Jobs Act at the end of 2017, it is having some unexpected consequences on bank earnings. While in the short-term, some bank earnings are taking a significant hit they will begin to benefit from the new law into 2018 and beyond.

The new tax law changes will impact bank earnings over the short and long-term.

How New Tax Laws Will Have a One-Time Impact on Bank Earnings

Many of the largest U.S. banks and even several international banks have found that the U.S.'s new tax laws are resulting in massive hits to fourth-quarter profits. Since the Tax Cuts and Jobs Act was signed into law in the fourth quarter, accounting rules require that companies adhere to the rules in that period. 

There are two ways that the laws are creating a one-time hit on bank earnings. First, banks that carry large "deferred tax assets" (DTAs) on their balance sheets will find that those assets will be worth less with the lower corporate tax rate. Write-downs of reduced DTAs account for the bulk of Q4 losses. Second, banks now have a lower tax base incentive to bring cash home that has been held abroad, but this repatriation process has a price. 

Five of the largest U.S. banks are expected to report a total of $31 billion in tax-related hits in Q4 2017, based on their recent public comments and disclosures. Citigroup alone reports that it lost $18.3 billion in Q4, with a $22 billion charge attributed to the new tax law. Goldman Sachs and Bank of America are estimating $5 billion and $3 billion hits respectively. Among foreign banks, Credit Suisse predicts a $2.4 billion write-down in Q4.

The Long-Term Affect of Tax Changes on Banks' Earnings

The short-term damage may sound drastic for banks, but the truth is that they will all make up for the one-time charge-offs in short order. The new tax law is providing a veritable boon for banks, who were paying an effective tax rate in the U.S. of 31% in 2017 inclusive of state levies. Now that the corporate tax rate has dropped to 21%, the effective tax rate for these banks is expected to fall around eight points in 2018. According to Bernstein analyst John McDonald, national and regional banks should see their earnings per share rise by an average of 15% over the next year due to the lower tax rate.

Banks can partner with a loan sale advisor to maximize loan portfolio returns.

Optimize Bank Portfolios With the Help of a Whole Loan Broker

As lenders enter 2018 after experiencing an earnings hit in the fourth quarter, it only makes sense to re-evaluate business for the coming year. Even with favorable tax laws, having the best portfolio mix can help minimize risk and maximize profits in Q1 and beyond. Banks and nonbanks can rebalance portfolios by buying and selling loans in different asset classes with the help of a loan sale advisory service and a whole loan broker.

Garnet Capital specializes in providing loan sale advisory and managing loan portfolio sales. To learn more about our services, sign up for our newsletter.