The new tax law is only two weeks old but already it is costing billions of dollars — on paper, at least.
Big banks will take about $30 billion in charges against fourth quarter earnings (some already have). Most of that is due to the banks speeding up recognizing past losses. Higher tax rates make the losses during the Great Recession more valuable during the good years. A lower corporate tax rate reduces the value of using the past losses to reduce taxes now.
Some of the reported red ink from banks like Bank of America, Goldman Sachs and Citigroup, when they report fourth quarter results in the week ahead, will be thanks to preparing to pay taxes on their overseas assets. The tax bill drops the one-time tax rate for bringing these foreign profits back to the U.S. from 35 percent to 15.5 percent.
The red ink on paper now won’t stick, though. That’s why the banks’ forecasts for the year ahead will be closely scrutinized. The new tax law cuts the corporate tax rate to 21 percent. It will be a big boon to the bottom line of banks. Bank of America, Goldman Sachs and Citigroup paid effective tax rates around 30 percent in their third quarter of last year.
The year ahead for banks isn’t just about lower taxes. It’s also about higher interest rates, and right now, the Federal Reserve is expected to raise its target rate a few times this year. When a company sells money, which is what banks do, higher borrowing costs help profits.
Banking stocks, especially multinational banks, have done well over the past year in anticipation of a tax bill. Investors now want to see that anticipation pay off in profits.
Tom Hudson hosts ‘The Sunshine Economy’ on WLRN-FM; @HudsonsView.