With the long-awaited tax bill finally unwrapped, analysts say the banking industry could gain the most from slashing the corporate tax rate from 35% to 21%.
In a note Dec. 18, Goldman Sachs Group Inc. analysts said the lower tax rate could boost earnings per share at the largest banks by 13% on average.
Goldman estimated that Wells Fargo & Co. would emerge as the biggest winner from the tax reform bill by getting an 18% boost in EPS, higher than projections for the largest financial institutions based in the U.S. The report estimated a 16% EPS boost for Bank of America Corp., a 10% increase for Citigroup Inc., a 13% increase for JPMorgan Chase & Co., an 11% increase for Morgan Stanley, a 16% increase for PNC Financial Services Group Inc. and a 13% increase for U.S. Bancorp.
Goldman did not include itself in the analysis.
The note pointed out that banks would see some negative impact through the elimination of Federal Deposit Insurance Corp. fee deductions. The bill would prevent banks from deducting any fees paid to the FDIC's deposit insurance fund if the institution has above $50 billion in total assets. Goldman claims that this would present a 1% headwind on average to bank earnings.
Goldman added that a devaluation in deferred tax assets would hurt common equity Tier 1 by an average of 10 basis points due to write-downs, although the analysts noted that the DTA impact is difficult to model.
Overall, the note points to an optimistic operating environment for banks in the future, with higher return on assets giving banks more options to grow their companies. Outside of the largest banks, the industry appeared optimistic as well. The Independent Community Bankers of America, representing smaller community financial institutions, expressed excitement over changes to tax laws on pass-through businesses that would allow for higher deductions on business income, encouraging more lending that would benefit both small businesses and the community banks they borrow from.
"[Banks] will be very well positioned to extend more credit in 2018 and beyond," Paul Merski, ICBA executive vice president for congressional relations, said in an interview.
Isaac Boltansky, an analyst at Compass Point Research & Trading, wrote in a Dec. 18 note that the overall industry sees "far more dessert than vegetables" in the final package due to higher bottom-line growth as a result of a dramatically lower corporate tax rate and increased top-line growth as a result of any stimulus in overall economic activity. Boltansky said the bill could further boost industry performance if the bill leads to a steepening yield curve.
"All things considered, banks are decidedly and unambiguously one of the clearest beneficiaries of the GOP tax reform package," Boltansky wrote.
Industry reaction has been positive. After the bill text was released Dec. 15, American Bankers Association President and CEO Rob Nichols said in a statement that the legislation would provide "significant" relief to an industry that pays among the highest effective tax rates.