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JPMorgan projects tax reform could lead to $2B expense in Q4

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JPMorgan projects tax reform could lead to $2B expense in Q4

JPMorgan Chase & Co. CFO Marianne Lake said Dec. 5 that tax reform could lead to an expense as large as $2 billion in the fourth quarter before lower rates drive benefits.

Also, she said management could look at increasing its dividend payout ratio if regulators take a softer approach during the next capital planning exercise.

Speaking at the Goldman Sachs Financial Services Conference, Lake said the tax cut should be "reasonably meaningful" for the company's bottom line with the reduction in the corporate tax rate more than offsetting any increases from base-broadening measures. She said the bank expected tax reform to be a positive for the economy generally, including for wage growth and loan demand. Lake said the bank would see profits increase from lower taxes but that it would be "competed away" over time as the bank would need to offer better pricing to remain competitive.

At the same time, assuming tax reform passes in short order, Lake said the bank would expect to book an expense in the fourth quarter of as much as $2 billion due to the repatriation of profits held in foreign subsidiaries. There would be some offsets, such as revaluing deferred tax liabilities, but Lake said there would be a hit.

"If something gets enacted this year, there would be an adjustment in the fourth quarter," Lake said. "For us, that would be negative and not small."

Separately, Lake said the bank might be able to raise its dividend in the next stress testing exercise. As part of the post-crisis regulatory regime, the largest banks participate in stress testing exercises in which the Federal Reserve assesses capital adequacy in hypothetical recession scenarios. As part of that exercise, known as the Comprehensive Capital Analysis and Review, or CCAR, banks submit a capital plan for dividends and share repurchases over the next year. In previous years, the Fed has set a "soft cap" on dividend payout ratios of 30%, meaning any bank that paid dividends in excess of 30% of earnings would receive additional scrutiny. Regulators had discussed removing the cap even before President Donald Trump's electoral victory, which has been expected to translate into an even greater pullback on regulatory scrutiny.

"Hopefully with new leadership there will be changes to the [CCAR] framework and one of those that I think is pretty widely accepted and acknowledged and supported would be at least changing the soft cap," JPMorgan's Lake said. "Yeah, we would, for sure, consider leaning more heavily into a dividend and earning into it as one of those options. It's clearly a board decision."