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Big banks begin sounding off on impact, cost of tax reform

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Big banks begin sounding off on impact, cost of tax reform

Big banks began sounding off on the potential impacts of corporate tax reform as Congress hashed out the differences in proposed legislation passed by the House of Representatives and the Senate.

Executives at some of the largest financial institutions took the opportunity at a recent investor conference to answer questions about the proposed impact of tax reform on their bottom lines, including opportunities and drawbacks of the various bills. Banking is an area that could have potentially outsized gains among S&P 500 companies if Congress lowers the effective rate, given that many financial institutions tend to pay the full or near the full rate.

BB&T Corp. Chairman and CEO Kelly King said the bank's current margin tax rate is around 31%, and dropping the rate to 20% would increase return on equity by 175 basis points. He added that the bank has a variety of ways to deploy the difference, with a third reinvested into areas like digital transformation efforts that should enhance future revenues and a third earmarked for dividend increases, with the remaining also passed to shareholders. King added that reform will impact different areas of the business; for instance, equipment finance could be enhanced because of write-offs and tax advantages.

KeyCorp CFO Donald Kimble said the bank would continue to see benefits for products and business lines such as life insurance related to income and tax credits tied to low-income housing and alternative energy under the proposed reforms. He also said KeyCorp's effective federal tax rate would fall from 20% to somewhere in the mid-teens to 15%. Chairman and CEO Beth Mooney said that any change to the bank's margin could mean greater investment in areas like technology that support profitability and shareholder returns.

Many of the executives acknowledged that they will forfeit the FDIC premium deductions, which could negate a small portion of the rate reduction. Bank of New York Mellon Corp. CFO Thomas Gibbons said that if the finalized bill looks like the House's version, the bank's effective tax rate would fall to 20% but that losing the FDIC premium deduction would cost it 50 basis points.

One contingency some executives mentioned is the inclusion or exclusion of the corporate alternative minimum tax, or AMT, which is a separate taxation method that parallels the standard corporate income tax method. Companies must calculate both approaches and use whichever calculates a higher payment. PNC Financial Services Group Inc. Chairman, President and CEO William Demchak said if the AMT is left in the corporate rate, the bank would have a rate around 20% and would cause some disallowance of existing tax credits. If the AMT is removed, the marginal rate would drop down to the mid-to-high teens.

SunTrust Banks Inc. Chairman, CEO and President William Rogers, Jr., called the AMT "a pretty big swing factor" in proposed tax reform, but said the bank's proposed rate would be in the low 20s. The difference in the bank's tax rate would first be reinvested in the company for opportunities for new growth or acceleration, and then returned to shareholders.

The executives also said tax reform could be a large boost to their corporate customers, although some said they do not expect to offer more competitive rates to customers. King at BB&T said there could be a "very bullish response" from small and midsize businesses interested in capital expenditures and other large investments, but that did not see a "dramatic drop" in interest rates. Huntington Bancshares Inc., which also has a sizable commercial focus on small-to-medium business, also does not expect "a give back" in terms of pricing for consumers, said Chairman, President and CEO Stephen Steinour.

Although corporate tax reform could offer long-term benefits for banks, the initial cost for an institution could be quite high because of how deferred tax assets and repatriation of overseas profits are treated. Citigroup Inc. CFO John Gerspach said the bank would take an accounting hit of roughly $20 billion largely driven by a write-down of the bank's deferred tax assets. Of that, the reduced valuation of the deferred tax assets would be $16 billion to $17 billion, with a repatriation tax to bring profits held overseas into the U.S. would cost $3 billion to $4 billion.

Even though a tax cut would be "reasonably meaningful" for JPMorgan Chase & Co.'s bottom line, the moneycenter could also face an initial hit as large as $2 billion due to the repatriation of profits held in foreign subsidiaries, said CFO Marianne Lake. She added there could be a slight offset from revaluing deferred tax assets.

"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."

Executives at financial companies outside of banks also chimed in on the proposed benefit, with Blackstone Group LP Chairman and CEO Stephen Schwarzman voicing support even if it would be slightly negative for private equity firms. He said reform could be a "game changer" but added that one proposal would eliminate tax deductions, which would weigh on earnings investment, and that the balance of benefits versus disadvantages would probably break even for partners.