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|15 January, 2019

Banks tell a U.S. tax tale with three endings

American banks started 2018 with a gift from Washington, D.C.: a big cut in the headline federal tax rate

Image used for illustrative purpose.

Image used for illustrative purpose.

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NEW YORK  - American banks started 2018 with a gift from Washington, D.C.: a big cut in the headline federal tax rate, from 35 percent to 21 percent. Some said they’d use it to give something back to the country, and others said nothing of the sort. They have benefited in different ways.

Take JPMorgan’s 2018 earnings on Tuesday. The $336 billion bank run by Jamie Dimon scored a 21 percent increase in post-tax profit from the previous year, adjusted for one-off tax effects in both years, partly because its tax rate fell from an underlying 26 percent to just 20 percent. Rival Citigroup’s headline rate fell from 30 percent to 23 percent, aiding a 14 percent increase in earnings on the same basis. Wells Fargo’s tax rate dropped from around 32 percent to 18 percent, fueling a 25 percent increase to the bottom line, excluding other tax effects.

Where the spoils from lower taxes went depends on the bank. JPMorgan, which doesn’t give specific expense targets, said it would invest, and it spent over $1 billion more on technology than the year before, but also increased its wage bill by $1.9 billion. Its core consumer loans grew 5 percent, faster than its two rivals. Wells Fargo increased wages for entry-level workers and gave over $400 million to philanthropic causes, though Tim Sloan’s $228 billion bank simultaneously cut benefits and incentives overall.

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Citi was more circumspect. Boss Mike Corbat, like Sloan, is under pressure to spend less. The bank cut around $1.5 billion of expenses in the division that includes head office costs and spent $1.2 billion more in other areas like technology. Corbat, who wants to get costs down to 53 percent of revenue from 57 percent last year, has mostly eschewed splashy wage-hike promises.

The other question is which bank needed its tax break most. At their old tax rates, the three mega-lenders would have been in very different places. JPMorgan’s adjusted earnings in 2018 would still have increased around 12 percent to $30 billion from a year earlier. Citi’s would have risen just 3 percent, while Wells Fargo’s would have increased 4 percent. Sloan’s bank enjoyed the biggest notional gain from the tax rate cut, at nearly $4 billion. But if Dimon seems to have given back most, it’s perhaps because he needed the help least.

CONTEXT NEWS

- JPMorgan on Jan. 15 reported earnings of $7.1 billion for the last three months of 2018, equivalent to $1.98 per share. That compared with analyst forecasts of $2.21 per share, according to I/B/E/S estimates from Refinitiv.

- Revenue of $26.8 billion was in line with estimates for the quarter. That was on a managed basis, which presents revenue from tax-exempt securities and investments that receive tax credits on a comparable basis to taxable investments and securities.

- Rival U.S. lender Wells Fargo said on the same day that its earnings were $6.1 billion for the final quarter, or $1.21 per share, compared with analyst estimates of $1.18. Its revenue of $21 billion fell short of forecasts of $21.7 billion. The company earned $6.2 billion on revenue of $22.1 billion in the same period a year earlier.

- JPMorgan’s revenue from fixed-income trading fell 18 percent year-on-year in the fourth quarter, excluding the impact of the 2018 U.S. tax cuts. Rival Citigroup said on Jan. 14 that its own trading revenue from fixed income fell 21 percent.

- Trading revenue overall was $3.2 billion, a fall of 11 percent from a year earlier. Chief Executive Jamie Dimon had told a conference in December that he expected trading for the fourth quarter to be “roughly equivalent to last year.”

(Editing by Richard Beales and Amanda Gomez)

© Reuters News 2019

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