Big US Bank shares face pain before tax cut gain

It's all about taxes

With the U.S. bank reporting season underway, the focus remains firmly on the strength of the potential shot in the arm they may get from the new new federal tax code. That was underlined by the first set of fourth-quarter results from major lenders, released by JPMorgan and Wells Fargo on Friday. These showed that patchy performances continued into year-end. What was striking was that with JPMorgan shares outshining those of Wells by way of reaction, investors clearly looked beyond divergent—and spectacular—early encounters with new corporate taxes.

JPMorgan tax pain trumps Wells' gain

JPM saw a $2.4bn hit in total. That was from a one-off repatriation tax on income kept abroad and also adjustments to the value of deferred tax assets and liabilities. The bank even said it didn’t expect to return sack loads of cash held overseas home. But its shares still closed up 1.6%. The contrast with Wells Fargo was stark. Its shares slipped 0.7% despite the biggest U.S. mortgage lender posting a huge benefit from President Donald Trump’s Tax Cuts and Jobs Act. Wells Fargo’s income was flattered by a one-off $3.35bn boost accounting for more than half its $6.2B net income, or $1.16 a share. More to the point, The bank's closely eyed expenses remained elevated. It also showed further signs of market share loss in its giant mortgage franchise, where originations slumped 33% in 2017.

Optimism helps 

Hence JPM’s and Wells’ results were no break from norms established last year. The former demonstrated satisfactory though turgid progress in all major businesses apart from trading, the latter continued its sluggish grind away from its reputational and financial doldrums triggered by its fake account scandal. More to the point, investor reaction shrugged off JPM’s tax slam, and lifted its stock based on an adjusted EPS of beat of $1.76. It was the opposite for Wells. Crucially, optimistic commentary seemed to help JPMorgan. The bank suggested revamped taxation would boost profit growth from increased revenue generation and not just from its tax rate falling to 19% from 32%.

Citigroup faces $20bn one-off dent

Similar patterns are expected to play out when both Citigroup releases earnings on 16^th January, Bank of America and Goldman on 17th and Morgan Stanley on 18^th.  No ‘bulge bracket’ lender is expected to see a similar immediate lift like Wells Fargo, though their shares could still applaud any signs that underlying recovery stories remain on track. Of the biggest Wall-Street focused banks that have yet to report, Citigroup looks most exposed to the new tax regime. It faces a $20bn charge in total. That's because seismic losses in 2007-2009 will now offset future taxes less than under previous rules. Goldman could take a total $5bn charge linked to the new repatriation tax.

A clue to market reactions in the wake of these earnings can be seen from the fact that large bank shares mostly outperformed the S&P 500 last year due to the expected boost to their bottom lines from reduced tax and regulatory burdens. 'Fin-reg' remains largely just an idea, but banks’ capability to make a credible case about positive impact from new legislation—as PMorgan did—could be crucial for how their shares perform in the wake of earnings and over the year ahead.