Will President Trump's Tax Reform Be Beneficial For Banks?

Some banks are optimistic that Trump’s tax reform will be beneficial for their financials while others are concerned about its one-time effect on the balance sheets.

The proposed drop in tax rates of 15% will give banks the liberty to enjoy higher profits, enabling them to make investments that would lead to growth. Also, lower taxes in the United States are likely to attract investments from foreign companies. Such active business spending will give a boost to the sluggish economy.

"We are a taxpayer of high order, so we'll get a benefit because we're paying a lot of taxes today," said Brian Moynihan, CEO of Bank of America (NYSE:C) at investors’ conference held recently.

Further, the lawmakers expect this major tax reform to speed up the economic recovery process that is expected to result in loan growth, which is again beneficial for banks.

However, these positive effects would not show overnight. Rather, banks will have to bear a one-time charge the year this bill gets enforced.

Banks usually pay up taxes in advance so that they can claim tax relief in difficult years and treat them as deferred tax asset. Since the banks have been calculating it at a tax rate of 35% so far, the asset would lose value once the President signs the final bill.

Trump’s pressure on the Republicans to get the bill cleared before the end of 2017 has got many banks worrying as they will have to write-off the asset this year itself.

Per an article by Reuters, Credit Suisse (NYSE:C) expects to write-off about CHF 2.1 billion, that might lead the bank report loss for full-year 2017, as it had reported net income of CHF1.1 billion for the nine months ended September 2017.

The article also mentioned about UBS Group (NYSE:UBS) expecting nearly CHF 3.1 billion as up-front loss. However, both the banks do not expect this write-off to impact their capital position.

Notably, Citigroup (NYSE:C) mentioned at a conference recently that it will have to discard $20 million saved-up tax credits once the tax bill gets implemented. (Read more: Citigroup to Witness Lower Trading Revenues in Q4)

Banks have been enjoying the spotlight of late due to several developments in the political and financial fronts. The rising rate environment, lesser regulations and now lower tax rates all are likely to support their journey henceforth.

Among the above mentioned banks, Bank of America and Citigroup are carrying Zacks Rank #3 (Hold), whereas Credit Suisse and UBS Group both carry Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Wall Street’s Next Amazon (NASDAQ:AMZN)

Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.

Click for details >>